<<Were we to have this situation here, banks would be closed, businesses would fail, etc., and we would get on with life. >>
this is where you err. one would EXPECT this to happen, but it won't. to wit: the Fed has printed $160 billion dollars in fresh money over the past six weeks alone, in an attempt to save the stock market and the fast deteriorating junk bond market. they will NOT allow a clearing out of the malinvestments, which is exactly what has happened in Japan. likewise, rest assured that politicians will re-discover interventionism in a big way if there's a more-than-average economic downturn. just look at California, there you have it. EIX and PCG have been defaulting on their commercial paper, and instead of bankruptcy, we get intervention by the state.
in qu.3, US banks had bad loans amounting to over $100 billion on their books, and that was before the economy took a dive. i predict that this number will rise dramatically in coming months. and you really believe there won't be bail-outs? the leverage and derivatives pyramid has become so large, and so concentrated, that the failure of a single big institution could bring the entire system to its knees. we have passed the stage of the credit/asset bubble where this problem was still amenable - now it's either inflate further, or risk collapse.
as an aside, shortly before the Japanese bubble peaked, Japan was universally regarded as invincible economically. their model was held up as one worthy of emulation around the world. and yet, it was a simple, classical credit bubble that was at the root of Japan's success, and the same holds true in the US. |
