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Lessons From the Worst Banking Crisis in History

by Tim Price, Sovereign Man:

It’s ironic that some of the most honest words to come out of a politician’s mouth were, “When it becomes serious you have to lie.”

That was a quote from Jean-Claude Juncker, former Prime Minister of Luxembourg and President of the European Commission (the EU’s executive branch) in 2011 when asked about Greece’s financial crisis.

Greece was on the ropes and the entire system about to collapse, so, of course they lied. Then they lied about lying.

This raises a very reliable rule of thumb to keep in mind during (and before) a banking crisis: don’t trust anyone in the establishment, especially a politician.

It’s good advice these days. Europe’s banks and its governments are caught like Macbeth’s “two spent swimmers that do cling together / And choke their art.”

Or perhaps a less elegant comparison– two drunken sailors holding each other up.

As usual there’s quite a bit of deflection to steer people away from looking too deeply at bank balance sheets, and high sounding language that everything is just fine.

A review of a historical banking crisis would be highly instructive. So let’s go back to one of the absolute worst in history– the US banking crisis of 1982.

It was so severe, in fact, that as Nassim Taleb writes in The Black Swan,

“In the summer of 1982, large American banks lost close to all their past earnings (cumulatively), about everything they ever made in the history of American banking – everything.”

Richard Koo, the chief economist of the Nomura Research Institute and author of ‘The Holy Grail of Macro-economics: lessons from Japan’s Great Recession,’ recounts the crisis with extraordinary candor.

Koo was a syndicated loan desk officer at the Federal Reserve Bank of New York… so he was truly at the epicenter.

Late on a Friday afternoon in August 1982, his job, along with those of his colleagues, was to try and convince the rest of the world that the US banking system was solvent (even though it was clearly NOT).

Read More @ SovereignMan.com

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