Newest Fed Reserve Bank President Backs Sanders' Bank Breakup Plan

The headline in the 'Money & Investing' section of Wednesday's  Wall Street Journal was 'Fed Official Backs Bank Breakups' (p. C1) which must have given all the investor class and banksters new heart palpitations that if Bernie is elected they have much to fear - and they will.   ( See e.g. Wall Street Journal  'Populists Reject Economic Orthodoxy' where author Greg Ip alerts us to the trepidation now felt by investors,  terrified because well, Bernie Sanders appears quite serious in his determination to break up the big banks.)

As the earlier cited WSJ piece notes (and let's please bear in mind the Journal is no "radical" publication):

"The Federal Reserve's newest bank president, a Republican who served as a top Treasury Department official during the financial crisis, called Tuesday for policy makers to consider breaking up big banks to prevent future government bailouts."

This is especially a crucial issue to those of us invested in money market funds as opposed to the volatile stock market. Many may not recall that in the wake of the 2007-08 disaster Bernanke's Fed was actually considering limiting any protection of money market funds, monies. . In 2010, the SEC actually started to run with the idea of allowing money markets to "float" as opposed to having a fixed $1 net asset value (NAV).

In The Financial Times of January 28, 2010 ('Markets & Investing' section, page 23) - about a third of the way down the page - there appeared a nondescript four column story under the header: 'Curbs on Money Market Funds'. As readers may be well aware, at the apex of the credit meltdown and banking crisis there was a veritable flood of investors toward safety, after seeing their investments in equities cratered. The first destination was money market funds, which are also the safest instruments available for most people with IRA or 401k holdings.

The FT article also pointed out:

"The SEC is to evaluate the merits of requiring a floating net asset value for money market funds rather than the stable $1 mark. Such action would involve substantial changes to the money market fund industry."

But WHY do that? This would introduce the very element of phantom or variable asset value (that exists in stock holdings) to now intrude into the "safe" money sphere. It would also let money market fund companies and managers off the hook, since if the share value is permitted to float, there will simply not be the same commitment  to adhere to the $1 value at all.

Untold was the underlying theme that this gimmick was in fact a hidden means of bailout for the bankster gamers and gamblers. Because of the risk of a new credit crisis (now increasing with student loan debt) we who hold safe investments would be required to aid in the next bailout. This, of course, is bullshit.

Getting back to the Minneapolis Fed bank chief (Neel  Kashkari's)  remarks and  contrary to Hillary's bloviations: "the 2010 Dodd Frank law did not go far enough".  He added that (ibid.): "the law hasn't ended the problem of banks so big that their collapse would endanger the financial system and economy forcing the government to rescue them in a crisis."

 Indeed, and those of us who've been paying attention have noted how the Reepos and their Maul Street lobby pallies have been gradually tweaking Dodd- Frank downward.  In the most recent (Dec., 2014) iteration, the Repukes snuck a last minute poison pill amendment into a critical  $1.1 trillion spending bill to keep the gov't open. The amendment allowed risky derivatives to be insured by Federal Deposit Insurance Corporation thereby setting the stage for a pre-emptive bailout if the CDS market goes south. See e.g. WSJ, A Warning Signal Flashes' (Feb. 12, p. C4), noting the market for credit default swaps - the same buggers that nearly crashed our financial system in '08 - are now on the rise again.  According to the Journal (ibid.):

"At the end of June the global CDS market was $14.6 trillion as measured by the total amount of default protection outstanding according to the Bank for International Settlements"

Do voters really want to risk another financial shit storm, and recession to make the last look like a jamboree? This is  the threat to which what Sanders is trying to awaken citizens. 

What are Kashkari's prescriptions for bank reform? According to the WSJ piece, "policy makers need to give serious consideration to":

- Breaking up large banks into smaller, less connected, less important entities

-  Regulating large banks like a public utility, or

- Taxing leverage through the financial system to reduce systemic risks wherever they may be

The Fed bank chief added, in a talk at the Brookings Institution (ibid):

"The financial sector has lobbied hard to preserve its current structure and thrown up endless objections to fundamental change. And in the immediate aftermath of the crisis when the Dodd-Frank Act was passed the economic outlook was perhaps too uncertain to take truly bold action. But the economy is stronger now and the time has come to move past parochial interests"

Indeed, and no surprise that Sen.  Sanders released a campaign statement after the speech saying he was "delighted" with Mr. Kashkari's position. Other citizens should also be once they wake up to what Sanders is saying, and repeating. (Well, as a former prof, if you repeat something often enough eventually it sinks into the student's cranium).

Let's also bear in mind Mr. Kashkari isn't some detached observer. During the financial crisis he ran the  $700 billion Troubled Asset Relief Program, an effort aimed at stabilizing the financial system by pumping capital into banks.

From this perspective of his experience, he likened big banks to nuclear reactors whose meltdown would be catastrophic and compared bank regulators to Transportation Security Administration workers checking shoe x-rays to thwart terrorist attacks. Kashkari is so concerned about the next big fail, that he's called for immediate proposals (such as those from Sanders) to attack big bank risk and to hold conferences and recommendations by year's end.

Are people, citizens paying attention? Or are Kashkari's and Bernie's calls for banking reform and the financial structure too abstract for most people to grasp and attend to?  They had better attend to it soon, and vote with their brains as opposed to believing more fake promises from pols who only want to get elected to "make history".

How Close Are We To A New Financial Meltdown? Ans. VERY

As too many Americans continue to be distracted by the bread and circuses of the modern corporo-media, some of us are looking seriously at the financial situation and whether, indeed, a repeat of the 2007-08 financial meltdown and recession may soon be upon us - possibly next year.

This isn't flighty crap like 'The Interview' and how idiots are "doing their patriotic duty" by watching that garbage (Can you also do your patriotic duty by eating dog shit  bearing the name 'Kim Jong-On'?) but rather a reality check that might be worthwhile for anyone with money stashed in 401ks.

Let's first look at some of the signs - which also preceded the earlier credit crisis:

- An inflated stock market well into bubble territory thanks to the Federal Reserve's continued cheap money infusions -via quantitative easing -  like crack to the Wall Street mob.

- Housing regulators have cut down payments to 3 percent in many cases, increasing the propensity for moderate to low income people to take out mortgages they may not be able to afford.

- A sub-prime loan enclave has materialized once more only now lodged in auto loans as opposed to home loans. The credit rating agency Standard and Poor's expects lenders to make no less than $21 billion in sub-prime auto loans this year, up from $20b last year and possibly as high as $23b next year.

- The last security backup, to protect against swaps (risky derivatives - used to 'bet the farm' by banks), was meanwhile removed by congress in the passage of a spending bill ending the last session.  Before this reckless move (by a Kansas Repug who stuck it into the bill at the last minute), Dodd-Frank regulations forced banks to separate their federally insured banks from their riskiest trading operations (which deal in derivatives). Now, they're all mixed together.

- Rising global debt imposes an added instability.  The Institute of International Finance, an industry research group, warned ten days ago that global debt (excluding debt held by banks), had reached a record 244 percent of worldwide economic output. This is now also propelled by the collapse in oil prices which means lenders won't receive payments from assorted oil operations that can no longer fund themselves and make good on their loans.

All the above in concert represent the perfect storm. All of them together create what is likely a 95% probability that the system will implode given one unforeseeable "X-event" (see the book by the same name, actually 'X-Events' - the chapters on financial catastrophe).

Yet, had the Wall Street gift amendment not been stuck into the spending bill, the probability might well be lower than 75 percent - given that despite the assorted instability agents, one still needed the swaps rule bailout to actually pose a serious systemic threat.

Incredibly, defenders of the amendment say they needed it to "preserve their ability to help farmers and businesses hedge their bets" - which is poppycock. The only remaining farmers of any note in this country today are the big agri-business farms, and the businesses which want to "hedge" their bets you don't want to know about. It's all a ruse to enable the banks to play with your hard earned money - bad enough when they're barely delivering 0.05% in typical passbook savings accounts.

Meanwhile, Thomas Hoenig, Vice-Chairman of the FDIC, has called the repeal "illogical", since the 2008 crisis "exposed the economic consequences of conducting derivatives trading in taxpayer-insured banks,"

One last heads up ought to scare the bejeezus out of any simpleton who feels extra -complacent: The so-called "too big to fail" banks that all needed a taxpayer bailout in 2008, now loom even larger than before the earlier crisis.  The nation's five biggest banks currently account for 44 percent of bank assets, up from 38 percent in 2007.

Einstein once defined insanity as doing the same thing over and over while expecting a different result. The banks are now set up, along with the nation - thanks to a reckless amendment - to test that definition to its limits at least in a first powerful iteration (there may be no resources left for later ones if this crash is as bad as I suspect).

And if you have money anywhere in the system, you had better be paying attention! In the words of Simon Johnson, Professor of global economics at MIT:

'We are on a very dangerous trajectory".

House Dems Need to Sink That F%$^#@! Spending Bill !

Leave it to the Repukes to sneak a last minute poison pill amendment into a critical bill ($1.1 trillion spending bill to keep the gov't open). But this bastardized piece of crap cannot be allowed to go forward - no matter it has Obama's "blessing". Sorry, Obama, but we cannot allow an amendment that subsidizes another bankster bailout because risky derivatives are allowed to be insured by Federal Deposit Insurance money. That dog won't hunt and you are backing the wrong dog! (No one wants a government shutdown, but NO one should want to risk another financial meltdown either!)

Let's back up here and get our minds around this: Back in 2008 the mother of all financial crises was spawned after the banksters used the money from ordinary passbook accounts to make bets on risky derivatives called "credit default swaps".  The damned things were insinuated all over the place - and no one knew how much of any bond (mislabeled AAA) or other instrument held them. The presence nearly caused a financial calamity of Depression proportions, but the resulting Recession was bad enough with over 20 million losing their jobs and many losing up to half of their 401ks. Massive bailouts followed in the wake - including under Bush (for AIG) then in the early months of Obama's tenure - with a stimulus package of nearly $793 billion.

All this is history, which makes one wonder why Obama himself doesn't remember it and is prepared to back this jackass mutant of a spending bill which threatens the same thing.

Why? In the aftermath of the 2008 credit  meltdown, the Dodd-Frank bill was passed in some form containing a key regulation which stipulated that the risky derivative trades could henceforth only be done on the banksters' own dime. Thus, the federal government would no longer insure those trades. In other words, banks could do the risky trades themselves if they wanted, but they'd no longer be insured by the taxpayers.

When I say insured, I mean using the FDIC (Federal Deposit Insurance Corporation) monies. The FDIC, for those unaware, insures all regular passbook savings of up to $250,000. Thus, if I have $250,000 in an account (I should be so lucky) and the bank goes under because of bad financial dealings - then FDIC pays and I can recover the losses. (You can have more money in the account but it's only insured up to the $250k limit). This sort of depositor protection came into regulations after so many millions lost all their money with the collapse of banks during the Great Depression.

But in the poison pill amendment that was stuck in this spending bill, the banks can once again use FDIC monies to back up their risky trades. In other words, the assholes that stuck this thing in the spending bill are paving the way for a new credit meltdown and implosion if the derivatives blow up the banks' trades again. And who will lose? Who do you think? John and Mary Taxpayer!

This is why this perfidy can't be allowed to go forward and thank goodness to Nancy Pelosi in the House and Elizabeth Warren in the Senate for mounting an opposition. They both understand that the risk is too damned great to allow this abomination to pass- even with a government shutdown possibly looming. Evidently, Obama is too desperate to have the spending bill pass with this mutation - but that's too bad.

The best chance to kill the thing is in the House where an unlikely alliance of Tea Party members and liberal democrats (who are needed because there aren't enough Tea Party votes) would bring it down. With both factions withholding support it has to die, unless the poison amendment and gift to Wall Street and the banks is removed.

As Elizabeth Warren put it yesterday:

"This is a democracy and the American people didn't elect us to stand up for Citigroup. They elected us to stand up for all the people. I urge my colleagues in the House - especially my Democratic colleagues whose votes are essential to moving this package forward to withhold support from it until this risky giveaway is removed from the legislation."

Amen! And until that risky giveaway is removed, no damned spending bill!

See also:

http://smirkingchimp.com/thread/richard-eskow/60022/this-is-not-a-drill-the-budget-deal-is-a-disaster



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Footnote: Alas,  the House Ds caved and voted for this perfidy, aware that a Continuing resolution would lead nowhere but into a world of hurt next year - when the Rs have majority control of both houses. Without Obama willing to use his veto pen, it was the proverbial losing wicket.