For four years, we have had a solvency crisis and not a liquidity crisis.
Unfortunately, for four years, policy makers have chosen to act as if we have a liquidity crisis.
For four years, central banks have pumped massive amounts of liquidity into the global financial system. For four years, fiscal authorities have run stimulus programs. For those four expensively purchased years, bank regulators engaged in extend and pretend rather than adopt current asset and liability-level disclosure and end the risk of the solvency crisis re-emerging.
Now, the solvency crisis has re-emerged.
Investors are once again asking the question of banks who is solvent and who is insolvent. With the withdrawal of fiscal stimulus, investors are once again asking the question of where is economic growth going to come from.
As stated in an earlier post, when investors start asking these questions, they become like Mark Twain - more concerned with the return OF their capital than the return ON their capital.
For confirmation of this, a Bloomberg article on the on-going stock market meltdown and US treasury market melt-up.
U.S. stocks tumbled amid growing concern the economy is slowing and speculation that European banks lack enough capital, while hopes for more stimulus from the Federal Reserve receded.
Bank of America Corp. (BAC) and JPMorgan Chase & Co. (JPM) dropped more than 4.6 percent as Sweden’s financial regulator said his country’s lenders must do more to prepare for a worsening in Europe’s debt crisis that could cut off funding.The bank solvency crisis morphing back into frozen funding markets.
Caterpillar Inc. (CAT) sank 5.6 percent, pacing losses in companies most-tied to economic growth, as jobless claims rose, consumer inflation accelerated more than forecast and the Philadelphia-area manufacturing index fell to the lowest level since March 2009.
The Standard & Poor’s 500 Index slumped 4.1 percent to 1,145.07 at 10:29 a.m. in New York. All 10 groups in the S&P 500 dropped at least 1.8 percent. The Dow Jones Industrial Average fell 438.62 points, or 3.8 percent, to 10,971.59. Treasuries rallied, pushing 10-year yields to a record low.
“It’s almost like a worldwide buyers strike,” Michael Mullaney, who helps manage $9.5 billion at Fiduciary Trust in Boston, said in a telephone interview. “There’s a continued general malaise on global economic activity. People continue to downgrade their expectations on growth on a worldwide basis. There’s concern about funding problems. That’s making us very nervous here and as such we want to take risk out of portfolios at least for the immediate future."