A Short but Unsettling Snippet

I've recently highlighted some interesting content from websites that I visit on a regular basis. Today's short but unsettling snippet, "Links 1/1008 and a Scary Tidbit," comes from Yves Smith, publisher of another one of my daily must-reads, Naked Capitalism.

Forgive me, but we are going to be a bit lean on posts tonight. I had too much to drink with someone who is terribly plugged in (security clearances AND knows tons of people in academia and the officialdom personally, both here and overseas).

Unfortunately, I can't use many of the specifics he conveyed, but he is a very upbeat sort by temperament but also has been studying the banking/credit mess. He sees us going down the Japan path. Banks will not be technically bankrupt, but will have so many bad assets on their balance sheets, and will have taken hits to their equity bases, that 18 months from now they will be unable to make new loans. They will be quasi nationalized. BTW he said this in a completely evenhanded fashion, as if he was giving a weather report.

This, mind you, comes from someone who has written frequently for the American Enterprise Institute and tells me the Treasury and the Feds are working on this scenario now. This is far more dire than any forecast either yours truly, a constitutional skeptic, or even uberbears like Nouriel Roubini, have been putting forward.

Actually, those who've read my book or who've been paying attention to what I've been writing about here at Financial Armageddon over the past year or so might take issue with that last sentence.

Comments

[dearieme]

Only an Armageddon? You must be an incorrigible optimist.

[B]

This really isn't unbelievable. It's not even conspiratorial. That's why I've been writing incessantly of deflation and banking problems for two years. Banks aren't loaning today. They are using liquidity injections to clean up their balance sheets as opposed to initiating new loans. Same thing happened in the Great Depression. Bernanke obviously knows this being a student of history. So, the fact the Federal Reserve would loan directly to the markets is not that far fetched. It is within their right and ability to do so. Be it though unstable nationalized banks or some other method. That was what Bernanke was talking about with helicopters. Not that he was going to debase the currency by printing money as the dimwits write. The problems with any of these scenarios is how it is actually accomplished. If it is accomplished opaquely without the knowledge of the masses, it will work. If banks start failing and the Feds nationalize banks, that will guarantee a crisis of economic confidence.

So, Michael, here's the real question I have. I won't post it on my blog because it's a little too bizarre and I don't want to be viewed as a crackpot. I don't necessarily believe it but I can't shake the thought. Even if it is remote. Many recent laws allow the government to effectively suspend the Constitution. And, local police departments are now armed to the teeth with military grade weapons and armored vehicles. Why do they need all of that firepower? Terrorists? Our police department used to show up in a suit. Now they show up with helmets, riot gear, machine guns and armored vehicles. Did the government realize what was unfolding and is planning to keep a society from possibly crumbling in the wake of massive economic shocks? And, even if the incompetent government didn't realize this, could that power be used to accomplish the same mission if major economic problems do occur? It's a little freaky.

[dearieme]

@B: An officer in the British Army told me once that any sensible government must assume that the slums will erupt if the slum-dwellers can't buy any food for two days.