I wish they had told me they were coming up on a hard stop at Bloomberg Television.
Talking in sound bytes is difficult if you want to be accurate, but we all know that, from hearing sound bytes for years.
To finish my point:
You can put any financial business into bankruptcy by denying them credit. And you can deny any company credit by buying enough protection in the CDS market.
It might not be so bad if it stopped there. Unfortunately, when the CDS on subprime mortgages came due, they overwhelmed the companies that had written the insurance.
When the insurance providers went under, and no one knew who had bought the insurance, then no investor could safely lend to any private company, no matter how well capitalized they might have been the week before.
Treasury Bills had so much demand in September of 2008 that yields went negative. You need no other proof that even the best banks weren’t safe enough.
One area that was utterly stopped cold by that fact was the international commodity business. After all, the only way a producer would ship their goods was to get assurance they would be paid.
That assurance came from Letters of Credit issued by banks.
But what if the bank held $20 billion in AAA CDO’s in a “matched book” with insurance, and the insurance provider just went belly up? Suddenly the bank might be insolvent.
As the owner of a big pile of iron ore, or wheat, or any other trade goods, I might have my doubts about being able to collect what was due several months in the future if the only assurance I had was from a bank that might not be there in three months.
Better to be cautious, and wait.
That happened all over the world.
Imagine what would have happened if that state continued. Too much of the world economy operates on the “just in time” principal of inventory control for the system to absorb that kind of interruption.
And that’s just one obvious spillover of this hidden $60 trillion casino.
Others were longer term, and still in place.
Half the US mortgage market was private companies issuing private MBS in 2007. By 2009, that avenue for financing home purchases was gone. The taxpayer was “forced” to try to take up the slack, making us the proud owners of Fannie and Freddie, and leaving us on the hook for losses.
Nice choice. Either you agree that you can only sell your house to someone who can pay all cash, or you agree to be taxed for the next 30 years to cover losses.
About 5 million households have to sell every year for life reasons (new job, divorce, medical bills, death, for example). Imagine if there were no money being lent by anyone (government Agencies included) to finance home purchases.
That would guarantee that five million families go bankrupt every year, on top of those who ended up there when they couldn’t pay the co-pays on their hospital bills.
Debtors’ prison, anyone?