Anyone who thinks that Congress will use the current financial regulation - Dodd-Frank - to break up banks in the middle of an even bigger crisis is dreaming. If the giant banks aren't broken up now - when they are threatening to take down the world economy - they won't be broken up next time they become insolvent either. And see this. In other words, there is no better time than today to break them up.
Standard and Poors is providing evidence for this assertion.
As the Financial Times notes today:
Officials fighting the next financial crisis may again bail out banks using the public purse, S&P has said, in an opinion that casts doubt on one of the fundamental tenets of US financial reform.
The rating agency said on Wednesday that the US Treasury, Federal Reserve and Congress might rescue a large financial group rather than allow it to fail like Lehman Brothers. Dodd-Frank, the legislation signed into law a year ago next week, was supposed to prevent bail-outs by allowing the government to seize and wind down safely an ailing "systemically important financial institution", or Sifi.And after the passage of Dodd-Frank).
But in a research note, S&P said: “We believe the government may try to avoid contagion and a domino effect if a Sifi finds itself in a financially weakened position in a future crisis.”
The agencies’ views are crucial to the fight over whether the phenomenon of “too big to fail” has been ended. If not, the largest banks will continue to enjoy a funding advantage over their smaller rivals.
Why Break Up the Giant Banks?
Virtually all independent economists and financial experts say that the giant banks are too big, and that their very size is hurting the economy:
- Nobel prize-winning economist, Joseph Stiglitz
- Nobel prize-winning economist, Ed Prescott
- Nobel prize-winning economist, Paul Krugman
- Former chairman of the Federal Reserve, Alan Greenspan
- Former chairman of the Federal Reserve, Paul Volcker
- Former Secretary of Labor Robert Reich
- Dean and professor of finance and economics at Columbia Business School, and chairman of the Council of Economic Advisers under President George W. Bush, R. Glenn Hubbard
- Former Director of the National Economic Council Larry Summers
- President of the Federal Reserve Bank of St. Louis, Thomas Bullard
- Deputy Treasury Secretary, Neal S. Wolin
- The President of the Independent Community Bankers of America, a Washington-based trade group with about 5,000 members, Camden R. Fine
- The head of the FDIC, Sheila Bair
- Former Tarp overseer and creator of the Consumer Financial Protection Bureau, Elizabeth Warren
- The head of the Bank of England, Mervyn King
- The leading monetary economist and co-author with Milton Friedman of the leading treatise on the Great Depression, Anna Schwartz
- Economics professor and creator of the "efficient market hypothesis", Eugene Fama
- Economics professor and senior regulator during the S & L crisis, William K. Black
- Economics professor, Nouriel Roubini
- Economics professor, James Galbraith
- Economist, Marc Faber
- Professor of entrepreneurship and finance at the Chicago Booth School of Business, Luigi Zingales
- Economics professor, Thomas F. Cooley
- Economist Dean Baker
- Economist Arnold Kling
- Former investment banker, Philip Augar
- Chairman of the Commons Treasury, John McFall
- Leading bank analyst, Chris Whalen
Why do these experts say the giant banks need to be broken up?
Well, small banks have been lending much more than the big boys. The giant banks which received taxpayer bailouts have been harming the economy by slashing lending, giving higher bonuses, and operating at higher costs than banks which didn't get bailed out.
As Fortune pointed out, the only reason that smaller banks haven't been able to expand and thrive is that the too-big-to-fails have decreased competition:
Growth for the nation's smaller banks represents a reversal of trends from the last twenty years, when the biggest banks got much bigger and many of the smallest players were gobbled up or driven under...
As big banks struggle to find a way forward and rising loan losses threaten to punish poorly run banks of all sizes, smaller but well capitalized institutions have a long-awaited chance to expand.
And as in December 2008, the big banks are the major reason why sovereign debt has become a crisis:
The Bank for International Settlements (BIS) is often called the "central banks' central bank", as it coordinates transactions between central banks.
BIS points out in a new report that the bank rescue packages have transferred significant risks onto government balance sheets, which is reflected in the corresponding widening of sovereign credit default swaps:The scope and magnitude of the bank rescue packages also meant that significant risks had been transferred onto government balance sheets. This was particularly apparent in the market for CDS referencing sovereigns involved either in large individual bank rescues or in broad-based support packages for the financial sector, including the United States. While such CDS were thinly traded prior to the announced rescue packages, spreads widened suddenly on increased demand for credit protection, while corresponding financial sector spreads tightened.In other words, by assuming huge portions of the risk from banks trading in toxic derivatives, and by spending trillions that they don't have, central banks have put their countries at risk from default.
A study of 124 banking crises by the International Monetary Fund found that propping banks which are only pretending to be solvent hurts the economy:
Existing empirical research has shown that providing assistance to banks and their borrowers can be counterproductive, resulting in increased losses to banks, which often abuse forbearance to take unproductive risks at government expense. The typical result of forbearance is a deeper hole in the net worth of banks, crippling tax burdens to finance bank bailouts, and even more severe credit supply contraction and economic decline than would have occurred in the absence of forbearance.
Cross-country analysis to date also shows that accommodative policy measures (such as substantial liquidity support, explicit government guarantee on financial institutions’ liabilities and forbearance from prudential regulations) tend to be fiscally costly and that these particular policies do not necessarily accelerate the speed of economic recovery.
All too often, central banks privilege stability over cost in the heat of the containment phase: if so, they may too liberally extend loans to an illiquid bank which is almost certain to prove insolvent anyway. Also, closure of a nonviable bank is often delayed for too long, even when there are clear signs of insolvency (Lindgren, 2003). Since bank closures face many obstacles, there is a tendency to rely instead on blanket government guarantees which, if the government’s fiscal and political position makes them credible, can work albeit at the cost of placing the burden on the budget, typically squeezing future provision of needed public services.Now, Greece, Ireland, Portugal, Spain, Italy and many other European countries - as well as the U.S. and Japan - are facing serious debt crises. We are no longer wealthy enough to keep bailing out the bloated banks.
Indeed, the top independent experts say that the biggest banks are insolvent (see this, for example), as they have been many times before. By failing to break up the giant banks, the government will keep taking emergency measures to try to cover up their insolvency. But those measures drain the life blood out of the real economy.
And by failing to break them up, the government is guaranteeing that they will take crazily risky bets again and again, and the government will wrack up more and more debt bailing them out in the future.
Moreover, Richard Alford - former New York Fed economist, trading floor economist and strategist - recently showed that banks that get too big benefit from "information asymmetry" which disrupts the free market.
Indeed, Nobel prize-winning economist Joseph Stiglitz has noted that giants like Goldman are using their size to manipulate the market:
"The main problem that Goldman raises is a question of size: 'too big to fail.' In some markets, they have a significant fraction of trades. Why is that important? They trade both on their proprietary desk and on behalf of customers. When you do that and you have a significant fraction of all trades, you have a lot of information."
Further, he says, "That raises the potential of conflicts of interest, problems of front-running, using that inside information for your proprietary desk. And that's why the Volcker report came out and said that we need to restrict the kinds of activity that these large institutions have. If you're going to trade on behalf of others, if you're going to be a commercial bank, you can't engage in certain kinds of risk-taking behavior."
The giants (especially Goldman Sachs) have also used high-frequency program trading which not only distorts the markets - making up more than 70% of stock trades - but which also lets the program trading giants take a sneak peak at what the real (that is, human) traders are buying and selling, and then trade on the insider information. See this, , this, and this. (This is frontrunning, which is illegal; but it is a lot bigger than garden variety frontrunning, because the program traders are not only trading based on inside knowledge of what their own clients are doing, they are also trading based on knowledge of what all other traders are doing). Goldman also admitted that its proprietary trading program can "manipulate the markets in unfair ways".
The giant banks have also allegedly used their Counterparty Risk Management Policy Group (CRMPG) to exchange secret information and formulate coordinated mutually beneficial actions, all with the government's blessings.
Again, size matters. If a bunch of small banks did this, manipulation by numerous small players would tend to cancel each other out. But with a handful of giants doing it, it can manipulate the entire economy in ways which are not good for the American citizen.
Further, fraud was one of the main causes of the Great Depression and the current financial crisis. The banks are so big that they are buying off politicians so that it has become official policy not to prosecute fraud. Indeed, everyone from Paul Krugman to Simon Johnson has said that the banks are so big and politically powerful that they have bought the politicians and captured the regulators. So their very size is allowing economy-killing corruption to flourish.
Moreover, the banks' enormous size means that the executives make orders of magnitude more in bonuses and salary than the executives of small banks. They are so big that their executives are living like kings. This is making inequality worse ... and rampant inequality was another primary cause of the Great Depression and the current financial crisis.
Indeed, failing to break up the big banks will result in the sale of national assets and the looting of national treasuries in order to pay off debts to the giant banks. This, in turn, will destroy the national sovereignty of virtually every country.
Leading independent bank analyst Christopher Whalen argues:
The fraud and obfuscation now underway in Washington to protect the TBTF [i.e. giant or "too big to fail"] banks ... totals into the trillions of dollars and rises to the level of treason.Just look at Greece. That is our future - and - unless we break up the "too big to fails".
These concepts have been known for hundreds of years:
"When a government is dependent upon bankers for money, they and not the leaders of the government control the situation, since the hand that gives is above the hand that takes... Money has no motherland; financiers are without patriotism and without decency; their sole object is gain."
- Napoleon Bonaparte
"There are two ways to conquer and enslave a nation. One is by the sword. The other is by debt."
- John Adams
“If the American people ever allow the banks to control issuance of their currency, first by inflation and then by deflation, the banks and corporations that grow up around them will deprive the people of all property until their children will wake up homeless on the continent their fathers occupied”.
— Thomas Jefferson
"I believe that banking institutions are more dangerous to our liberties than standing armies...The issuing power should be taken from the banks and restored to the Government, to whom it properly belongs."
- Thomas Jefferson
"[It was] the poverty caused by the bad influence of the English bankers on the Parliament which has caused in the colonies hatred of the English and . . . the Revolutionary War."
- Benjamin Franklin
“The Founding Fathers of this great land had no difficulty whatsoever understanding the agenda of bankers, and they frequently referred to them and their kind as, quote, ‘friends of paper money. They hated the Bank of England, in particular, and felt that even were we successful in winning our independence from England and King George, we could never truly be a nation of freemen, unless we had an honest money system. ”
-Peter Kershaw, author of the 1994 booklet “Economic Solutions”
- Historian Alexander Del Mar
"The British Parliament took away from America its representative money, forbade any further issue of bills of credit, these bills ceasing to be legal tender, and ordered that all taxes should be paid in coins ... Ruin took place in these once flourishing Colonies . . . discontent became desperation, and reached a point . . . when human nature rises up and asserts itself."
- British historian John Twells
The US government (White House and Congress) spends $10 billion dollars a month, or $120 billion a year, to fight an estimated “50 -75 ‘Al Qaeda types’ in Afghanistan...” (Let this one sink in a minute).
During the past 30 months of the Obama presidency, Washington has spent $300 billion dollars in Afghanistan, which adds up to $4 billion dollars for each alleged ‘Al Queda type’. If we multiply this by the two dozen or so sites and countries where the White House claims ‘Al Qaeda’ terrorists have been spotted, we begin to understand why the US budget deficit has grown astronomically to over $1.6 trillion for the current fiscal year.
During Obama’s Presidency, Social Security’s cost-of-living adjustment has been frozen, resulting in a net decrease of over 8 percent, which is exactly the amount spent chasing just 5 dozen ‘Al Qaeda terrorists’ in the mountains bordering Pakistan...
The crumbling empire has depleted the US treasury.
As the Congress and White House fight over raising the debt ceiling, the cost of war aggressively erodes any possibility of maintaining stable living standards for the American middle and working classes and heightens growing inequalities between the top 1% and the rest of the American people...
The burden of sustaining a declining empire, with its the monstrous growth in military spending, has fallen disproportionately on middle and working class taxpayers and wage earners. The military and financial elites’ pillage of the economy and treasury has set in motion a steep decline in living standards, income and job opportunities...
Even greater blows are to come in the second half 2011: As the Obama White House expands its imperial interventions in Pakistan, Libya and Yemen, increasing military and police-state spending, Obama is set to reach budgetary agreements with the far right Republicans, which will savage government health care programs, like MEDICARE and MEDICAID, as well as Social Security, the national retirement program. Prolonged wars have pushed the budget to the breaking point, while the deficit undermines any capacity to revive the economy as it heads toward a ‘repeat recession’....
I've snipped primarily the economic stats from this article. But, Petras also discusses the strength of the Taliban and their primary role in keeping foreign occupiers out of Afghanistan. The Taliban is not part of any "international terrorist network," as we've been led to believe. In fact, he writes they've *never* committed any terrorist act on the U.S. here or abroad. He offers several hypotheses for exactly why, then, we are putting the lives of our military at risk, draining the treasury and in turn depleting the standard of living for the folks here at home. Israel's role in instigating this war will come as no surprise to the readers here.
Read the rest of the article here:
...the true purpose of the bank rescue plans is "a massive redistribution of wealth to the bank shareholders and their top executives...The Great Bank Robbery, if you will...[T]he trillions in bailouts went to banks, not Main Street ... and a large percentage of the bailouts went to foreign banks (and see this). And so did most of money from the second round of quantitative easing
The article indicates that Prof. Michael Hudson, a highly-regarded economist, predicts that what just happened in Greece will happen here in America in just a couple of weeks.
trying to get to this....
Fed Chairman Bernanke told congress today:
‘Gold isn’t money’But Bernanke's predecessor - former Fed chair Alan Greenspan - disagrees.
As in 2009:
Professor Emeritus of Mathematics Antal Fekete has argued for years that gold is the ultimate - and only - safe haven when things really hit the fan.
For example, in 2007 Fekete wrote:The grand old man of the New York Federal Reserve bank’s gold department, the last Mohican, John Exter explained the devolution of money (not his term) using the model of an inverted pyramid, delicately balanced on its apex at the bottom consisting of pure gold. The pyramid has many other layers of asset classes graded according to safety, from the safest and least prolific at bottom to the least safe and most prolific asset layer, electronic dollar credits on top. (When Exter developed his model, electronic dollars had not yet existed; he talked about FR deposits.) In between you find, in decreasing order of safety, as you pass from the lower to the higher layer: silver, FR notes, T-bills, T-bonds, agency paper, other loans and liabilities denominated in dollars. In times of financial crisis people scramble downwards in the pyramid trying to get to the next and nearest safer and less prolific layer underneath. But down there the pyramid gets narrower. There is not enough of the safer and less prolific kind of assets to accommodate all who want to "devolve”. Devolution is also called "flight toDarryl Schoon makes the same argument.
Here's a visual depiction Exeter's inverted pyramid, courtesy of FOFOA:
(Click here for full image)
Are Exeter, Fekete and Schoon right?
I don't know. But Alan Greenspan just lent some support to the theory.
Gold prices that jumped above $1,000 an ounce this week are signaling that investors are buying metals to hedge against declines in currencies, former Federal Reserve Chairman Alan Greenspan said.
The gains are “strictly a monetary phenomenon,” Greenspan said today at an investment conference in New York. Rising prices of precious metals and other commodities are “an indication of a very early stage of an endeavor to move away from paper currencies,” he said...
“What is fascinating is the extent to which gold still holds reign over the financial system as the ultimate source of payment,” Greenspan said.
In other words, Greenspan is saying that investors are moving out of the second-to-lowest step on the pyramid (currencies and government bonds) and into the lowest step (gold).
Greenspan is also verifying what goldbugs like Exeter, Fekete and Schoon have been claiming: that "the barbarous relic" still holds an important place in the modern investor's psyche.
Moreover, as last year:
Alan Greenspan told the Council of Foreign Relations last week:Fiat money has no place to go but gold.
Greenspan also said that supply and demand explanations treating gold like other commodities “simply don’t pan out."
Greenspan also spoke of how, during World War II, the Allies going into North Africa found gold was insisted on in the payment of bribes, and said:If all currencies are moving up or down together, the question is: relative to what? Gold is the canary in the coal mine. It signals problems with respect to currency markets. Central banks should pay attention to it.
As last month:
Utah has declared gold and silver to be legal tender - with the value of the coin determined by the weight of precious metal it contains
As the New York Times notes:The law is the first of its kind in the United States. Several other states, including Minnesota, Idaho and Georgia, have considered similar laws.
World Bank president Robert Zoellick noted last year:Although textbooks may view gold as the old money, markets are using gold as an alternative monetary asset today.
Moreover, as FT reported last year:
Intercontinental Exchange, the US futures exchange group, has followed rival CME Group by allowing its European clearing house to accept gold bullion as collateral for transactions.
Zero Hedge notes:
JP Morgan Accepts Gold Bullion As Collateral.And Phoenix Capital Research argues that central banks are themselves loading up on gold because they know that the entire fiat money scam will soon collapse....
There will be a third fewer people earnings profits for businesses, paying taxes to governments, buying homes or cars, or taking vacations. Starting around 2015 the adult population will start to decline at about 2% a year. Productivity in the industrial nations (output per worker) has grown at slightly more than 2% since 2000, according to The Conference Board,  so a 2% decline in working-age population suggests that output will remain more or
Population aged 15 to 59, more developed regions
Source: UN Population Prospects, Constant-Fertility Scenario
Growth in the industrial world will come to a halt, and government revenues will stagnate, just when governments need revenue the most. In 2010, 24% of the people of the developed countries were elderly dependents. By 2030, that figure will rise to 30%, and by 2040 it will rise to 42%. The demands on public pension and health systems will be enormous, especially in rapidly-aging Europe and Japan. Taxes will rise drastically to support the retirees, which means that after-tax income will fall.
America is the grand exception to the global trend.
Adult population by region (2010=100)
Source: UN Population Prospects, Constant-Fertility Scenario
America's higher fertility, though, may be a mixed blessing, and it may not persist, for it depends on very high fertility among Hispanic immigrants. By 2050, Americans of European ancestry will comprise just half of the population. Hispanic immigrants are drawn disproportionately from the poorest and least-educated strata of Mexican and Central American society and may not integrate into America as well as previous immigrants. But there are other sources of American demographic strength. Evangelical Christians, who comprise about a quarter of Americans, have a fertility rate of 2.6, far above replacement.
America, Canada and Australia are the lepers with the most fingers. They are the only industrial nations worth investing in for the long term, but demographic decline in the rest of the developed world will affect them as well. There will be fewer people to buy American exports, and fewer suppliers of new products from overseas.
What about the developing world? China's adult population will fall from 915 million in 2010 to only 682 million in 2050, by more than a third. India's adult population will grow by a third, but it remains to be seen how many of them will be integrated into the country's pocket of modernity and how many will remain trapped in poverty. Africa, Latin America and the Arab world never have contributed much besides raw materials to the world economy, and the productivity of their people simply is not a factor over any pertinent horizon.
The bubble that popped in 2008 (see Waking from Lever-Lever Land, December 25, 2008) was the collective delusion of the industrial nations that they could generate high returns from investments despite the imminent decline of the number of people there to produce those returns.
Now that the delusion is dead, the citizens of the industrial nations have no choice but to accept lower returns on investment, reduced government largesse, and a poorer existence generally. From the Wisconsin State House to the Palazzo Montecitorio in Rome, the only question is how fast governments will cut spending and for whom.
The crisis came in 2008, when leverage collapsed. Today's euro zone debt drama is not a crisis, but a negotiation. There is an instructive comparison between the municipal debt crisis in the US and the sovereign debt crisis in Europe. The most corrupt city in the US is a refuge of angels compared to any political venue in southern Europe.
The voters who also are the taxpayers have given a mandate to politicians to ruthlessly cut expenses. In Wisconsin and Minnesota, where Republican governors confront public-sector unions, it has come to open confrontation. In fits and starts, the system is working, because states and cities must raise money from their residents, and taxpayers vote directly for those responsible for taxes and spending.
State and local government employment is falling sharply, with 21,000 layoffs in June alone. During the past year, US cities have shed 124,000 education jobs. Borrowing by US states and cities has fallen by half this year, and municipal debt performed better than any other fixed-income asset class.
In Europe, where national governments and the bureaucrats in Brussels control spending by localities, and voters have little to do with local government budgets, there is no such responsiveness. The result is a battle between Greek recipients of government largesse and German taxpayers. There is no incentive for local constituencies to throw the bums out, for it is not the tax money of the Athenians that pays municipal salaries in Athens. Europe's laggards must look deeply into the abyss before doing what US states and cities have done proactively.
That's where the similarity ends. America has enough taxpayers to fund its obligations at all levels of government. The euro zone will lose 30% to 40% of its potential taxpayers by mid-century. And at some point, today's Italian and Spanish government bonds will have about as much value as obligations signed by Emperor Romulus Augustus in the year 475 CE.
1. 2011 Productivity Brief – Key Findings, The Conference Board, 2011.