Nothing changed after 2008 – and you’re about to pay for it

The financial system is more vulnerable than ever, says Bill Bonner – all thanks to central bankers.


The financial system is more vulnerable than in 2008 thank the central bankers

Stocks went up big-time yesterday. Why? We don't know.

Sooner or later probably sooner they will go down. And the Fed will print money to buy stocks. Doesn't that sound crazy?

In the meantime, more about what will happen when a real crash comes.

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In a real financial crisis, people reach for something real to hold on to.

Following the crash of '29, for instance, people ran to their banks and took out so much cash that 10,000 banks closed they were out of money.

In the crisis of '08-'09, people were confused. In an era of credit money, what is real? In the event, they too rushed to take out cash. According to Congressman Paul Kanjorski, member of the House Committee overseeing the banking industry, depositors took out $550bn in less than two hours which would have bankrupted every money fund and every bank in the nation in less than 24 hours.

Readers, we have set off on a long, winding road. We are skipping along, cheerfully anticipating the end of the world. What we are trying to figure out now is how our modern credit-based money system will survive the next crisis. In a crisis, people are sure to want money' in hand they always have. But how can you hoard money you cannot see? How can you stockpile credit? What can you trust when trust disappears?

Every financial system suffers shocks from time to time. When they do, promises tend to be marked down sharply. No one knows for sure who can pay and who can't. No one can borrow because no will can lend. Credit vanishes. What is left is cash cold, hard cash.

The Fed can step in, as it did in 2008, and promise all the credit in the world. But what good is it in a real financial crisis?

Imagine the local cardealer. He goes into his bank to refinance his business loan.

"Are you selling any cars," asks the loan manager?

"Are you kidding? Nobody's buying."

"Then, I can't lend you any money; you won't be able to repay."

It doesn't matter that the Fed is providing money to the bank even at zero interest. The bank is still better off holding on to the money than taking a loss on a loan.

Now, imagine that across the whole economy. Credit may be available. But not to the people who are desperate for cash. Besides, it is credit that has caused the crisis: too many people owe too much money they can't pay.

Yes, the Fed will offer an infinite amount of credit. It will promise that "no bank will fail". But that won't make insolvent businesses suddenly profitable. It won't cause people to buy cars, or build houses, or spend money. Stocks will be slashed in half. GDP growth will turn negative. Housing sales will come to a halt.

And you can imagine too because we lived through it so recently how banks and businesses will take the news that their collateral is giving way beneath their feet. They will cut off lines of credit. They will cancel investments. They will lay off employees by the hundreds of thousands.

They will default on their own debt and refuse to lend to anyone else.

Fear and uncertainty will spread. The whole economy and everyone in it will rush for cash. Lines will form at ATMs. And within hours, the cash will run out.

Why didn't that happen in September '08? It almost did. But three things prevented a total meltdown:

There was less debt than today $8trn less in America, $88trn less worldwide.

The world economy was still in growth mode. China still growing at 8% per year. Commodities were becoming more expensive. There were still many areas in which investment was paying off.

The Fed still had some ammunition to fight the downturn. Its key rate was 1%. Now, it has been near zero for the last 75 months.

It would have been better to let the crisis of '08-'09 take care of itself. Free markets are remarkably robust and self-healing. Instead, the PhDs who work for the Treasury and the Fed believe they can do better. They fought an excess debt problem by giving the world more debt. And now they have a system that is more vulnerable to a crisis than ever before.

While this has greatly enriched the banks, the cronies, and the speculators, it has only made the situation of the middle classes worse. There are fewer real breadwinner' jobs today than there were in 2007 and real median household income is lower.

In 2009, the Fed chairman was ranked, in the popular imagination, somewhere between Abraham Lincoln and Jesus Christ. But after six years of failure, with policies that obviously rob the many to pay off the few, the public will be less ready to believe a new messiah is on hand when the next crisis comes.

Suspicious and fearful, they will rush the ATM machines sooner, rather than later.

But the Fed still has one trick up its sleeve...