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The Economic Collapse Bad Financial News Keeps Pouring In: 14 Facts That Just Might Scare The Living Daylights Out Of You Posted: 03 Oct 2011 Will the bad financial news ever stop? A lot of people in the financial world were hoping for a much better fourth quarter after an absolutely disastrous third quarter. Well, if Monday was any indication, October could end up being a really rough month for global financial markets. So much bad financial news keeps pouring in that it really is a challenge to try to keep track of it all. Greece seems to get closer to defaulting on their debts with each passing day, and it appears that Germany is not going to contribute any more bailout money beyond what they have already committed to. Major banks on both sides of the Atlantic are on the verge of collapse, and investors all over the world are afraid that we may have another "Lehman Brothers moment" soon. Shares of American Airlines dropped a staggering 33 percent on Monday as rumors that they will soon be entering bankruptcy swirled. Yes, things certainly are getting interesting. Back in 2008, the governments of the western world saved the financial system with gigantic bailouts that were absolutely unprecedented. If the financial system crashes again at some point in the coming weeks or months, will the political will for more bank bailouts be there? If not, what is going to happen to the banking system? On both sides of the Atlantic, the big banks are highly leveraged, they have taken on a ton of risk and they are very deeply exposed to derivatives. It is as if virtually nobody learned any lessons during the financial crisis of 2008. Once again we are facing a situation where if a couple of financial dominoes fall it could send dozens of others tumbling to the ground. Some very significant things happened on Monday. But the media has gotten so used to reporting on tremendous financial instability that Monday's events mostly got brushed to the side. Instead, Amanda Knox captured most of the headlines. But the reality is that some really, really monumental stuff has been going down. The following are 14 facts that just might scare the living daylights out of you.... #1 On Monday, the Dow was down 258 points. Lately it seems as though the Dow has been going up or down by several hundred points almost every single day, and that much volatility is not a good sign for the health of the financial system. #2 Shares of Wall Street banking giant Morgan Stanley fell by another 8 percent on Monday. Overall, shares of Morgan Stanley have declined by more than 50 percent since February. #3 Bank of America stock dropped down to $5.53 a share on Monday. Just a few years ago, it was trading for more than $50 a share. #4 There are reports that Goldman Sachs may actually show a loss for the third quarter of 2011 and that yearly bonuses for employees may be slashed to next to nothing. Yes, not too many people are going to have sympathy for Goldman Sachs, but this just shows how bad things are getting out there for the big Wall Street banks. #5 Normally Goldman Sachs is quite upbeat, but lately they have been coming out with some really frightening reports. For example, a new report from Goldman Sachs declares that there is a 40 percent chance that we are entering a "Great Stagnation". #6 Shares of European banking giant Dexia plunged by about 10 percent on Monday on rumors that it will soon need a significant bailout. The stocks of major banks all across Europe have been getting absolutely hammered for weeks. #7 Shares of American Airlines fell by 33 percent on Monday on rumors that the airline is about to enter bankruptcy. Amazingly, trading in the stock was stopped 7 different times on Monday. #8 It is being reported that approximately 240 pilots for American Airlines have retired in the last two months alone. All of those pilots are retiring so that they can shield their pensions from the upcoming bankruptcy filing. #9 Nearly the entire airline industry got hit really hard on Monday. Shares of United Continental, U.S. Airways and Delta were all down more than 10 percent. #10 Overall, U.S. stocks fell by 14 percent during the third quarter of 2011, and now the fourth quarter is off to a very rocky start. #11 The incoming head of the European Central Bank, Mario Draghi, has publicly admitted that major European banks are having "funding problems". Just like back in 2008, we are rapidly heading for a giant "credit crunch". #12 A shocking new Bloomberg survey has found that approximately one out of every three international investors expects a "global economic meltdown" within the next 12 months, and 70 percent of them believe that the global economy is "deteriorating". Perhaps they have been reading The Economic Collapse Blog too much. #13 Financial markets in Europe were rocked on Monday when it was revealed that Greece is not going to hit the deficit reduction targetsset for it either this year or next year despite all of the severe austerity measures that have already been implemented. Needless to say, a lot of financial authorities in Europe were very displeased by this news. #14 German Finance Minister Wolfgang Schaeuble is publicly declaring that Germany will not contribute any more money to the European bailout fund. The truth is that the political will for more bailouts has totally dried up in Germany. The recent vote by the Bundestag to approve money for the European rescue fund should not be misinterpreted. That vote simply approved money that was part of a deal that was agreed to over two months ago. What is more important is what many major German politicians said after the vote. Essentially, the overwhelming consensus is that Germany is done contributing money. Once the money is gone from the current bailout pool (which is not anywhere close to what is really needed), there will be no more money from Germany. That means that the era of the bailouts in Europe is drawing to a close. In a recent editorial, Ambrose Evans-Pritchard described the situation in Germany in this manner.... The furious debate over the erosion of German fiscal sovereignty and democracy – as well as the escalating costs of the EU rescue machinery – has made it absolutely clear that the Bundestag will not prop up the ruins of monetary union for much longer. Horst Seehofer, the leader of Bavaria’s Social Christians, said his party would go "this far, and no further". Let that last phrase sink in. Basically, what politicians all over Germany are saying is that Germany has now done all that it is going to do. The implications of this are huge. Ambrose Evans-Pritchard recognized this in his editorial. In fact, the usually reserved journalist actually used all caps for six straight sentences and broke out some very strong language that is very uncharacteristic for him.... Repeat after me: THERE WILL BE NO FISCAL UNION. THERE WILL BE NO EUROBONDS. THERE WILL BE NO DEBT POOL. THERE WILL BE NO EU TREASURY. THERE WILL BE NO FISCAL TRANSFERS IN PERPETUITY. THERE WILL BE A STABILITY UNION – OR NO MONETARY UNION. Get used to it. This is the political reality of Europe, since nothing of importance can be done without Germany. All else is wishful thinking, clutching at straws, and evasion. If this means the euro will shed some members or blow apart – as it almost certainly does – then the rest of the world must prepare for the day. Basically, this is his way of saying that "the sky is falling" and that the financial system of Europe is doomed. If you have followed the writing of Ambrose Evans-Pritchard for any length of time, then you know that he is one of the most respected financial journalists in the world and that he is not prone to indulge in much "doom and gloom". For him to say what he did is very significant. But even if there were no financial problems in Europe, the United States would probably be slipping into another recession anyway. Right now our economy is a total mess, and all kinds of people are coming out of the woodwork and are trying to take credit for "calling" the upcoming recession. Some of the pronouncements are so bold that you would think that some half-crazed blogger wrote them. For example, just check out the following quote from a report recently put out by the Economic Cycle Research Institute.... "Here's what ECRI's recession call really says: If you think this is a bad economy, you haven't seen anything yet." But do the American people really need some experts to tell them that we are going into another recession? The American people know what is going on. According to one recent poll, 90 percent of the American people believe that economic conditions in the United States are "poor". According to another recent poll, 80 percent of the American people believe that we are actually in a recession right now. So perhaps the American people are actually ahead of most of the so-called "experts". In any event, economic conditions in the United States continue to get worse. The average American family is having a harder and harder time getting to the end of each month. According to a Harris Interactive survey taken near the end of last year, 77 percent of all Americans are now living paycheck to paycheck. In 2007, the same survey found that only 43 percent of Americans were living paycheck to paycheck. At least Barack Obama is not talking so much about an "economic recovery" these days. When asked recently if Americans are better off today than they were four years ago, Obama said the following.... "Well, I don't think they're better off than they were four years ago." Finally, something that we can all agree with Barack Obama about. Sadly, things are about to get even worse. Pay close attention to all of the bad financial news that keeps pouring in. Just like in 2008, something really big is happening. When the current bailout fund in Europe runs out in a few months, things could really start to unravel. If Greece (or any other eurozone nation for that matter) defaults, it could set off a chain of financial events so catastrophic that it just might scare the living daylights out of all of us. Let us hope for the best, but let us also prepare for the worst. Tremendous fear and panic has gripped the financial world, and the underlying problems causing this crisis are not going to be solved any time soon. We are about to enter unprecedented territory. Hold on tight. ------------------------------------------------------------ Ambrose Evans-Pritchard Ambrose Evans-Pritchard has covered world politics and economics for 30 years, based in Europe, the US, and Latin America. He joined the Telegraph in 1991, serving as Washington correspondent and later Europe correspondent in Brussels. He is now International Business Editor in London. Subscribe to the City Briefing e-mail. NEIN, NEIN, NEIN, and the death of EU Fiscal Union By Ambrose Evans-Pritchard Economics Last updated: September 30th, 2011 Angela Merkel with Eastern European leaders today (Photo: AP) Judging by the commentary, there has been a colossal misunderstanding around the world of what has just has happened in Germany. The significance of yesterday’s vote by the Bundestag to make the EU’s €440bn rescue fund (EFSF) more flexible is not that the outcome was a "Yes". This assent was a foregone conclusion, given the backing of the opposition Social Democrats and Greens. In any case, the vote merely ratifies the EU deal reached more than two months ago – itself too little, too late, rendered largely worthless by very fast-moving events. The significance is entirely the opposite. The furious debate over the erosion of German fiscal sovereignty and democracy – as well as the escalating costs of the EU rescue machinery – has made it absolutely clear that the Bundestag will not prop up the ruins of monetary union for much longer. Horst Seehofer, the leader of Bavaria’s Social Christians, said his party would go "this far, and no further". There can be no question of beefing up the EFSF to €2 trillion or any other sum, whether by leverage or other forms of structured trickery. "The financial markets are beginning to ask whether Germans can afford all this help. We must not risk the creditworthiness of the German state," he said. The best-read story in today’s Handelsblatt is the mounting rebellion against the EFSF in the Bundesrat, the German senate representing the interests of the regions. While this chamber does not have the power to block budget deals, it has begun to express deep alarm about the drift of events. Marcel Huber, Bavaria’s Staatskanzleichef, gave an explicit warning that the Free State of Bavaria will not take one step further towards an EMU fiscal union or debt pool. “A collectivisation of debts will under no circumstances be accepted. We oppose credit lines for the EFSF or leveraging through the ECB. Our message is simple and clear.” Since the existing EFSF is too small to make any material difference to the EMU debt crisis, this means that nothing has in fact been resolved. We are where we started, almost entirely reliant on the ECB to play the role of lender-of-last resort. Can it realistically play this role after the double resignation of Axel Weber at the Bundesbank and Jurgen Stark at the ECB itself over bond purchases? Can it defy Europe’s paymaster state for long? You decide. This great eruption of feeling in Germany has been the transforming political and strategic fact of Europe over the summer. Finance Minister Wolfgang Schäuble is no doubt scrambling around trying to find some formula to breach his pledge that there is no secret plan to leverage the EFSF into the stratosphere. He will try to pretend that this is not a flagrant double-cross. But his scheming with the French is largely irrelevant at this point. Bigger events are rolling over him. If he really thinks he can dupe the Bundestag yet again, he is out of his mind. And will soon be out of office. As Bundestag president Norbert Lammert said yesterday, lawmakers had a nasty feeling that they had been "bounced" into backing far-reaching demands. This can never be allowed to happen again. He warned too that Germany's legislature would not give up its fiscal sovereignty to any EU body. In a sense, the Bundestag vote was much like the ruling by the Constitutional Court earlier this month. It too said "Yes" to the bail-out machinery, but that was not relevant fact. What mattered was the Court’s implicit warning that Germany had reached the outer boundaries of EU integration, that German democracy is under threat, and its explicit warning that the Bundestag’s fiscal powers could not be alienated to Brussels. Something profound has changed. Germans have begun to sense that the preservation of their own democracy and rule of law is in conflict with demands from Europe. They must choose one or the other. Yet Europe and the world are so used to German self-abnegation for the EU Project – so used to the teleological destiny of ever-closer Union – that they cannot seem to grasp the fact. It reminds me of 1989 and the establishment failure to understand the Soviet game was up. Our own Chancellor George Osborne has fallen into this trap. I can entirely understand why he is calling for quick moves towards EMU fiscal union, but such an outcome is not on the table. Repeat after me: THERE WILL BE NO FISCAL UNION. THERE WILL BE NO EUROBONDS. THERE WILL BE NO DEBT POOL. THERE WILL BE NO EU TREASURY. THERE WILL BE NO FISCAL TRANSFERS IN PERPETUITY. THERE WILL BE A STABILITY UNION – OR NO MONETARY UNION. Get used to it. This is the political reality of Europe, since nothing of importance can be done without Germany. All else is wishful thinking, clutching at straws, and evasion. If this means the euro will shed some members or blow apart – as it almost certainly does – then the rest of the world must prepare for the day. It has certainly been an electrifying few weeks. I happened to be in the room with a group of Nobel economists in Lindau last month when German President Christian Wulff lashed out at Europe, accusing the ECB of violating its mandate and subverting the Lisbon Treaty. “I regard the huge buy-up of bonds of individual states by the ECB as legally and politically questionable. Article 123 of the Treaty on the EU’s workings prohibits the ECB from directly purchasing debt instruments, in order to safeguard the central bank’s independence,” he said. “This prohibition only makes sense if those responsible do not get around it by making substantial purchases on the secondary market,” he said. Mr Wulff said Germany itself risks being engulfed by escalating debts. Who will “rescue the rescuers?” as the dominoes keep falling, he asked. "Solidarity is the core of the European Idea, but it is a misunderstanding to measure solidarity in terms of willingness to act as guarantor or to incur shared debts. "With whom would you be willing to take out a joint loan, or stand as guarantor? For your own children? Hopefully yes. For more distant relations it gets a bit more difficult." More distant relations? “All I heard was Germany, Germany, Germany. There was nothing about Europe. It was astonishing,” said Myron Scholes, the winner of the 1997 Nobel Prize. Indeed it was. Fellow laureate Joe Stiglitz said that if President Wulff’s views reflected the outlook of the German government, monetary union would have collapsed already. Well yes. Quite. Tags: bundestag, debt crisis, emu, EU, euro crisis, eurozone, fiscal union,George Osborne, Germany