Sunday, September 14, 2008

The Sky May Be Falling

And I am not Chicken Little.

The cascade of consequences from the subprime meltdown may be coming home to roost like you can’t believe. If you've read my blog for any amount of time, you know that right now, in this bear market, I have been a disciple of New York University economist, Nouriel Roubini. This weekend a post by Roubini describes a potential cascade of events which will likely start on Monday morning, probably while you read this blog entry if your up early.

In short, what Roubini described this spring and what he is surmising will happen Monday morning will go down in a manner that is eerily similar to the consumer bank failures of 1929. One key difference is that the failures will, mostly effect institutions that are not key consumer banks. The one notable exception is Washington Mutual (WaMu). While these are not big consumer banks that you and I depend on every day, the effect will be profound and make this summers events look like a walk in the park. The impending failure of Lehman Brothers is quite similar to the predicament that afflicted Bear Stearns this spring. However, the problem is that the Fed and Treasury Department have steadfastly said that there will be no further commercial bailouts after Fannie & Freddie. There is still a possibility that the Fed will flinch and give in and do the right thing. I still believe that preserving the banking system of this country and its key institutions is essential to our nation’s security.

Why am I blogging this? Because I think the $300 Billion that Congress committed to the Foreclosure Relief Act this summer, which I think is in vain, could have been very helpful in brokering a potential bailout of Lehman Brothers. Bailing out Lehman might avert a cascade of broker dealer and bank failures that will be historic. Remember where you are right now; history is unfolding right before our eyes. September 15th 2008 is going to be one very memorable and infamous day if things go down the worst case, but plausible path. I'm not talking about relatively trivial regional banks like Indy Mac. I am talking about financial institutions like WaMu and AIG, major financial institutions which affect most tax paying US citizens. The preservation of these institutions benefits us all, while keeping your irresponsible neighbors in their over priced homes does not.

In short, take cover, because it’s likely to be a bad day at the OK Corral.

Where are Randolph and Mortimer Duke when we need them

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