Some thoughts regarding Madalyn’s question.
(1) As long as the status quo is maintained, that is, as long as Congress and the Fed continue to enable the ponzi-like scheme being run by the mega banks, those banks will remain fat and happy, the American economy (which is running on borrowed money and borrowed time) will keep running, the worldwide foreign exchange market will continue to barrel along at a frantic pace, and our little corner of that market will continue to provide us (small, retail traders) with the gambling opportunities we crave.
(2) I’ve come to believe that too-big-to-fail status is coveted by the banks. Once they achieve that status, they are virtually untouchable. Lawmakers and regulators fear the consequences of cracking down on the mega banks, and turn a blind eye to the criminality of those banks. In fact, they vigorously support the banks’ ponzi scheme, out of fear of what would likely happen if they fail to provide the mega banks with all the funds they can use (and misuse). The government’s fear of a systemic meltdown guarantees the continued success of the too-big-to-fail banks.
(3) Retail forex traders, who generally aren’t known for having a death-wish, can enjoy this ride for as long as it lasts — all the while knowing that it can’t last forever. Of course, we all hope it will last until after we have made our money in this market. And, in a sense, that makes us complicit in this racket the banks are running with their stock-buyback frenzy.
(4) Three of the four banks mentioned by name in the first paragraph of the Wall Street on Parade article are among the 10 biggest providers of liquidity to the foreign exchange market. JP Morgan, Citi, and Goldman Sachs are numbers 1, 3, and 10, respectively, on the latest LIST of top liquidity providers in the interbank network.
If a too-big-to-fail bank actually failed, and if that actually triggered a systemic failure of the banking system, the entire top tier of banks (the entire top of the forex food-chain, as I like to call it) could seize up. This hasn’t happened since the Great Depression in the 1930’s, long before the electronically-traded forex market, as we know it, even existed. So, guessing how things would play out is a dicey proposition.
(5) My guess is that total chaos could prevail in the currency market for some period of time after a systemic meltdown, with prices either spiking in both directions, or simply unavailable. Trading accounts would be wiped out, and brokers would be wiped out.
(6) Yet, after the chaos of a systemic meltdown had run it course, the relative values of the world’s major currencies might not have changed much, at all. Relative values are what we trade, after all — there are no “intrinsic” values in the currency market. So, if the economies of the industrialized countries all crashed at the same time, then after the dust had settled, the major pairs and the major crosses might have roughly the same prices as prior to the crash.
(7) How long it would take before an organized, efficient, and tradeable market for currencies could exist again, after such a crash, and whether a re-born forex market would be available to small, retail customers — these are hypothetical questions for Happy Hour (after everyone has had several drinks).
(8) If a too-big-to-fail bank were on the brink of failure, threatening to bring down the whole house of cards, and if the government then stepped in with extraordinary measures to prop up that bank, we might have a replay of the Financial Crisis of 2007-2008. In that case, the history of the forex market during that prior crisis might serve as an indicator of what to expect during a “Financial Crisis 2.0”.
It’s worth a look at our charts for the period of the 07-08 Financial Crisis, with an eye on the timeline of events (Bear Stearns, Lehman Brothers, AIG, and others).
History repeats, but it never repeats exactly. So, another threatened collapse of the financial system, if narrowly averted, might be similar to what took place in 2007-2008, yet produce very different results in the currency market.