ALERT - September 15, 2008

JOHN WILLIAMS’ SHADOW GOVERNMENT STATISTICS

A L E R T

September 15, 2008

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Systemic Risk Appears Intensified by Abandonment of Lehman

Markets Face Extreme Volatility and Distortions, with Heavy Intervention

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The inflationary recession and systemic solvency crises continue to intensify, with the solvency crisis breaking over the seawall, once again, this past weekend.  Federal Reserve and U.S. Treasury management of developments in the last three days appears likely to have deepened the systemic liquidity crisis, rather than to have eased same. By allowing the loss of Lehman, the Fed and the Treasury either believed they could contain the resulting negative systemic impacts, and/or they were playing to presidential election year politics by trying to look tough on the "moral hazard" issue. Irrespective of moral hazard, the solvency crisis has evolved too far — under pre-existing lax oversight by the Fed and Treasury — for the overseers now to start denying help to entities that could threaten the system. Playing politics with systemic solvency significantly increases the risks of systemic collapse and/or the cost of preventing same.

With no help offered by the Fed and Treasury to Lehman, and the politically-correct implication that there are no financial institutions too big to fail, risk has increased for an intensified crisis of confidence in the U.S. banking system, with possible flight to safety out of (a run on) the U.S. banks. Such is despite the liberalized and expanded liquidity facilities just offered by the Fed, and increasing speculation of renewed Fed easing, and despite any $70 billion fund being created by private global banks. I still expect that the Fed and the Treasury will do whatever they have to do, will create whatever money they have to create, in order to prevent an unthinkable systemic collapse. The costs and difficulty of doing same have just been increased by this weekend’s activities.

Former Federal Reserve Chairman Alan Greenspan was widely quoted from a Sunday television appearance, where he described the current crisis as "a once in a half century, probably a once in a century event."  Slightly over a century ago, the 1907 banking/financial panic triggered a depression and resulted in the founding of the Federal Reserve, which was supposed to prevent banking crises such as seen later in the 1930s, 1980s and 1990s, and today. Where Fed actions in recent years encouraged and fostered some of the financial system abuses that have led to today’s circumstance, the Fed’s practical role now has evolved into one primarily of financial-crisis containment.

The President’s Working Group on Financial Markets (PWG), popularly called the Plunge Protection Team, was created following the 1987 stock market crash, with an eye towards the Treasury, the Fed and various market regulators preventing disorderly, and maintaining orderly, financial markets. Direct intervention/manipulation of the equity, credit, currency, oil and gold markets has been seen at different times since 1987. Most recently, intervention often has been coordinated with foreign central banks. Although PWG activity, by its nature, usually is not disclosed, in the current banking solvency crisis, interventions have been a virtual certainty, such as with the extraordinary market gyrations seen at the time of the Bear Stearns failure.

The PWG certainly will be at work in today’s market place, given the fundamental market displacements from the evolving banking solvency crisis, as well as pressures in different markets from the unwinding of various Lehman positions. Accordingly, the various markets remain subject to extreme volatility and distortions, where short-term market movements may appear to be irrational.

The options open to the Fed and the Treasury in keeping the system afloat all involve creating new money and liquidity, with implications for higher inflation, regardless of any near-term, violent and heavily suspect moves in oil pricing. My longer-term outlook remains the same, for a deepening bear market in equities, an eventual spike in long-term interest rates, heavy selling of the U.S. dollar and much higher prices for precious metals. 

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A Flash Update will follow tomorrow’s CPI release.