By Number Six

Watching the Watchers

Happy Winter Solstice, y'all. And now, to make sure your holiday is so rich with DOOM-grade terror, let's again remember that 2008 may look like far worse than 1929 ever did.

As the credit paralysis stretches through its fifth month, a chorus of economists has begun to warn that the world's central banks are fighting the wrong war, and perhaps risk a policy error of epochal proportions.

"Liquidity doesn't do anything in this situation," says Anna Schwartz, the doyenne of US monetarism and life-time student (with Milton Friedman) of the Great Depression.

"It cannot deal with the underlying fear that lots of firms are going bankrupt. The banks and the hedge funds have not fully acknowledged who is in trouble. That is the critical issue," she adds.

Lenders are hoarding the cash, shunning peers as if all were sub-prime lepers. Spreads on three-month Euribor and Libor - the interbank rates used to price contracts and Club Med mortgages - are stuck at 80 basis points even after the latest blitz. The monetary screw has tightened by default.

York professor Peter Spencer, chief economist for the ITEM Club, says the global authorities have just weeks to get this right, or trigger disaster.

"The central banks are rapidly losing control. By not cutting interest rates nearly far enough or fast enough, they are allowing the money markets to dictate policy. We are long past worrying about moral hazard," he says.

"They still have another couple of months before this starts imploding. Things are very unstable and can move incredibly fast. I don't think the central banks are going to make a major policy error, but if they do, this could make 1929 look like a walk in the park," he adds.

See, all these banks worked so very hard, what with their lobbying, to have their cake and eat it as well. Minor detail: It's backfired. Huge backfired. Those with debt just can't repay it anymore, and we're not talking about me and you, banks....and companies, yes....are sliding under the waves. Of course, the MSM doesn't bother with that detail:

Citigroup, Merrill Lynch, UBS, HSBC and others have stepped forward to reveal their losses. At some point, enough of the dirty linen will be on the line to let markets discern the shape of the debacle. We are not there yet.

Goldman Sachs caused shock last month when it predicted that total crunch losses would reach $500bn, leading to a $2 trillion contraction in lending as bank multiples kick into reverse. This already seems humdrum.

But, didn't they start this mess to begin with? Yeppers. Years of handing out credit cards and EZ-loans. Then, they pressured Washington to revise the bankruptcy laws, so that credit cards have to paid off or else. Or else what?

Or else, we're staring it down right now. People are losing their homes everyday. Companies are slamming their doors, because THEY, like the rest of is, also exist on borrowed money. What lies ahead?

The 2nd Great Depression. Maybe this time, with a huge revolt tossed in for that lovely French flavoring? We shall see what we shall see.

The major investment firms have begun selling off sizeable chunks of themselves (4% to 12%) to foreign investors in order to obtain enough cash to keep going. From what I've read, these initial sales will only help short term--they'll need a lot more in the long run.

So they either go down, or they sell another, probably bigger, chunk to foreign investors, if they can find any willing to put more $$ into the money pit.

End result is either major financial disaster or major financial reordering.

Ain't deregulation fun?

But have no fear, the major media will always portray the crisis as either not here yet, or been here but its gone now. In fact, if you want some real sick laughs, go back to the NY Times front pages at the start of the 1929 market crash and read their headlines over the next several days. Every single day, it looked like things had bottomed out and were about to turn around. Looking better on Monday. Whoops, no that was still bad, but its looking better Tuesday. Whoops, no that was still bad, but its looking better on Wednesday. Whoops.....

One of the bad parts about deregulation, combined with "trickle down" nonsense is that I call the "chum in the water effect" we're now seeing: These bankers are now circling each other, ready to pounce on each other.

Golly, wasn't that what we saw back in '29? Yes, we did. Cretins like the sainted Rockefellers made out like roaches in a KFC when the crash hit, sweeping up anything they could for pennies on the dollar.

If such is a comparison? It is then already too late, and the 2nd Great Depression is here, we just ain't felt it hard......yet!

Oh, and here's another cutie to show it's all just getting worse. Oh, yes even the credit card goons are feeling it.

WAIT! They're one and the same! STREWTH! Imagine that!