Meltdown
Meltdown is the point at which a previous solid substance liquefies. All existing structures turn to mush. Boundaries are broken; systems no longer function in any recognisable form. All is fluid, and therefore slightly chaotic.
Short of not being able to withdraw money from your bank account in order to withdraw cash, what does the anatomy of a financial services meltdown look like? According to Nouriel Roubini, professor of economics at New York University, it might go something like this:
· Overnight lending in the money markets dries up as banks refuse to lend to each other.
· LIBOR goes through the roof.
· Bank shares collapse in value.
· CDS spreads for bank debt (reflecting the perceived risk of banks defaulting on their debt) go through the roof.
· Banks collapse - they become both balance sheet insolvent (ie, their liabilities far exceed their assets, thanks partly to the collapse in their share price) and liquidity insolvent (ie, they are unable to raise enough short-term cash on money markets to fund their commitments). No bank will be safe, even household names.
· Households and companies are unable to get credit.
· Highly leveraged households go bankrupt.
· Highly leveraged companies collapse.
· Consumer demand and investment demand collapse. Unemployment shoots up.
· The government suspends all trading in financial stocks until further notice.
· The government nationalises all banks and highly leveraged financial institutions.
· We have the Great Depression of the 2010s.
Treasury Secretary Hank Paulson and others in the Bush Administration also feared the worst: an apocalyptic scenario of food shortages and a breakdown in law and order.
What's it got to do with the financial crisis?
As the crunch has gone from bad to worse to worse still, 'meltdown' is being mentioned with increasing frequency.
If you're pessimistically (or some might say realistically) inclined, signs of mush aren't hard to find:
LIBOR has soared, reflecting banks' unwillingness to lend overnight in money markets. Financial institutions like Bear Stearns, Lehman Brothers, AIG, Washington Mutual, Northern Rock, Bradford & Bingley and more have collapsed. Mortgages are a lot harder to come by.
Governments have engaged in widespread bailouts of the financial system.
Short selling of financial services stocks has been banned everywhere from the UK, to the US, Australia, the Netherlands and Switzerland.
More than 87 US banks have failed in 2009, and some of the failures are giant. Federal officials announce one or two more failures every Friday, in the evening when the markets have safely closed.
Last updated on 7 September 2009.
