but here is a bigger joke. at the moment, sanctions seem to be protecting the iranian economy from the worst of the contagion. how perfect can a perfect storm get ?

You probably refer to Cedric’s response to my remarks on bank nationalization.

Absorbing losses: in my ideal bank nationalization shareholders and subordinated creditors are wiped out. That would take case of a fair bit of losses. Furthermore, nationalized banks would benefit from low funding costs and would not innovate or conduct expensive marketing. They would be utilities. Of course that would hurt development if it would take too long but I do not believe that the past ten years of private sector finance (I know the industry pretty well) have been entirely constructive either. Nationalization is the most advantageous of the current repertoire from a taxpayer’s perspective, if one assumes that both the cost of a major recession and a continued state of moral hazard are politically unacceptable. In an Arrow-Debreu world one would let banks go belly up of course. But then again such a world does not exist. And, in such a world ranks etc would be redundant..

The system isn’t structurally insolvent. Many institutions are insolvent by GAAP if they mark to market now. If we let the market correction in RRE complete, markets will clear and we’ll know who’s really underwater on a hold-to-maturity basis.

That said, I wouldn’t buy any banking stocks right now, although that’s as much fear of dilution-by-Treasury-fiat as anything.

I´m also from Brazil and I want to second what Christian Bojlesen has said. The great volatility in the real these days is due to companies (mainly exporters) that where selling calls options on dollars in order to reduce the cost of their hedge against real apreciation. When the strike price of this options was reached, they started to lose money and the market got the news that they were, in fact, speculating against the dollar. This, together with all the turmoil abroad, caused the possiblity of a huge “corner” on the FX market, a possibility that was promptly seized by others players. The BCB reaction was slow, but tey start selling reserves yesterday and, with that, the real is recovering today.
The problem is that the market suspects that many other companies have been doing the same thing (Cetip is registering more than R$ 58 billions in sold positions of no-financial companies). Needless to say that in the current circunstances, the exit door is very narrow.

The Fed and Treasury are perplexed. Liquidity schemes like the TAF, PDCF, TSLF, TARP, ABCPMMMFLF, and the CFFF did not help stimulate bank lending.

Liquidity measures cannot solve the crisis or stimulate lending. It is pushing on a String in Bernanke’s Academic Wonderland.

Paulson is foolish enough to force the issue and is Threatening To Take Ownership Stake In Banks to do it. The problem is not uncertainty or liquidity. It is 100% certain that the entire US financial system is insolvent. The problem is insolvency.

“The core problem is that the smart people are realizing that the banking system is broken,” said Economist Carl B. Weinberg. The cancerous disease is fractional reserve lending, the very existence of the Fed, and an unsound monetary system. The only cure is to eliminate the Fed, abolish fractional reserve lending, and put in place a sound monetary system backed by hard assets.

If it costs nothing, there is something wrong here. If the banks are insolvent (which I think they are) then someone has to absorb the loss. If people don’t stare at that fact and acknowledge it, they you’ll have all these hare-brained schemes to create something from nothing, which is sort of how we got into this mess in the first place.

If all we had was a liquidity problem this could be resolved with the Fed’s borrowing facilities. We don’t have a liquidity problem, we have a solvency problem, and any scheme that *DOESN’T* result in losses to the taxpayer needs to be looked at suspiciously.

“The over-indebted US household, corporate and state sectors face a devastating liquidity crisis amid frozen lending markets, broken securitization markets and a panic of de-leveraging. It’s an absolute debacle, and US policymakers can do little about it other than try to slow the collapse.”