You know, we always called each other good fellas. Like you said to, uh, somebody, :You’re gonna like this guy. He’s all right. He’s a good fella. He’s one of us.: You understand? We were good fellas. Wiseguys.
From the movie Goodfellas, 1990
Wiseguys have a term: connected, which refers to a guy who’s made his bones, who’s on the inside and protected by the mobster powers that be. It applies to the political context with the same connotations, and is nowhere more appropriate than the banker-government nexus. Thursday morning, before the stock market opened, the Zero Hedge website printed an article “Dollar Tumbles After Fed Whiffs Again; More Cracks Appear In Chinese Bubble,” that began:
All those saying the Fed will never be able to raise rate are looking particularly smug this morning, because if the market needed a green light that despite all the constant posturing, pomp and rhetoric, the US economy is simply (never) ready for a rate hike, it got it late last night when Goldman pushed back its forecast for the first Fed rate hike from September to December 2015 saying that “in large part this reflects the fact that seven FOMC participants are now projecting zero or one rate hike this year, a group that we believe includes Fed Chair Janet Yellen. We had viewed a clear signal for a September hike at the June meeting as close to a necessary condition for the FOMC to actually hike in September, but the committee did not lay that groundwork today.”
If you’re in on one of the biggest scams in history, that’s all you had to read to know that the stock market would gap up when it opened, which it did. There is no more connected institution than Goldman Sachs, supplying both Bill Clinton and George W. Bush with Secretaries of the Treasury (Robert Rubin and Henry Paulson) and regularly landing on Top 10 lists of campaign donors for candidates of both parties. The heads of the European Central Bank and the Bank of England are Goldman alumni. If Goldman says a rate hike won’t happen in September, it won’t happen.
For a while, it was believed that the rate hike would happen this month, but Snow White Yellen and her merry band of intellectual dwarves found excuses to delay it. Their explanations are couched in terms of the labor market, inflation expectations, and actual inflation, but the real reason is that nobody wants to bring to an end the ongoing theft known as the Zero Interest Rate Policy (ZIRP). Economics has nothing to do with the Fed putting its thumb on the scale of interest rates; rather it is designed so the banks and Wall Street that have captured it will make money. That’s not the reckless rant of a conspiracy-theorizing populist. SLL is a staunch defender of capitalism and the self-interest that is its foundation, but banks stopped being capitalistic institutions over a century ago. What follows is a cold-blooded analysis of the deterioration of banking into larceny.
At the heart of fractional reserve banking is a lie: that a banks’ unsecured creditors—depositors—can withdraw their money on demand. They can’t, not all at once, and when, in the heat of a financial panic, they try, the bank faces a run, which can quickly become systemic. Ostensibly, the Federal Reserve was established to ameliorate this risk. The corrupting trade-off: from the moment of the enabling act’s passage, the banking industry became a ward of the state.
For a what-should-have-been-said-at-inception critique of the Federal Reserve, in a gripping historical novel no less, see The Golden Pinnacle, by Robert Gore. (The Golden Pinnacle was written by Gore in the belief that important ideas and a great read need not be mutually exclusive, and are in fact what readers are looking for. Prove him right and buy the book; it will be $22.46 (current price on Amazon) or $4.99 (Kindle and Nook) well spent.) The upshot of banker Daniel Durand’s fictional testimony before a House of Representatives committee: a central bank benefits the government, debtors, bankers, and the central bank at the expense of everyone else. Governments and other debtors benefit from lower interest rates and the hidden tax of a depreciating currency. The banks benefit from the establishment of a de facto banking cartel, mitigation of inherent banking risk, and access to cheap money with which to speculate. The central bank is one of the most powerful institutions in the government and its personnel benefit from the payola of regulatory capture and their positions as gatekeepers.
Further socialization of banking risk (but not banking rewards) came during the Great Depression with the establishment of deposit insurance. Too Big To Fail (TBTF) put the final nail in the coffin of any capitalistic tendencies still lurking within the banking system, and so inextricably intertwined the banks, the Federal Reserve, and the government that it was impossible to determine where one began and the others ended. TBTF set the stage for the Heist of the Century.
The TBTF banks in 2008 found themselves in the same position as a highly leveraged commodity speculator on the wrong side of a market move: tapped out. Fortunately for the banks, they had purchased plenty of insurance through the years—campaign contributions for politicians and revolving door jobs for politicians and bureaucrats alike. Nobody was going to let them to meet the fate that true capitalism demanded—bankruptcy— except for Lehman Brothers, which apparently did not grease enough, or the right, palms (and was also one of Goldman Sachs’ chief competitors). Other banks that would have gone bankrupt were sold to connected banks at fire sale prices.
The Heist wasn’t the bailouts per se; the government has got most of the taxpayer’s money back. The Heist is ZIRP, which began on December 16, 2008 and appears set to mark its seventh anniversary this December. Nobody, including bank executives or officials at the Fed and the Comptroller of the Currency, knew in 2008 how deep a hole the banks had dug themselves into. Many of their assets, which amounted to multiples of their shrinking capital, had no market or highly illiquid markets. The first step was to suspend mark-to-market accounting for those assets, so nobody on the outside could determine the banks’ true financial position. On April 9, 2009, the Financial Standards Accounting Board eased mark-to-market rules for hard to value and deeply underwater assets.
The economic and financial justifications for ZIRP were specious, the pitch to the marks as they were swindled. The Japanese economy had sputtered, enduring multiple recessions despite ultra-low interest rates for almost two decades—a clear demonstration of ZIRP’s inefficacy. In fact, mispriced interest rates reduce savings, promote debt, and lead to malinvestment that retards rather than promotes economic growth. That’s an intuitively obvious conclusion that Greenspan, Bernanke, Yellen, their flunkies, and cheerleaders in the media cannot allow themselves to speak, although it’s been part of the Austrian economic canon for a century.
Plunging deeper into financial fraud, they espoused the “wealth effect” doctrine. This pernicious and idiotic dream-masquerading-as-respectable-theory endorsed speculation and rising markets to create a wealth effect that would supposedly promote spending and economic expansion. This bizarre mutant of “trickle down” has even less empirical or analytic support than ZIRP. Rather, its true purpose was as an implicit directive and assurance for the connected. The directive: borrow at negligible rates and buy stocks, bonds, and related derivatives. The assurance: the Fed will give plenty of notice before rates are raised and will flood the system with additional liquidity if, despite its best efforts, markets should head south (the Greenspan, Bernanke, and Yellen “puts”). The Fed created a rigged game, open only to those who could access its ultra-cheap money—the banks and Wall Street. The revolving door between the Fed and its “clients” and substantial honoraria for former Fed officials reading ghost-written speeches are among the payoffs.
The victims of this swindle are the American public, who have sustained huge and mounting losses, summing to the trillions. By retarding economic growth, ZIRP, in concert with the refusal to allow the 2008 financial crisis to perform the function such crises usually perform—culling insolvent businesses, repricing assets, and purging unsound debt—has led to the weakest so-called recovery on record. Because of economic anemia, millions of Americans are unemployed or underemployed who would not be in a sound economy. Healthy businesses have not reaped the profits—the source of capital investment and jobs—that they should have because low interest rates have kept their sick competitors on life support. Malinvestment has created a deflationary overhang of excess production. ZIRP has discouraged savings, the fountainhead of economic growth, and encouraged debt, which must be repaid from future production. Debt has grown so large it threatens the solvency of the government and its people, and presents a future of unmitigated bleakness for America’s youth.
Many Americans are vaguely aware that they’ve been robbed, but there hasn’t been a reaction remotely proportional to the incalculably large losses. This has allowed to theft to continue, but the quietude will end when the artificially juiced stock market finally crashes and takes the economy with it. That the central bank has run the risk of public and political hostility and allowed the theft to go on as long as it has may well be an indication that the big banks are not as sound as advertised. Their financial statements have been indecipherable and opaque since before the suspension of mark-to-market, and they are still huge players in highly leveraged derivative markets. SLL recently posted an article about Deutsche Bank, the largest European TBTF bank, that raised the disturbing possibility that it faces financial difficulties (“Is Deutsche Bank The Next Lehman?” 6/13/15). With world debt over $200 trillion and the interlinkages in the global financial system, problems at one large bank, especially one that is a counterparty on trillions of dollars of derivatives contracts (like Deutsche Bank), can reverberate quickly and systemically.
Crime pays when it’s ostensibly legal, backed by the government, and its perpetrators convince gullible victims that it’s for their own good. The savvy know better, but also realize that not until, in Washington Irving’s words, “the whole superstructure built upon credit and reared by speculation crumbles to the ground, leaving scarce a wreck behind” will things change. It will be black humor at its finest when the crooks discover that most of what they’ve stolen is debt that will never be repaid. It would be justice at its finest if they spent decades in the graybar hotel.
“WHEN THE SLAVES REVOLT, THEY WILL SEEK THE BLOOD OF THEIR MASTERS,” THE GOLDEN PINNACLE
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