The Oil Drum: Canada

Axel Weber, the president of the Bundesbank, is arguably the most powerful man in European finance, despite the ECB. His remarks merit scrutiny. The core of his argument is that today looks a lot like the eve of Great Depression, but there is a big difference. The "bank run" is now a commercial paper, or money market, run. Investors are well aware that banks have no money. The by far largest part of credit (debt, money) creation has taken place outside the traditional banking system. One look at the derivatives markets makes that painfully clear.

Credit turmoil ‘has hallmarks of bank run’

Mr Weber told fellow central bankers and economists at the Federal Reserve’s Jackson Hole symposium that the only difference between a classic banking crisis and the turmoil under way in the markets is that the institutions most affected at the moment are conduits and investment vehicles raising funds in the commercial bond market, rather than regulated banks.

These entities were inherently vulnerable to a sudden loss of confidence on the part of their funders because “there is a maturity mismatch” on the part of financial institutions that have invested in long term mortgage-backed or asset-backed securities using short-term finance.

“Most of the conduits are owned by the banks,” he said. In many cases, sponsoring banks are being forced to take risky assets back onto their balance sheets, in turn causing banks to keep hold of their own cash, putting pressure on short-term money markets, he argued.