It’s Not Just Deutsche Bank: The Whole Financial Sector Is Sick
These are great times for financial assets—and by implication, for finance companies that make and sell them, right? Alas, no. Each part of the FIRE (finance, insurance, real estate) economy is imploding as ‘modern’ finance hits the wall. Interest rates, for instance, have fallen for three decades; stock prices are at record
levels; and real estate is revisiting its recent bubble.
In this kind of paper paradise it’s no surprise that banks and their cousins have grown fat, happy and arrogant. And with the above trends now ending, it’s also no surprise that business models premised on their continuance are failing. Everyone knows the Deutsche Bank story of bloated costs, horrendous derivatives exposure and debilitating criminal penalties. But lots of other finance companies are staring into the same abyss. Some notable examples: Commerzbank; ING; Stanford endowment; and US pension funds.
If every part of the financial sector hits the wall simultaneously, the resulting crisis will overwhelm the ability of governments and central banks to keep the game going. Their last, desperate policy experiment will involve coordinated currency devaluations to make debts less onerous. When this fails because everyone responds by borrowing even more—thus making the total debt burden more rather than less onerous—a big part of the FIRE economy will die.
This will be a disaster for those working on Wall Street, or who rely on a public sector pension and/or own bank stocks. It will be hard but survivable if your wealth is in real rather than financial assets. Gold, as always, is the safe haven.