We crashed when CDS blew up. This is not the biggest fraction
of the pie. When T-bonds crash, expect things much worse,
as the biggest fraction of the pie, the interest rates swaps,
will blow up. Expect much higher rates and much lower dollar.
Citi will likely collapse first, triggering
the collapse of JPM, BAC, WFC, and a number of foreign banking
institutions. No bank is safe, but small US banks did not
participate in this scheme, if only indirectly. In general,
one would expect a cascading domino effect, a collapse of
the World financial system, when large derivative players
fall one after another. No Western country is safe. The key
reason huge injection of reserves by the Fed did not stop
the collapse is that banks stopped trading with each other.
Why? Was it Joe six pack who doesn't pay the mortgage? Yes,
that's the key reason - the global economy can't
support the Ponzi scheme of this size. But in a more concrete
way the reason is counterparty risk. As you don't get paid,
netting of derivative positions becomes useless, and notional
value becomes real value. The BK is very likely to be devastating, with even 1929-1932 period looking like a walk
in the park. IMHO. |
