Fri Oct 24th, 2008 at 10:02:43 AM EST
This whole bubble deflation/market contraction thing is just a liquidity problem, right? So if the central banks pump a trillion (pick your currency) of taxpayers' money into the system, it will right itself, right? Right?
So why did the European and Asian exchanges drop 10% overnight? Why the US stock futures markets close before they opened today because they'd already hit their limit down? The answer lies within an article from Reuters this morning, quoting Citi Index's Tom Hougaard, "There will be more margin calls today, and something sinister is brewing."
Margin calls mean credit is continuing to contract. Which means that liquidity continues to dry up, in spite of the injection from the central banks. Which means, as I have been saying elsewhere, that the problem is not liquidity but solvency. Assets bootstrapped themselves up for years, supporting the debt that supported their inflated prices. When debt started destabilizing with the ARM resets in the US in late 2006, lenders suddenly realized, "Oh poop, we aren't going to get repaid, and the assets securing the debt don't really cover us." Then it began to unwind. And while the debt was still there, the assets began sinking from their debt-inflated heights to a level that a real market could sustain (No, they haven't bottomed yet.). So the assets in the system are now worth far less than the debt in the system.
That isn't illiquidity, folks. That's insolvency. And the "something sinister" that's brewing is the realization that no amount of paper can patch this over.