9/15/08 - Buddy Logan
The walls are tumbling!
This is the month Trends Institute forecaster Gerald Celente said was going to get ugly. As usual, he wasn’t wrong. The biggest financial news since the 1929 crash hit the streets today, along with attempts by the mainstream media to dampen its effect. This time, I think I am on the MSM’s side. No sense in hastening the arrival of Godzilla.
Even though they are considered to have a healthy balance sheet, financial giant Morgan Stanley, is already beginning to fear that it wouldn’t take much panic to make them bite the dust, along with the announcements this morning of the failures of Lehman Brothers and Merrill Lynch.
Economic commentators and forecasters in Europe and Asia are all talking about the meltdown of the U.S. economy, and have been for several weeks. In the United States, the media is trying their best to keep a tight lip and our potential future leaders are silent in their campaign speeches.
As Gerald P. O’Driscoll Jr. said in a Wall Street Journal article recently, “…hope appears to be all we have.” O’Driscoll is a senior fellow at the Cato Institute and a former vice president and economic adviser at the Federal Reserve Bank of Dallas.
“We are at a Smithian moment”, says O’Driscoll, “in which the temptation for the Fed to spend its last dime of credibility may prove irresistible. Investors are already being taxed by inflation and can rationally expect that tax rate (the inflation rate) to be raised going forward. Wages are not keeping up. Main Street is being taxed to fund Wall Street excess. Anyone who works, saves and invests is exposed to confiscation of his capital and earnings through inflation.”
The world is nervous. The implosion of the U.S. economy will affect everyone except the African villager who trades with goat’s milk and eggs.
We have seen the collapse of some large financial institutes in the last few months, but the big news happened this morning. Bank of America, in extreme financial duress itself, took over Merrill Lynch in a 50 billion dollar deal. As if that isn’t enough news for the day, 158-year-old Lehman Brothers declared itself bankrupt after a desperate attempt at negotiating a bailout failed over the weekend.
British bank Barclays considering buying out Lehman Brothers, but walked away on Sunday saying it was just too risky. Lehman’s bankruptcy will affect a great number of companies over the entire globe. The effect will be felt immediately. As Art Hogan, chief market strategist at Jefferies & Co. put it, ”A Lehman bankruptcy is not like an airline bankruptcy; it’s not like they can keep flying until they figure it out. Lehman is going away.”
Bank of America’s buyout of Merrill Lynch, for 50 billion dollars, just created the world’s largest financial services company. Consideration of the fact that both institutions were on precarious ground before this transaction took place does little to make one feel comfortable. Remember that Bank of America is the same institution that bought all of Countrywide’s bad mortgage loans.
In a joint statement, a group of 10 global commercial and investment banks said they will pump 70 billion dollars into the world economy to help ease the shock. In a joint statement they “initiated a series of actions to help enhance liquidity and mitigate the unprecedented volatility and other challenges affecting global equity and debt markets.”
Meanwhile, the Federal Deposit Insurance Corporation, the smoke-and-mirrors protector of the banking industry in the U.S., has recently mentioned that it is considering asking the U.S. Treasury for a loan “due to liquidity issues”. It seems they may be getting a little short on funds.
Treasury Secretary Henry Paulson says not to worry. The U.S. banking system is “safe and sound”.
Fortune 500 forcaster Gerald Celente’s advice: “Invest in quality local farming.”