If there is any doubt what is spooking the global markets look to the IFR piece, Credit taps run dry for European lenders, setting scene for liquidity crisis. This is a must read over the weekend.
Remember, Chairman Bernanke, the number one student of the Great Depression, believes it was the bank failures that took place in 1931 Europe that “made the Great Depression great.” In a 2009 conversation with the Council of Foreign Relations the Chairman stated,
I think perhaps the most critical, in May of 1931, the Creditanstalt, which was one of the largest banks in Europe, failed, which generated a wave of financial crisis around the world. Up till early 1931, arguably the 1929 downturn was just a ordinary — severe but ordinary downturn. It was the financial crises and the collapse of banks and other institutions in late 1930 and early 1931 that made the Great Depression great.
The IFR reports,
Options are rapidly running out for Europe’s ailing mid-tier banks as nervous creditors pull the plug on once vital sources of funding in response to growing sovereign contagion worries, sowing the seeds of an imminent liquidity crisis at the heart of the eurozone.
With bond markets shut and investors unwilling to buy asset-backed securities, the repo market – for some banks the sole remaining source of private funding – has become the most recent tap to run dry, with some investment banks pulling credit lines worth tens of billions of euros in recent weeks.
Another reason that Bernanke gives for the great in the Great Depression was the Fed was constrained by the gold standard and couldn’t provide liquidity to even healthy banks. People lost their savings, the money supply experienced a massive contraction, and the rest is history.
The eurozone countries and banks are on a quasi-gold standard with the Euro and the institutional constraints on the European Central Bank. This better change quickly or we’re gonna have a big problem. Stayin’ in the bunker for now.