FROM EIR DAILY ALERT
Financial Collapse Stalks Unprepared President
Dec. 17, 2018 (EIRNS)—The Federal Reserve Federal Open Market Committee (FOMC) meets this week, and President Donald Trump is trying to stop a rate increase; but his Twitter message Monday morning showed how deep is his misunderstanding of the situation of great financial danger the nation faces, or its cause. The President tweeted,
“It is incredible that with a very strong dollar and virtually no inflation, the outside world blowing up around us, Paris is burning and China way down, the Fed is even considering yet another interest rate hike. Take the Victory!”
Credit markets, stock markets, real estate markets, industrial production growth continued to fall as he wrote, and new initiatives with other nations for infrastructure projects and technological breakthroughs were urgently needed to create real economic value and higher productivity.
Sunday’s Financial Times carried a report of the first real breakdowns in the corporate debt markets. As re-reported by Zero Hedge, the Financial Times
“reported that U.S. credit markets have ‘ground to a halt’.... Things are even worse in the bond market, where not a single company has been able to borrow money through the $1.2 trillion U.S. high-yield corporate bond market this month. If that freeze continues until the end of the month, it would be the first month since November 2008 that not a single high-yield bond priced in the market.”
Zero Hedge additionally reported that in this frozen condition, six leveraged-loan proffers and at least two junk-bond offerings had had to be withdrawn and “eaten” by the investment banks trying to market them, which are taking losses as a result. This phenomenon was the early-2007 harbinger of the coming failures of Bear Stearns and then Lehman.
The Bank for International Settlements (BIS) published a Dec. 10 comment by Head of the BIS Monetary and Economic Department Claudio Borio, warning that the derivatives clearinghouses set up by major banks after the 2008 crisis, known as CCPs or central counterparties, were supposed to minimize derivatives risk, have themselves become concentrations of risk and potential detonators of an explosion in derivatives markets, including that threatened by a “hard Brexit.” Daily Telegraph International Business Editor Ambrose Evans-Pritchard, writing in the Telegraph Dec. 16, headlined this warning: “BIS Fears Financial Seizure at the Heart of the World’s Clearing System.” He wrote, citing the BIS Quarterly Report, “The pillars of the global financial system are fundamentally unstable and could lead to a frightening chain-reaction in the next crisis, the world’s top watchdog has warned.
“Giant ‘central counterparties’ (CCPs) that clear much of the $540 trillion (£428 trillion) nexus of derivatives are themselves vulnerable to failure in times of extreme stress.... The Bank for International Settlements said in its quarterly report that the CCPs could cause ‘a destabilizing feedback loop, amplifying stress.’ ”
