Friday, June 22, 2012

Panic is not enough - Bank downgrade addition

Five of the top six U.S. banks were downgraded today by Moody's.  In some cases the downgrade was severe.  Morgan Stanley was able to convince them to ONLY downgrade them 2 points (vice 3).  Globally 15 major banks were downgraded.

Their new grades:

Source:  Wall Street Journal (found here)

Buried somewhere (o.k. here and here) in our past posts we have brought up the collapse of the an Austrian Bank, Creditanstalt, as one of  the primary agents of the Great Depression.  Coming in 1931, well after the after the 1929 U.S. stock market crash.  It is one of the items that made the Great Depression "Great".
It is useful to realize that the Great Depression itself was not one large unified crash, but a series of crash and recoveries, with each succeeding crash being larger than the one before.  Just as we try and kick the can down the road, with regards to the worldwide debt crises, they did some of that as well back then.
The idea that this crises is all about sub-prime credit lending being pushed by FANNIE and FREDDIE is laughable: wish it were so.
So when I see the Creditanstalt collapse was noted by a columnist at the Financial Times, I take notice.  The fact that a massive bank downgrade interrupts in between the point I write much of this post (in the middle of a book review bonanza), and being able to post it, only emphasises the point.

Panic has become all too rational
Martin Wolf, Financial Times, 5 June 2012 (hat tip: NC)

It is often forgotten that the failure of Austria’s Creditanstalt in 1931 led to a wave of bank failures across the continent. That turned out to be the beginning of the end of the gold standard and caused a second downward leg of the Great Depression itself. The fear must now be that a wave of banking and sovereign failures might cause a similar meltdown inside the eurozone, the closest thing the world now has to the old gold standard. The failure of the eurozone would, in turn, generate further massive disruption in the European and even global financial systems, possibly even knocking over the walls now containing the depression.
How realistic is this fear? Quite realistic.
Creditanstalt from a postcard


GalaktioNova said...

Quite scary, thank you. I'll have to think about it.

russell1200 said...

On the plus side, the 1930's various banking crises did not cause the rioting and looting that today's apocalypse-in-progress fiction imagines.

Or at least not really big riots.