Saturday, November 22, 2008

This crisis is not 1929



The comparison between today & 1929 is strong. Anywhere you go you read "uncanny" similarities between 1929 and today's Gold prices (see the chart on right).
The now-defunct Merrill Lynch's CEO states that today's economic environment compares with 1929 in terms of being "catastrophic".
Nothing could be more far from truth.

Go back further: to 1873. The year of the Real Great Depression. There are some strong conclusions from how it was resolved. The panic of 1873 was the result of esoteric mortgages, land values climbed and climbed, and Europe was beseiged by the cheap grain and goods from USA.

  1. When banks fail in Wall Street, the traffic in Main street stops for a long time.
  2. British banks hold back funds because they are not sure which recepient is safe and which is not. Of course the chancellor of Exchequer has threatened to nationalise banks if they don't start lending money. Let's see how that comes to pass.
  3. Banks with largest capital reserves were able to ride the panic in 1873. The same holds good today too. The banks with largest capital today are Wells Fargo with 8.5% capital ratio and HSBC with 8.8% in clean deposits are by far the strongest on record. Of Course, Citi claims it has a 10.4% ratio with $55 Billion of deposits, but, the fact remains is that it is bringing a portion of its $1.2 Trillion failed assets chucked away off the balance sheet back into its balance sheet. Even assuming it brings only 10% of its OBS failed assets into its balance sheet, that amounts to $18 Billion. Which means its capital ratio falls to 7.4% The lowest for any Retail bank which can survive.

Bernanke may have earned ridicule and Paulson may be the most hated person in Main Street for bailing out bad banks, but in hind sight their quick action may prove to be the most calming effect so far.

Because as history has shown in 1873, 1879, 1929 and 1987(SLA Debacle), when Banks fail, Main Street stops. Period.





No comments: