The next banking crisis

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I blogged this in July:

I have to say I normally pay remarkably little attention to the Sovereign Society in the USA. They are, if I put it nicely, good friends of tax havens. That’s why I read their newsletters. You have to know who’s writing about you – and these guys do seem to have it in for me and my friends, quite often. But we’re pretty thick skinned – and since almost without exception people think people of this ilk come from beyond the fringes, who cares?

Well, on this occasion they seem to have spotted something, so I’ll take note for once. Of course, someone may point out what is wrong with their logic – and it will be good if they did. But their beef (spread over thousands and thousands and thousands of words) is that they’ve spotted a massive short selling opportunity because they think 48 of the 50 US states are about to go bust.

The two exceptions are, I think, Montana and North Dakota. The rest, they claim, have no prospect of balancing their budgets by yesterday – when they were, apparently legally obliged to do so, because US states can’t run deficits, although they can borrow for capital spending. And they do borrow: the “municipal bonds” they issue are massively popular because they’re tax free in the US. Apparently there are some $2.81 trillion of those bonds in issue (and you thought UK debt was big?) and the Sovereign Society thinks they’re going to default, which has happened in the case of these bonds before now.

Well, I bet they don’t: the US can underwrite that debt and I’m quite sure it will. But what this shows are a number of things.

First is the madness of trying to enforce balanced budgets when the situation just does not allow it. People have to come first.

Second, if this is true, is that risk is created by the folly of policy based on poor economics, not by the underlying economic reality.

Third, that the far right just see this as another opportunity to benefit from other people’s suffering – because the whole tone of the Sovereign Society’s message is that no one should miss out on the chance to speculate on this crisis. Which is pretty sick – and precisely why short selling is a mechanism to be eliminated.

And finally – that quite where the next crisis comes from can’t be predicted, but as some banks like RBS in the UK have been saying, we’d better be prepared for it, because it will be hitting us soon.

I note the world is now catching up.

In the US this is the next big banking crisis.