My columns have turned rather apocalyptic of late, but for a valid reason. Just this week, we got confirmation that our financial system is, again, on the brink of collapse, when the Bank of England (BOE) was forced to enact, de facto, a bailout of the pension funds of the United Kingdom.
On Sept. 28, around noon, the Bank of England stepped (back) into the gilt markets and started buying government bonds with longer maturities to stop the collapse in their value, which could have caused the financial system to become unhinged. Pension funds were faced with major margin calls, which threatened to cause a rapidly cascading run on their liabilities, as trust in their liquidity and solvency would have become questioned by a widening circle of investors and customers.
Effectively, the BOE stepped in to limit the vicious circle of margin calls faced by pension funds because of the crashing values of the gilts.
Without the BOE intervention, mass insolvencies of pension funds, with about $3 trillion worth of assets—and thus most likely other financial institutions—could have commenced on that afternoon. It’s obvious that if one of the major financial hubs of the world, the City of London, would face a financial panic, it would spread to the rest of the world in an instant.
Poster Comment:
A woman who survived the 1930s said, "When one bank goes, they all go." There is a quadrillion dollars in derivatives out there. The US cannot be protected from a collapse in Europe. High US interest rates are destroying the world economy.