Saturday, September 10, 2011

Anniversaries and Other Comparisons

Tomorrow is the 10th anniversary of 9/11. I am praying mostly that America, and all her families and people will pass a safe day. My daughter flies from Tampa to Baltimore tomorrow afternoon. I pray for her safety as well. The best thing about today versus September, 2011? We are no longer so afraid. And we have given up the less useful part of our innocence.

Right now, I want to look at another comparison: September, 2008, just before the financial world collapsed and now, September, 2011. The New York Times Business section did a story, comparing stock performance of top financial companies, in New York and Europe, in 2008, running up to the Lehman collapse on September 12, and the performance of the same financials thus far in 2011. Here are the two charts:

Striking, isn't it? Is there a Lehman moment ahead? I'm afraid to say, it's possible. This time the shock will come from Europe and spread to the US. A sovereign default (Greece). A breakdown in interbank funding. A run on one or more of the larger country banks (Spain, Italy, possibly France). A less than lightning response from the ECB (whose senior finance director, Jurgen Stark, a German, quit on Friday in apparent protest over the ECB's buying Spanish and Italian bonds to support liquidity in those countries). And Europe will begin to melt down. 

US banks would be next. Bank of America, closely followed by Citi, are our weakest banks, as the market (see above) tells us. Would they survive? Possibly, and possibly not. The Fed would act with lightning speed, again. But market based equity would have been driven down, and this time, the Government will not put it back in. No TARP II. One, or both banks, would be put into the new Resolution Authority, and we would have a chance to see if Dodd-Frank gives us a workable mechanism to shut down a Too Big To Fail bank. The chances? Who knows. I say they are one in three, but that is "spurious accuracy", as one of my B School profs used to say. I just know they are not zero.

What would happen then? A double dip recession. More unemployment. Would Washington be able to respond? I am really not sure. It might take the 2012 elections, contested clearly on the parties' very different views on the role of government in supporting and, yes, stimulating the economy, to decide the issue. I think Obama, and a progressive  view of the role of government, would carry the day. But I am not the slightest bit sure.

Rocky times ahead, I fear. Very possibly nowhere near as dire as portrayed above. But I feel it is prudent to prepare for possibly stormy seas.

I have asked my daughter to text or call me as soon as she touches down in Baltimore tomorrow afternoon.

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