Monday, November 22, 2010
Irish Banking Bailout Not a Good Sign
The Irish Banking Bailout
The Irish banking bailout story on the front page of the WSJ this morning spawned a reflection on how the 2008 financial crisis unfolded. Surveying the damage in December of 2008, Wall Streeters collectively wondered, “how did we miss it?” The collapse of Bear Stearns, the plunging stock prices of US financial institutions and the fiasco at Freddy and Fannie left market watchers mystified as to how blind they had been not to see the sign post. The crisis had been a massive freight train barreling down the tracks, blowing the whistle, and they had missed it. After the fateful weekend in which Lehman Brothers filed for bankruptcy and Merrill Lynch was purchased by Bank of America, the market actually ended higher for the week the following Friday.
If the global economy “double dips” pundits and economist will look back at the episode in Greece as the first overt sign that systemic problems were lingering and much graver than was thought at the time. I can mentally overlay the Greek inability to publicly fund their debt to the break down in auction market securities in early February 2008. In retrospect the destruction of the ARS market should have been a siren alert that the situation was extremely dire and was sure to get out of hand. The Greek situation has all the same markings.
The Irish banking crisis validates the foreshadowing characteristics of the Greek bailout. It offers two concerning aspects that fit a scenario of a developing crisis in which the significance of the Greek debacle is under estimated.
Last week the Irish policymakers were declaring that no “bail out” was necessary. Something obviously changed their tune. Circumstances were not what the financial leadership perceived or the circumstances changed at light speed. In either case, such sudden direction adjustments indicate Irish financial matters are unstable.
The other indication that things might not be going as plan across the pond is the use of EU funds to bail the Irish out. When the 175 billion euro fund was created, the IMF and EU officials speculated that by its very existence fears regarding European banks’ liquidity would be quelled, making the actual use of the funds unnecessary. This is obviously not the case in Ireland.
Those of us who feel we are not out of the woods yet view these conditions with great suspicion. We cling to the notion that until the employment situation improves, residential home prices stabilize, the government stops issuing debt at historical levels and the Federal Reserve stops printing money at historical levels the economy is on very shaky ground at best.
No thinking person suggest that our global monetary and fiscal policy is sustainable. It’s like a long distance runner sprinting out of the gates to conquer a marathon. The runner and the crowd know he has no chance to complete the race unless he hits a maintainable stride. If he continues to sprint, the question is not if he will collapse short of the finish line, but when. The Irish banking bailout is analogous to our runner feeling a blister starting to form on his heal. A Spain and Portugal banking bailout will indicate a blister is forming on the other heal. Run Forrest, run!
Meanwhile, we have the stock market trading at pre crisis levels and bullishness is rampant. Looks and feels a lot like November of 2007 if you ask me.
Hal Blackwell is the author of “Secrets of the Skim” and foresaw the 2008 financial crisis.