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1.Market Observations, 8.Was Sticky

11 Aug 2017 (AFR) – How the world’s financial markets were rewired after the global financial crisis

[COMMENT: Now this is fantastic reading. A good recap on how the GFC unfolded, which provides some clues as to how the next one might unfold. And it contradicts many supposed experts who have claimed that no one could see the GFC coming. Well, this article describes the clues that were readily visible on 9th August 2007 – several months before the GFC unfolded. I do not normally include so much of the news story in my blogs, but I have on this occasion to give you, the reader, a reasonable appreciation for the amount of quality material in the full story. I do urge you to follow the link and read the entire story at AFR.com.]

(11 August 2017, AFR REVIEW supplement, page 1R, by Adam Toze)

Early in the morning of Monday, September 14, 2007, lines of panicked savers gathered outside branches of the mortgage lender Northern Rock on streets across Britain. It was – or at least it seemed to be – a classic bank run. JOHN GILES

It is a decade since the first tremors of what would become the Great Financial Crisis began to convulse global markets. Across the world from China and South Korea, to Ukraine, Greece, Brexit Britain and Donald Trump’s America it has shaken our economy, our society and lately our politics. Indeed, it has thrown into question who “we” are. It has triggered both a remarkable wave of nationalism and a deep questioning of social and economic inequalities. Politicians promise their voters that they will “take back control.” But the basic framework of globalisation remains intact, so far at least. And to keep the show on the road, networks of financial and monetary co-operation have been pulled tighter than ever before. In Britain the beginning of the crisis was straight out of economic history’s cabinet of horrors. Early in the morning of Monday, September 14, 2007, lines of panicked savers gathered outside branches of the mortgage lender Northern Rock on streets across Britain. It was – or at least it seemed to be – a classic bank run. Within the year the crisis had circled the world. Wall Street was shaking, as was the City of London. The banks of South Korea, Russia, Germany, France, Belgium, the Netherlands, Ireland and Iceland were all in trouble. We had seen nothing like it since 1929. Soon enough Ben Bernanke, then chairman of the US Federal Reserve and an expert on the Great Depression, said that this time it was worse.’ <snipped…>

‘What really did for banks like Northern Rock and for all the others that would follow – Bear Stearns, Merrill Lynch, Lehman Brothers, Hypo Real State, Dexia and many more – and what made this downturn different – so sharp, so sudden and so systemic, not just a recession but the Great Recession – was the implosion of a new system not just of bank lending, but of bank funding. It is only when we examine both sides of the balance sheet – the liabilities as well as the assets – that we can appreciate how the crisis was propagated, and then how it was ultimately contained at a global level. It is a story that the crisis-fighters have chosen not to celebrate or publicise. Ten years on, the story is worth revisiting, not only to get the history right, but because the global fix that was first put in place in the autumn of 2007 is in many ways the most significant legacy of the crisis. It is still with us today and remains largely out of sight. The hidden rewiring of the global monetary system provides reassurance to those in the know, but it has no public or political standing, no resources with which to fight back if attacked. And this matters because it is increasingly out of kilter with the nationalist turn of politics.’ <snipped…>

‘In 2007 economists were expecting a crisis. Not, however, the one they got. The standard crisis scenario through the fall of that year involved a sudden loss of confidence in American government debt and the dollar. During the George W. Bush administration, the Republicans had…’ <snipped…>

‘Most of the Northern Rock depositors had little to fear. Their deposits were, like all other ordinary savers, guaranteed by then chancellor Alistair Darling. The investors who weren’t covered by government backing were those who had provided Northern Rock with funding through a new and different channel – the wholesale money market. They had tens of billions at stake, and every reason to panic. It was the sudden withdrawal of this funding that actually killed Northern Rock.’ <snipped…>

‘By the summer of 2007 only 23 per cent of Northern Rock’s funding came from regular deposits. More than three-quarters of its operation was sustained by borrowing in…’ <snipped…> ‘The European money markets seized up on August 9th…’

‘The European money markets seized up on August 9. Within a matter of days Northern Rock was in trouble, struggling to repay short-term loans with no new source…’ <snipped…>

‘By the late summer of 2008 the South Korean banks operating this system owed $130 billion in short-term loans. Normally this was no problem – you simply rolled over the loan, taking out a new short-term dollar credit to pay off the last one. But when the interbank market ground to a halt, the South Koreans were painfully exposed.’ <snipped…>

Read the complete lengthy article at AFR.com (might need AFR login access, or try: AFR.com/trial)

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About robertbrain

Brainy's Share Market Toolbox. Read the honest truth about the sharemarket. Develop or fine tune your investing/trading strategies using share price charts (technical analysis), or learn about the investment strategies of others. Melbourne (Australia) based - supporting share market investors and traders to build wealth through smarter investing using my Share Market Toolbox arsenal of weapons to tackle the market.

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