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Three years ago, the House of Lehman collapsed like a house of cards. And if you thought the original was scary, just wait until Lehman II comes to a theater near you — in IMAX 3D with digital surround sound.
That’s the view of sober-minded Canadian strategist and money manager John Stephenson, senior vice president of First Asset Management in Toronto.
He predicts a new, Lehman-like financial crisis in the next six to 12 months, only this time involving the debt of governments and European banks.
He thinks it could drive stocks much lower, to levels at which they traded, well, just after the collapse of Lehman and AIG in fall 2008.
“When it happens, it’s going to happen fast, and it’s going to be ugly and very deep,” he told me in a telephone interview, adding that he expects it to be “worse than the last crisis. Last time around, the governments had some room to bail people out. They don’t have that capacity [now].”...
Taking a page from the work of Carmen Reinhart and Kenneth Rogoff, Stephenson says the financial crisis first hit the private sector and then moved to the public arena as governments bailed out the banks to “save” the economy.
“A buildup in government debt has been a defining characteristic of the aftermath of banking crises for over a century, ” wrote Reinhart and Rogoff in their 2011 paper “A Decade of Debt.” “For the countries with systemic financial crises and/or sovereign-debt problems, average debt levels are up by about 134%.”
That puts a huge burden on taxpayers and makes the creditworthiness of sovereign debt shakier. “You’ve had a transfer of risk to governments,” Stephenson said. “The average citizen wonders why they’re going to have to suffer for someone else’s mistake.”...
“The only surprise is that it hasn’t happened sooner,” Stephenson said. “The pressure builds and the dam can’t hold.”
“Once the default occurs, it could be very easy to see a banking crisis in Europe become a banking crisis in the U.S., Canada, and Australia,” he said.