We Have Fixed Nothing

I attempt to explain this on a fairly regular basis so let me try again to do that:

There is an enormous problem with the global economy. The problem is not ‘a’ thing but the convergence of things. The convergence of these things continue to be so because they are immensely mindblowingly profitable for people who are able to access particular financial tools and opportunities. In other words – not you.
The problems we had in 2008-09 have not been fixed. What we have done since September of 2008 is to pour trillions of dollars into the banking system in order to keep it liquid and solvent. Central banks are still dropping $200 billion a month into the global banking system in order to keep it liquid and solvent.
If not for an accounting rule change in March of 2009 your bank would still be as insolvent on paper today as it was in January of 2009 – and that insolvent to solvent status change was a change in paper status only and not a change in the actual status of the bank which is why we still pour $200 billion a month into the banks in order to keep them solvent.
Grasp this – all we have done is to reinflate the bubble which burst on September 15, 2008 when Lehman Brothers went under. No systemic changes were made to address the situation – what was done was to pass silly legislation like Dodd-Frank which merely drove local and regional banks out in favor of the Too Big To Fail banks. Dodd-Frank simply codified Too Big To Fail banks – indeed it was among the greatest gifts to Wall Street ever provided by congress.
The response to the crisis of 2008-09 has been for the Federal Reserve to adopt the loosest monetary policy not just in the history of the United States but the history of the world combined with congress and the Obama administration providing the big six banks on Wall Street with extravagant privileges never before known in the history of this country.
I will repeat – we fixed nothing. We have simply made the current bubble much larger than the last bubble which was much larger than the bubble before that one. As Jim Rickards points out – Wall Street bailed out a bank when the bubble popped in 1998, the central banks bailed out Wall Street when the bubble popped in 2008, who is going to bail out the central banks when this bubble pops?
This is not a ‘sky is falling’ kind of post – but it is a pay attention kind of post. Quite a few people seem to think these problems of 2008-09 are in the past and resolved and done with.
That is not the case.
The global notional value of derivatives is about $544 trillion. The Too Big To Fail banks in the United States alone are counterparty to about $168 trillion of that. Deutsche Bank is actually the most systemically important bank in the world because they are counterparty to a greater dollar value of derivatives than anyone else on the globe, some where around $45 trillion. The banks of Spain, Italy and Greece are on life support. Who do you think is the #1 creditor to the banks of Spain, Italy and Greece? Deutsche Bank.
See how bad things can happen?
Let me repeat again – we did nothing to solve the problems of 2008-09. We just reinflated the bubble.
The insanity of the policies of 2001-2008 were only exposed when the Federal Reserve began to systematically raise interest rates and credit tightened and contracted. In 2017 credit is presently contracting and the Federal Reserve says it will systematically raise interest rates. Does that mean history repeats? Probably not but a decent chance that it rhymes.
So – pay attention.

Reinitiating Glass-Steagall

I differ with a lot of my friends over reinitiating something along the lines of Glass-Steagall.
Here is why I disagree that reinitiating something along the lines of Glass-Steagall would be effective:
No rational assessment of any future situation involves the United States government allowing the ‘Too Big To Fail Banks’ to actually fail. The six largest US banks are on the hook for about $168 trillion in derivatives at the moment. For some context the GDP of the entire world is about $70 trillion. If one of these banks failed it would domino into bank failure around the globe simply from being counter-party to these derivatives. That would in all probability lock up the world credit markets and if that were to occur, Boeing couldn’t sell an airplane, Walmart couldn’t make payroll, etc etc etc.
The U.S. government is not voluntarily going down that path.
Hence removing FDIC insurance from investment banks that no one believes the government will ever allow to fail is the very definition of hitting an empty paper bag.
IF these banks were actually allowed to fail then your last concern will be FDIC insurance regardless.

Quote Of The Day

Quote of the Day: “In the summer of 1959, as in the summer of 1957, I worked as a clerk-typist in the headquarters of the U.S. Public Health Service in Washington. The people I worked for were very nice and I grew to like them. One day, a man had a heart attack at around 5 PM, on the sidewalk outside the Public Health Service. He was taken inside to the nurse’s room, where he was asked if he was a government employee. If he were, he would have been eligible to be taken to a medical facility there. Unfortunately, he was not, so a phone call was made to a local hospital to send an ambulance. By the time this ambulance made its way through miles of Washington rush-hour traffic, the man was dead. He died waiting for a doctor, in a building full of doctors. Nothing so dramatized for me the nature of a bureaucracy and its emphasis on procedures, rather than results.” – Thomas Sowell

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