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-- Posted Wednesday, 22 April 2009 | Digg This Article | Source: GoldSeek.com
Yesterday the International Monetary Fund raised its estimate of the total cost of the global financial crisis from mid-2007 to 2010 to $4 trillion in bank write downs. Are we therefore going to see a repeat of the banking crises that caused the Great Depression of the 1930s? It is easy enough to assume that government bank bailouts and re-capitalizations have been timely and sufficient to work. But even the central bankers implementing these programs admit they have no idea how they will work in practice, as what is being attempted is unprecedented. 1930s banking crises In the 1930s there were two banking crises: from September 10th 1930 to December 16th; and then a second leg from February 24th 1931 to October 5th; and stock markets only finally bottomed after a gold drain and currency crisis from March 8th to July 8th 1932. It is not true that the Federal Reserve did nothing in 1930. The Fed reduced the discount rate quickly. But crucially it did not then pump money into the banking system and took no further meaningful action until the summer of 1931. From August 1931 to January 1932 1,860 banks with deposits of $1.5 billion suspended operations. It is this systemic banking crisis that the modern Fed and Treasury Department are working to avoid at all costs. However, the IMF now puts losses to the global banking system at $4 trillion, of which $2.7 trillion is on US originated assets, $1.2 trillion from Europe and $149 billion from Japan. How this is spread between global banks we are left to guess. Now while strong efforts by the central banks of the world in coordinated stimulus and bailout programs are certainly going to offset a part of this hole in global bank balance sheets, it is still clear that there must be a day of reckoning. Keeping all the banks afloat will surely not work. There has to be an orderly contraction and consolidation and elimination of bad loans. This is how smaller national or regional banking crises have ended, and a global problem is the same only larger. Historical precedent So it would seem some kind of banking crisis, or possibly two of them followed by a currency crisis looks almost inevitable, and to that extent the pattern of the 1930s will be repeated. It is the only historical precedent that we have to guide us, and the pattern of the stock market bust and rally has been almost identical to the 1929-30 pattern thus far. This is terrible news for stock prices. The first banking crisis of the 1930s took stocks to a 59 per cent discount on the 1929 peak; the second banking crisis left stocks down 77 per cent; and after the final currency crisis stocks bottomed down 89 per cent.
-- Posted Wednesday, 22 April 2009 | Digg This Article | Source: GoldSeek.com
Previous Articles by Peter Cooper
About Peter Cooper:
Oxford University educated financial journalist Peter Cooper found himself made redundant by Emap plc in London in the mid-1990s and decided to rebuild his career in Dubai as launch editor of the pioneering magazine Gulf Business. He returned briefly to London in
1999 to complete his first book, a history of the Bovis construction group.
Then in 2000 he went back to Dubai to become an Internet entrepreneur, just as the dot-com market crashed. But he stumbled across the opportunity to become a partner in www.ameinfo.com, which later became the Middle East's leading English language business news website.
 Over the course of the next seven years he had a ringside seat as editor-in-chief writing about the remarkable transformation of Dubai into a global business and financial hub city. At the same time www.ameinfo.com prospered and was sold in 2006 to Emap plc for $27 million, completing the career circle back to where it began a decade earlier.
He remains a lively commentator and columnist as a freelance journalist based in Dubai and travels extensively each summer with his wife Svetlana. His financial blog www.arabianmoney.net is attracting increasing attention with its focus on investment in gold and silver as a means of prospering during a time of great consumer price inflation and asset price deflation.
Order my book online from this link
 
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Will We Repeat The Banking Crises of The 1930s?
