Tuesday, June 16, 2009

A brilliant article

I came across a brilliant article written recently in the Atlantic titled "The Quiet Coup" (thanks to Bill Cara's excellent blog). It covers the ties between the financial services industry and the US government and compares the US to other . The article is written by Simon Johnson, former chief economist of the IMF. I am not a fan of the dismal science, but Johnson is clearly brilliant.


I suggest reading it but I wanted to highlight two important passages:
It (a scenario) goes like this: the global economy continues to deteriorate, the banking system in east-central Europe collapses, and—because eastern Europe’s banks are mostly owned by western European banks—justifiable fears of government insolvency spread throughout the Continent. Creditors take further hits and confidence falls further. The Asian economies that export manufactured goods are devastated, and the commodity producers in Latin America and Africa are not much better off. A dramatic worsening of the global environment forces the U.S. economy, already staggering, down onto both knees. The baseline growth rates used in the administration’s current budget are increasingly seen as unrealistic, and the rosy “stress scenario” that the U.S. Treasury is currently using to evaluate banks’ balance sheets becomes a source of great embarrassment.

The conventional wisdom among the elite is still that the current slump “cannot be as bad as the Great Depression.” This view is wrong. What we face now could, in fact, be worse than the Great Depression—because the world is now so much more interconnected and because the banking sector is now so big. We face a synchronized downturn in almost all countries, a weakening of confidence among individuals and firms, and major problems for government finances. If our leadership wakes up to the potential consequences, we may yet see dramatic action on the banking system and a breaking of the old elite. Let us hope it is not then too late.
I agree with much of what Johnson has written, and I am planning to write an article soon on how I see this recession (depression) evolving over time. A hint: once again, almost everything in the mainstream consensus, especially in Canada, is completely out to lunch. Recent musings by CIBC economist Benjamin Tal had me both laughing and shuddering at the scope of the fantasy (I am planning a separate entry on this gem). 

The scenario that Johnson has outlined above is quite plausible and is consistent with portions of my scenarios that I am developing. The European banking system (as well as others) are in horrible shape and I expect things to get ugly over the next few months and years. One of the current fault lines is in Latvia, and I would keep an eye on developments there.

position in SKF, FAZ, SPY puts, BAC puts, Canadian bank shares, QID

1 comment:

BBC said...

Can't wait to read your next entry!!! Thanks again for your time.