Two Days to Fix It or Watch It Break
Today and tomorrow in Washington will tell the story: September 27 and 28, 2008. Amist all the testimony, the questioning, the fury, and the recriminations, there has to be a solution found by the time this weekend is over, so that by the time the banks open on Monday morning a solution will have been found so that the entire financial system does not freeze up.
The banks do not trust each other. In the normal course of business, they lend to each other overnight, but that has essentially stopped. We are just a fingersnap away from a total freeze-up of the system.
Part of the problem lies in the fact that the institutions which are clamoring for a government-inspired solution are the very ones who created the problem in the first place by inventing and distributing exotic financial instruments which were advertised as spreading risk, while the truth of of the matter is that they are so intertwined that risk is concentrated instead. Even the President of the United States has called the system a “house of cards.”
Congress is in a tight spot. Failure to nip this problem in the bud years ago has allowed it to grow to gigantic proportions, and now the piper must be paid. Price action in the markets as early as the first two or three months of year 2007 clearly showed, when displayed in Japanese Candlestick format, that Bear Stearns and Merrill Lynch, in particular, were in for a rough time of it in terms of the price of their stock in the market. There was no surprise, for those who were looking and who understood wehat they saw.
It is to be hoped that by the time Sunday night is here, some kind of a solution will be found in order to prevent a total meltdown of the banking system on Monday.