Judging How Big a Crisis to Expect

 | Sep 22, 2011 | 11:41 AM EDT
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Does it do any good to say that the world is on the eve of another financial crisis, as I hear so many say today? Does it do any good to catcall me for saying that Treasury Secretary Tim Geithner was just being upbeat and hopeful when he said there will be no more Lehmans?

No and yes. No, it does not do any good to proclaim we are on the eve of the next financial crisis, because it's the degree of crisis that matters. People seem to forget that the center almost didn't hold during 2008. It was only the destruction of trillions of dollars of capital that allowed us to bottom, with a tremendous number of financial institutions in this country being wiped off the face of the earth, including many that had been with us for some time, including Bear Stearns, Lehman Brothers, Merrill Lynch, Fannie Mae, Freddie Mae and three reconstituted and quasi-nationalized firms, General Motors (GM), American International Group (AIG) and Citigroup (C).

Are we going to get that kind of crisis? That's where the second point comes in, Geithner's point. There is a grave misconception about what Geithner told me last week and what I am reading, say, in the mocking Twittersphere.

Here's what Geithner said: There will be no more Lehmans. Europe will not let it happen. That means there will be no more catastrophes that freeze credit worldwide and pretty much wreck every economy out there.

What did he not say? That there won't be shotgun marriages, Citigroup-AIG-like quasi-nationalizations and banks that are allowed to disappear gracefully.

He took Lehman off the table.

Nothing else.

What does that mean? OK, we call it the Great Recession. We put "Great" in because we want to analogize to the Great Depression. We use "Recession," not depression, because we did not have 25%-30% unemployment -- remember, 91% of the people in this country are employed -- and we did not have the wholesale failure of the U.S. banking system. People forget that the issue in the Great Depression came down to whether the democracy was in jeopardy.

Which brings me to the second analogy: the near return to Great Depression levels in 1937, because of a false sense of security that we were able to raise rates, and a belief that we had to raise rates in order to "cool" the economy. Our Fed chairman understood this to be the worry, and he is still working to prevent this from becoming a reality.

But the Europeans are on collision course with 1937 and even took a page from the handbook, foolishly raising rates twice. They are about to repeat the errors of the United States in 1937. Again, not Lehman, but a real bad moment that will cause them to put into action what we put into action after the barn door had already been wide open: an anti-Lehman game plan.

There's a lot of talk about Chubby Checker right now, because the Fed chairman is doing Operation Twist, which is the lowering of rates with the hope that someone -- the government? the people? -- takes advantage of them to refinance. It's not going to work, because the regulators are requiring the banks to force people to put up too much money to get those rates, and the government is stubbornly sticking by the issuance of short-term notes instead of a gigantic, liquidity-insuring offering of hundreds of billions of dollars of long-term bonds.

At least Bernanke is singing the right tune. In Europe, though, they've got a different crooner going. It's all about Sam Cooke, and the central bankers there clearly "don't know much about history." Which of course will then lead to "A Change Is Gonna Come," and it isn't a good one.

So, remember, no more Lehmans does not mean no more pain. It doesn't mean no more point losses. It just means no more possibility that the center might not hold. Now if only they knew history over there and had some political will, which Geithner said is the sticking point for those who actually want to do the right thing over there.

It translates into staying the course, playing it with high-yield stocks and taking a beating on those that don't. If you can't stand that beating, sell some of those stocks. I know most won't, because the losses, if you bought in the last year, are now bordering on the horrific. But to get a real bottom, someone has to capitulate. Decide now if it has to be you.

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