Saturday, October 11, 2008

Boundless anxiety

What if the European Union falls, and the different countries go back to their own currencies?

What if a bank in the Cayman Islands or the Bahamas has lent wildly in excess of its reserves?

What does it take for an unregulated tropical bank to fail?

What if hedge funds with loans from undercapitalized, underregulated banks are counterparties embedded throughout the financial system?

As it turns out, the G7 cannot agree to draw a circle of safety around its own banks, so the next phase of the crisis -- collapsing tropical banks that are providing leverage inside the system -- won't unfold next week.

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