Why We Won’t Have a “Lehman Moment” in the 2016 Crash
Charles Hugh Smith

One way to lose a war is to focus on preparing to fight the last war. “The last war” in 2008-09 was a battle to save heavily leveraged centralized financial institutions from default and liquidation.

There won’t be a “Lehman Moment” in the 2016 meltdown…

What the central banks cannot do is create productive places to invest the credit they’ve generated in such excess, or force qualified borrowers to swallow more unproductive debt.

One way to lose a war is to focus on preparing to fight the last war. Preparing to fight the last war is a characteristic of losing generals, militaries and nations. The same is true of finance and economies.

General Grant’s difficulties in breaking the trench warfare around Petersburg, VA in the last year of the American Civil War (1864 to early 1865) telegraphed the future of trench warfare to astute observers. Few took heed of the lessons of the “first modern war,” and many of the same strategies of 1864 (digging a tunnel under enemy lines and filling the tunnel with explosives to blow a hole through their defenses, for example) were repeated in the Great War of 1914-1918 fifty years later.

When a weapon system capable of breaking the stalemate emerged–the tank–its potential for massed attack escaped planners on both sides, and the new weapon was squandered in piecemeal assaults.

“The last war” in 2008-09 was a battle to save heavily leveraged centralized financial institutions from default and liquidation–commercial and investment banks, insurance companies, etc. The concentration of capital, leverage and risk in these behemoths rendered the entire system vulnerable to their collapse (or so we were told).

Saving imploding private-sector banks was no problem for central banks that could create $1 trillion in new money with the push of a button and offer essentially unlimited lines of credit to banks facing a liquidity crunch.

But the current financial meltdown is not like the last war. Central banks are ready to extend unlimited credit again to private-sector financial institutions, but this time around, the problem won’t be a lack of liquidity.

By refusing to allow a house-cleaning of risk, leverage and mal-investment, central planners have simply pushed the risk into systems they don’t control: foreign-exchange (FX) currency markets, shadow banking and the economy that depends not just on available credit but the willingness of qualified borrowers to take on the risks and costs of more debt.

Central banks have created abundant credit and liquidity, but no productive places to invest that ocean of nearly free money

Creating abundant credit works to spur growth when growth has been restrained by a lack of credit.

But when credit has been abundant for decades, what’s scarce isn’t credit–it’s productive investments that are scarce. Central banks are powerless to create productive uses for the credit they create.

The inevitable consequence of this failed strategic error is defeat. Central banks issued trillions of dollars, yuan, euros and yen in new credit to stave off defeat in the last war (the Global Financial Meltdown of 2008-09), but the problem wasn’t a lack of credit. Now, seven years into the strategy of flooding the global economy with credit, the problem is a scarcity of productive uses for all that money sloshing around the global economy.

There won’t be a “Lehman Moment” in the 2016 meltdown, because central banks can prop up or “save” any new Lehman with a few keystrokes.

What the central banks cannot do is create productive places to invest the credit they’ve generated in such excess, or force qualified borrowers to swallow more unproductive debt.

The global economy is choking not just on an excess of debt, it’s also choking on the consequences of an unprecedented mal-investment of the credit central banks have issued in such over-abundance.

Issuing more credit will only make the 2016 crash worse. Trying to stop the current crash with more credit and lower interest rates is like sending the cavalry on suicide charges against entrenched machine guns, artillery and tanks. The coming financial slaughter will be as senseless, wasteful and ineffective as any suicide attack in the Great War.

At readers' request, I've prepared a biography. I am not confident this is the right length or has the desired information; the whole project veers uncomfortably close to PR. On the other hand, who wants to read a boring bio? I am reminded of the "Peanuts" comic character Lucy, who once issued this terse biographical summary: "A man was born, he lived, he died." All undoubtedly true, but somewhat lacking in narrative.

I was raised in southern California as a rootless cosmopolitan: born in Santa Monica, and then towed by an upwardly mobile family to Van Nuys, Tarzana, Los Feliz and San Marino, where the penultimate conclusion of upward mobility, divorce and a shattered family, sent us to Big Bear Lake in the San Bernadino mountains.

The next iteration of family took us to the island of Lanai in Hawaii, where I was honored to join the outstanding basketball team (as benchwarmer), and where we rode the only Matchless 350 cc motorcycle on the island, and most likely in the state, through the red-dirt pineapple fields to the splendidly isolated rocky coastline. In 1969-70, this was the old planation Hawaii, where we picked pine in summer beneath a sweltering sun.

We next moved to Honolulu, where I graduated from Punahou School and earned a degree in Comparative Philosophy (i.e. East and West) at the University of Hawaii-Manoa. The family moved back to California and I stayed on, working my way through college apprenticing in the building/remodeling trades.

I was quite active in the American Friends Service Committee (Quakers) and the People's Party of Hawaii in this era (1970s).

I next moved to the Big Island of Hawaii, where my partner and I built over fifty custom homes and a 43-unit subdivision, as well as several commercial projects.

Nearly going broke was all well and good, but I was driven to pursue my dream-career as a writer, so we moved to the San Francisco Bay Area in 1987 where I worked in non-profit education while writing free-lance journalism articles on housing, design and urban planning.

Within a few years I returned to self-employment, a genteel poverty interrupted by an 18-month gig re-organizing the back office of a quantitative stock market analyst. I learned how to lose money in the market with efficiency and aplomb, lessons I continue to practice when the temptation to battle the Monster Id strikes.

Somewhere in here my first novel was published by The Permanent Press, but alas it fell still-born from the press--a now monotonous result of writing fiction. (Seven novels and I still can't stop myself.)

I started the Of Two Minds blog in May 2005 as a side project of self-expression, and in an unpredictable twist of evolutionary incaution, that project has ballooned into a website with about 3,500 pages that has drawn almost 20 million page views.

The site's primary asset may well be the extensive global network of friends and correspondents I draw upon for intelligence and analysis.

The blog is #7 in CNBC's top alternative financial sites, and is republished on numerous popular sites such as Zero Hedge, Financial Sense, and David Stockman’s Contra Corner. I am frequently interviewed by alternative media personalities such as Max Keiser, and am a contributing writer on peakprosperity.com.

www.oftwominds.com/blog.html