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I know. Not what you were expecting. (Photo by Serendigity/Flickr)
While the planet’s air, water and land are heating to dangerous levels because of human pollution, the world’s trade is cooling off, slowing down and coagulating in the deepening chill, threatening the well-being of every country and virtually every person. I remember very well in 2008 watching the most powerful members of Congress emerge from a come-to Jesus meeting conducted by the Treasury Secretary on what was about to happen to the world’s financial institutions and America’s economy. They had the pale faces and staring eyes of people who had just been introduced to the angel of death.
The world of trade and finance is confronting such a moment now, and is every bit as much in denial as it was in 2008. This time it’s not America’s Lehman Brothers tottering into an early grave and pulling half the world in with it; it’s Deutsche Bank.
Germany’s largest bank is not doing well. Its operating loss last year was almost seven billion Euros; its share price has fallen almost 70% since April of 2015, and dropped over seven per cent in a single day this week, to just over 10 Euros. Go back to September of 2008 and read the news reports about Lehman, and feel the burn.
If Deutsche Bank’s share price drops another Euro, the total capitalization of the bank will be less than 14 billion Euros, which is the amount of a fine the U.S. Department of Justice has proposed to levy against the bank for its sins in handling subprime mortgage derivatives leading up to the deadly financial eruption of 2009. It’s not the only trouble the bank is in; it’s under investigation for transgression in currency trading, precious metals trading, and money laundering. It recently settled a massive case alleging manipulation of interest rates. (That’s it, I’m moving my money to Wells Fargo. Oh, wait….)
Masters of the Universe are talking openly about — and betting massively on — a Deutsche Bank failure (yes, it’s another Big Short). The German government has vowed not to bail it out, but the bank’s assets, ravaged though they may be, represent nearly 60% of Germany’s gross domestic product. This is the very definition of too big to fail.
Meanwhile Germany’s second-largest bank, Commerzbank, which has lost nearly 40% of its market value this year, has just announced a desperate reorganization plan. It’s firing 10,000 people and downsizing operations in a manner that strikes some as more like butchery than surgery. Moreover, the seven Landesbanken are hemorrhaging capital because the global shipping industry, in which they are heavily invested, is imploding.
Germany is hardly the only country whose banks are deeply troubled right now. This week the Organization for Economic Cooperation and Development — comprising 34 member democracies committed to improving world trade — issued a stern warning about pursuing toward the brink of disaster the policies that led to the crash of 2009. The warning was not only to Germany, but to Japan and the United States as well.
“These developments [i.e. the awful performances of banks and corporations] exacerbate the challenges to improving well-being of people in both advanced and emerging economies.” The problem for the OECD is this: people are consumers, and if consumers don’t do well, they can’t consume enough, and in consumption-based economies, that’s a cardinal sin.”
The central banks, it seems to me, are trying to feed the wrong end of the horse; stuffing perfectly good hay in places where it doesn’t belong, while the animal starves. Making sure the banks and corporations have tons of money to play with, when they don’t use it to make products or hire people, helps no one but people who do not need help.
Of course, enormous forces are at work propping up these zombie banks and their pretensions, staving off any day of reckoning until the day after tomorrow, just as they were doing in 2008. How did that work out for them, anybody remember? But whatever they do, they cannot change the fact that out where stuff is manufactured, and shipped, and sold, the temperature is falling, the pipes are freezing up, and a new Ice Age has taken hold. Stop expecting us to congratulate you for giving away free ice cubes.
[Now, as the world churns, we return you to our regularly scheduled news programs, featuring Donald’s sniffles, Hillary’s emails and who’s running for president in 2020?]
SEE ALSO: “They’re Parking the Trains and the Ships and Planes…”
“World Trade is Coming to a Halt.”
There is another ‘too big’ problem of the economy that is rarely discussed: that the financial sector has simply become too big, whether it is all one bank or a thousand. The delightfully named FIRE (Finance, Insurance, Real Estate) sector has grown out of any proportion to the real economy that it is supposed to serve. To sustain that growth they have had to pursue customers they should not, such as NINJA borrowers.
Love “feeding the wrong end of the horse,” maybe economists should have to take a course in animal husbandry!
If you think you detect a slight whiff of desperation emanating from Deutsche Bank, it is only because you aren’t close enough to inhale the pungent odor of sheer terror that is playing out behind the scenes.
There was a time back in 2014 when the fracking cheerleaders were high-fiving and talking up American “energy independence”. We all (here) knew that was bullshit, and we logically predicted a near total collapse of the shale/fracking industry. That moment came to pass, as we knew it would.
Now we live in a time where the same logic and deduction of mathematical certainty can be applied to discern that the financial industry and with it the entire global economy is going to collapse, spectacularly. This moment will also come to pass, and with Deutsche Bank we may be witnessing the crumbling pillar that finally brings the whole rotten system down.
Whether or not this is “the big one”, doesn’t matter. The time will come, with certainty. And when it does, I doubt that many people will be celebrating the end of the biggest bubble ever blown in puny human history.
My understanding is that the FIRE sector invested pretty heavily in the fracking debacle, so that’s part of the reason the ground is trembling beneath their feet as we speak. However, I suspect they will hold things together by hook or by crook until November 9, because the money people are pretty serious about trying to keep Donald Trump from getting the keys to the Oval Office.
I am not a consumer. I am a human being.
Heh, turns out the “smartest people in the room” were just very short-sighted, so much so in fact that they didn’t see that hollowing out the middle class would effectively bankrupt the economy. Then they decided to bet on guaranteed failures (because they knew their mortgage products were based on fiction). Well, that went over nicely, now, didn’t it? After trying again with student loans, other avenues needed to be found to churn money. Rather than admit to or learn from their mistake(s) they used the same failed strategy to create the derivative market! What could go wrong?!
Meanwhile, the guy on the street has no idea that we’re at the end of the line and that the normal economic commuter train he’s riding on, like the one that blasted through the Hoboken station this morning, is going to surprise everyone all of a sudden out of no where – possibly right after the upcoming bottom of the barrel election.
Another fine essay Mr. Lewis. Thanks for your thoughts, wit and wry sense of humor.
Dear Mr. Lewis – Thank you for your blog. I check in frequently to see if you have a new post up. Well written and entertaining, but more importantly, informative. Lew
Thanks Lew. The encouragement of you and the other commenters means a great deal to me.
Well Tom, speaking to a family friend in one of the local big four in OZ – seems the consensus view here is that Deutsche is a cooked goose, no one is going to lend them the money to get out of the bind besides they owe more than their worth so their is no point in anyone wanting to buy them either, not the private banks anyway, they reckon about a month to go.