jpinpb, my point was not to pick on you. It was to jar your thinking a bit. I don’t think a bank holiday is likely, but it or something like it could happen and its hardly too alarming to contemplate.
As many here know I am a short/medium term deflationisto. Long term I feel inflation is the way forward, but short term its all about credit/debt deflation.
A bank holiday in the 30’s served to stem the panic, not start it. However it wouldn’t work this time because the banks themselves aren’t really the problem. The toxic levels of debt system wide are the problem. The banks don’t even own most of it anymore. They’ve sold it off to large pension funds which is where the REAL damage has yet to be done.
Closing down insolvent banks would send a message that we are serious about clearing the bad debt out of the system, but it won’t happen. Once that chain reaction begins it would, in my mind, be impossible to stop a full scale deflationary implosion of the economy.
Lets say we closed down Citi and unwound all its toxic debts. Not just the on balance sheet stuff but the off balance sheet stuff. Who knows what the bond holders would get, but it would probably be under 50 cents on the dollar. Ok who are Citi’s bond holders? Well there is that one rich Arab prince, but I’m ok with him getting screwed over. Then there are all those pension funds who also own it. Blamo smoking hole in THEIR balance sheets. Companies which are already struggling with lower profits are going to have to contribute more to pension funds to make up the difference. Some will go under exacerbating the unemployment situation, most will have their stock price trounced.
If there is one thing senor Obama doesn’t want its another collapse in the stock market. Thats just bad PR.
