Systemic risk is on red alert
by Graham Summers
Phoenix Capital Research
Posted June 15, 2011
SINCE 2009, I’VE BEEN WARNING THAT SYSTEMIC RISK REMAINS HIGH. However, from that time until today, investors have been willing to bet on the US Federal Reserve (and the world’s central banks) keeping a lid on things. Until today.
Greece has erupted into full-scale, violent riots that could shut down the entire Government there. SHOULD this happen it’s the beginning of the END GAME for central bank intervention in the financial system. And the reason is: The only thing that has maintained investor confidence since the depths of 2009 is the belief that the central banks can continue to bailout/ intervene to control any financial problem.
Remember, we never actually “took the hit” we needed to take in 2008. The same junk debt remains in the system (it’s just been hidden by loosened accounting standards). The same enormous derivatives time bomb is still ticking (it’s over $600 TRILLION in size).
None of these problems were solved. None were even addressed. All the central banks did was lend more money to the insolvent big banks. Well, that and damage their sovereign balance sheets by taking on a ton of garbage debt (the Fed’s balance sheet is now over $2.8 TRILLION in size).
So in plain terms, the central banks took systemic risk that existed in the private sector and allowed it to spread to the public sector.
What does this mean? That the next Crisis won’t just involve banks like Goldman Sachs, it will involve entire countries (including the US) going belly-up. We’re already seeing it in Greece. That situation has made it very clear what happens when you combine public outrage with Government bankruptcy and systemic insolvency: SHUT-DOWN.
This IS coming to the US. And it won’t be long. Once the bailout wagon stops (first in Greece) the ensuing collapse will spread VERY quickly. The reason is quite simple: Greece is the Bear Stearns of the Sovereign Debt Collapse.
So buckle up, because it was only six months or so after Bear Stearns that the Lehman disaster unfolded. Given the amount of leverage in the system today, we could easily see the issues hitting Greece today arriving at the US’s shores before the year’s end.