Some of the biggest banks in the world are having troubles with their credit risk which has begun exploding in a fashion that is similar to that of Lehman crisis. Despite continuous pumping of liquidity from the Federal Reserve, financial conditions are tightening at a historic rate. These problems in the financial sector might end up being the most dramatic Bank collapse in history.
The stock market crash has already begun and economists are predicting that there will be a 40 percent collapse from the all time highs. We are expecting the market to crash further and in the process trillions of dollars will be lost from the stock market. At the same time, the bond market is also headed to the same direction as the stock market. In the last 5 weeks, more than $25 trillion of ‘paper’ wealth has been lost from the markets and this has wiped the gains we have had for the last 3 years. The stock market is going through the worst period in history. In fact the banking industry is more troubled even more than any other part of the economy. People are underestimating the effect of this economic crisis to the banking industry. The stock market crash might continue and this is already a big hit to the economy. However, the biggest problem lies within the banking industry. We owe the banks more than $250 trillion in terms of global debts like mortgages, business loans, credit card debt and government debt. This is where the biggest problem lies because the current economic collapse, millions of people will lose their jobs. This means that they will not have cash to pay their debts and this will trigger a tsunami of loan defaults from individuals, businesses and even governments. This will be the biggest bank collapse in history.
In the middle of these economic troubles, we have historic decline in oil prices and this means that many oil companies will soon go out of business.
Millions of retail businesses are already struggling and it is just a matter of time before they go bankrupt especially those that have been temporarily shut down because of the public health policies. Cumulatively, all these businesses have trillions of dollars in debt and if they go out of business, their defaults will be crushing to the whole banking sector.
On the same note, our banks are already super leveraged because the worldwide bank capital is only $10 trillion. T the same time, we have a $250 trillion global debt. This means that we have a 1:25 leverage. This is cancerous to the whole global banking sectors because incase this economic crisis leads to a 4 percent default, it means that most banks will go bankrupt within a very short period of time.
When we consider the trillions the banks have in derivatives, it is very clear that a big disaster is ahead of us. We have a full-blown bank crisis because our banks are bloated with debt just like our economy. Many banks are in already in trouble and the Deutsche bank is already at a tipping point. This bank is at the verge of a collapse. All the way from last year, they have been cutting down on the number of their workers. This is just one example of many troubled banks in Europe. For now these banks can use their accounting tricks to hide their risks but they will not survive for long. We have a serious economic meltdown that will hit the banking industry in a big way and many banks will not survive.
The economic crisis we are experiencing right now will culminate to historic levels of default within a matter of months if this trend continues. When compared to what is coming, the 2008 financial crisis will look like nothing.
It seems that we are headed to a day of reckoning but before hell breaks loose, we would lather prepare for tougher economic times.
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