My readers I am sadly watching the debt ceiling drama unfold. I am very pessimistic that an agreement will be reached to increase the US debt limit. Some very hard times are going to follow.
In my last blog post on this subject I talked a lot about the financial collapse in Argentina in late 2001. Some readers were incredulous. Please allow me to give you a link to read about the collapse in more detail if you're curious.
http://en.wikipedia.org/wiki/Argentine_economic_crisis_(1999%E2%80%932002)
What happens to each of you after a default event is tied to the banking system. Let us focus of that a little more. In 1971 I was a university student at Tulane University. I took a fascinating economics course called Money and Banking. It was taught by a great instructor named Dr. Hans Flickensheld. He went on to be a super star in academics and finance.
The course itself was boring and tedious in parts. But it left a profound impression with me. "To make a long story short," I came away with the profound impression of how weak and fragile the banking system is under the best of circumstances. When circumstances get worse, the banking system can quickly collapse. The key here is that banks are constantly second by second exchanging money with each other. In a simplistic explanation this is done with "repo windows." When these windows shut the whole banking system locks up.
After a major default event here, the "repo windows" will lock up as they did temporarily when Lehman Brothers collapsed. President Bush II, Hank Paulsen, and Ben Bernanke, regardless of what you think about them, took decisive actions that saved the day with a massive $750 billion dollar bail out. Sadly we will have no money left for such a bailout this time.
What happens when the "repo windows" close will be a panic and a run on the banks with long lines of people trying to withdraw their funds. Of course these frightened depositors will get nothing and some violence will ensue. Law enforcement and the military will be called in to restore order. Those of you who are more calm and rational will take comfort in the fact that you can go online to pay your bills and maintain some normalcy in life. This ,most likely, will not work. I envision a scenario where salary and pension checks come into the banks and nothing can go out.
This crisis would be manageable if congress and the president were able to work together. It will not be the case this time. I have no idea what President Obama and Jack Lew can come up with to unfreeze the banks. Most likely they will come up with a solution like Angela Merkel and the European Union used when there was a banking crisis on the island of Cypress. There will be what is called "a bail in" In other words depositor's funds will be seized to provide funds for the banks. In the case of Cypress the argument was that most of the big depositors at the banks there were criminals and tax evaders who deserved to lose their ill-gotten gains. That argument will not work in US banks. I envisage a seizure of depositor funds in excess of $100,000 US.. Large corporations will be exempted in the hopes that they can continue to pay salaries, etc.
Now let us look at your retirement funds including 401(k)'s, IRA's , etc. In the Argentina nightmare, people with private retirement funds like my wife found these funds seized and integrated into the Argentine Social Security system. This could happen here!
This situation is going to be very ugly with human suffering beyond comprehension.
In my last blog post on this subject I talked a lot about the financial collapse in Argentina in late 2001. Some readers were incredulous. Please allow me to give you a link to read about the collapse in more detail if you're curious.
http://en.wikipedia.org/wiki/Argentine_economic_crisis_(1999%E2%80%932002)
What happens to each of you after a default event is tied to the banking system. Let us focus of that a little more. In 1971 I was a university student at Tulane University. I took a fascinating economics course called Money and Banking. It was taught by a great instructor named Dr. Hans Flickensheld. He went on to be a super star in academics and finance.
The course itself was boring and tedious in parts. But it left a profound impression with me. "To make a long story short," I came away with the profound impression of how weak and fragile the banking system is under the best of circumstances. When circumstances get worse, the banking system can quickly collapse. The key here is that banks are constantly second by second exchanging money with each other. In a simplistic explanation this is done with "repo windows." When these windows shut the whole banking system locks up.
After a major default event here, the "repo windows" will lock up as they did temporarily when Lehman Brothers collapsed. President Bush II, Hank Paulsen, and Ben Bernanke, regardless of what you think about them, took decisive actions that saved the day with a massive $750 billion dollar bail out. Sadly we will have no money left for such a bailout this time.
What happens when the "repo windows" close will be a panic and a run on the banks with long lines of people trying to withdraw their funds. Of course these frightened depositors will get nothing and some violence will ensue. Law enforcement and the military will be called in to restore order. Those of you who are more calm and rational will take comfort in the fact that you can go online to pay your bills and maintain some normalcy in life. This ,most likely, will not work. I envision a scenario where salary and pension checks come into the banks and nothing can go out.
This crisis would be manageable if congress and the president were able to work together. It will not be the case this time. I have no idea what President Obama and Jack Lew can come up with to unfreeze the banks. Most likely they will come up with a solution like Angela Merkel and the European Union used when there was a banking crisis on the island of Cypress. There will be what is called "a bail in" In other words depositor's funds will be seized to provide funds for the banks. In the case of Cypress the argument was that most of the big depositors at the banks there were criminals and tax evaders who deserved to lose their ill-gotten gains. That argument will not work in US banks. I envisage a seizure of depositor funds in excess of $100,000 US.. Large corporations will be exempted in the hopes that they can continue to pay salaries, etc.
Now let us look at your retirement funds including 401(k)'s, IRA's , etc. In the Argentina nightmare, people with private retirement funds like my wife found these funds seized and integrated into the Argentine Social Security system. This could happen here!
This situation is going to be very ugly with human suffering beyond comprehension.
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