Saturday, September 26, 2009

U.S. Financial System In Even More Precarious Position Than Before

BNN had an interview today with renowned historian and Harvard University professor Niall Ferguson.

He says we are in is no ordinary recession, it is closer to a depression. The stock market runup is overdone. We will see a flatline, the U.S. economy will undershoot; U.S. projections will be deeply disappointing.

He says we have avoided Great Depression 2.0, but says the U.S. financial system is in an even more precarious position than before the economic crisis began. The bond market cannot accomodate the amount of debt. There will be pressure in higher interest rates.

Ferguson stated that "we are fiddling while the financial system burns".

On Goldman Sachs, he says the reason Goldman Sachs and others can afford million of dollars of bonuses is because they have a license to print money. They have very low cost capital as they can borrow at zero interest rates and leverage themselves in other investments. They have a state guarantee.

The market share of the "too big to fail" banks is getting bigger and bigger, part of why we are in a more precarious situation.

On the exit strategy: it is very far away, we are in an anemic state of affairs, it's a non discussion.
The fed will need to make extremely painful decisions on on how much money they will need to inject into mortgages and how they will need to bonds, until people realize the U.S is heading into insolvency. We are heading to the moment of truth in the bond market. Coming soon!

Watch BNN's fascinating interview.

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