The Financial Crisis Is Not Over. Here Comes the Next Meltdown.

We’ve written extensively about the fact that financial crises never happen in one shot. They typically begin with one or two institutions or countries in a certain market segment. Then the crisis grows through financial contagion, which works exactly like a real pandemic.

The panic virus spreads from bank to bank in the same way a real virus spreads from human to human. Sooner or later, the regulators grow concerned because events seem to be spinning out of control. They intervene with various kinds of bailouts, including deposit guarantees, Treasury note liquidity facilities, and orchestrated takeovers where solid banks like JPMorgan get to buy up valuable businesses like First Republic’s asset management group on the cheap. This produces a quiet period following the first wave of panic.

This happened from December 1997 to April 1998 during the Russia-LTCM crisis, and it happened again from December 2007 to March 2008 during the Global Financial Crisis. In both cases, investors thought the all-clear signal had been given and they came out of hiding and began buying risky assets again. They thought the crisis was over. But in both cases, the crisis came roaring back.

In 1998, the financial crisis grew exponentially worse in August – September 1998 with the default of Russia and the meltdown of LTCM that almost brought global financial markets to a standstill. In the 2008 financial crisis, stage two emerged with the collapse of Bear Stearns in March 2008 and the bankruptcy of Lehman Brothers in September 2008.

The lesson in both cases was the same – the crisis was not over after the first phase; it was just on pause. The second phase was coming soon to do much more damage.

The first phase of the latest financial crisis lasted from March 9, 2023, to May 1, 2023, with the failures of Silvergate Bank, Silicon Valley Bank, Signature Bank, Credit Suisse and First Republic. Things grew quiet from June to September. Now the crisis is reemerging, as reported in this article.

Binance, the world’s largest crypto-currency exchange, is in financial distress. Crypto holders are taking their coins out or asking to be converted back into dollars. Senior management is deserting and over 1,500 layoffs have been announced.

The chief marketing officer said, “Every battle is a do-or-die situation, and the only thing that can defeat us is ourselves.” Nice try. But if I saw that message coming from an institution where I had money, I would take my money out the same day.

A Binance fiasco will not be confined to the crypto world. Get ready for phase two of the ongoing financial crisis.

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