Banking is in a league of its own when it comes to government subsidies, special privileges, and bailouts.
There isn't a vestige of the free market left when it comes to the country's financial sector. Central control goes way beyond the fact that the Federal Reserve has been fixing the price of money (interest rates) for the past few decades.
The largest banks enjoy the explicit guarantee of the U.S. taxpayer. They are designated Systemically Important Banks (SIBs) – deemed officially too big to fail.
Bureaucrats invented the SIB designation during the 2008 financial crisis when fraud and mismanagement in real estate lending threatened to destroy many of the institutions lining Wall Street.
Now it appears regional bankers have joined this protected class. When the Silvergate, Silicon Valley, and Signature banks blew up, Janet Yellen stepped into the breach and declared no more! Officials will not allow any bank to fail if its collapse represents a risk of contagion.
The only bankers left to worry about consequences for the decisions they make are running the smallest and least significant banks.
American taxpayers have once again been pressed into service defending the way of life of those at the big banks.
Yellen has offered her assurance that banks, not citizens, will pay for programs like expanded deposit insurance through increased fees. She just assumes people are too dumb to figure out at the end of the day, average citizens are always on the hook.
It is worth reviewing what Americans got after the last round of bank bailouts and the regime of persistent subsidies to the financial sector since 2008.
It turns out they paid to transition banks into something a lot less useful in the economy, but they're somehow just as likely to collapse and need another bailout.
The Federal Reserve took interest rates to zero and kept them there, giving banks access to essentially free money. Banks borrowed from the Fed's discount window or took depositor funds and used this free money to buy Treasuries or Mortgage-backed securities with yields. Then they pocketed the interest rate spread.
The scheme was wonderful while it lasted – for the banks. There was no way to lose as long as rates stayed at zero.
It was, unfortunately, entirely counterproductive in terms of growing the real economy.
This money wasn't lent to entrepreneurs and consumers who might do something useful with it.
It was simply a windfall for the financial sector and government budgets – both of which kept growing relative to the rest of the economy.
Today interest rates are on the rise, and the wheels are coming off. Bankers made the assumption that rates would remain low indefinitely. When that turned out to be wrong, the banks began sliding into insolvency as value of their vast holdings of bonds fell.
This problem is compounded by deposit flight at small and regional banks.
Clients are nervous about what they see happening to balance sheets, and they are moving deposits into the “too big to fail” banks.
Now the government is riding to the rescue, once again. If the expanded deposit guarantees and special lending facilities don't do the trick, Americans can be sure that Janet Yellen and the Fed will roll out even larger and more expensive interventions.
The U.S. economy is slowing down and many expect the coming recession will be a doozy. Banks may soon have to contend with declining demand for new loans and rising loan defaults on top of the current troubles with their balance sheets.
There is no question letting banks collapse would be devastating to the economy. It would be worse today than 15 years ago since the
stimulus-fed financial sector has only grown larger as a percentage of the overall economy.
The bailouts and the lack of consequences for behavior ranging anywhere from incompetent to criminal could end in an epic financial disaster that ultimately collapses the U.S. dollar.
A question is whether officials will be able to artificially prop up the banks one more time... or if the final reckoning is now upon us.
Money Metals Exchange and its staff do not act as personal investment advisors for any specific individual. Nor do we advocate the purchase or sale of any regulated security listed on any exchange for any specific individual. Readers and customers should be aware that, although our track record is excellent, investment markets have inherent risks and there can be no guarantee of future profits. Likewise, our past performance does not assure the same future. You are responsible for your investment decisions, and they should be made in consultation with your own advisors. By purchasing through Money Metals, you understand our company not responsible for any losses caused by your investment decisions, nor do we have any claim to any market gains you may enjoy. This Website is provided “as is,” and Money Metals disclaims all warranties (express or implied) and any and all responsibility or liability for the accuracy, legality, reliability, or availability of any content on the Website.
Follow us on Telegram
Stay updated of all the news
EUR/USD remains on the back foot below 1.0800
EUR/USD remains on the defensive below 1.0800, as it consolidates weekly gains heading into Friday’s European session. The pair takes cues from the market’s sluggish momentum amid a light calendar and repositioning ahead of next week’s top-tier EU/ US events.
GBP/USD keeps range around 1.2550 amid quiet markets
GBP/USD is keeping its range play intact at around 1.2550 in the European morning this Friday. The US Dollar is licking its wounds following the US jobs data-led steep sell-off. Markets stay cautious, anticipating the end-of-the-week flows and position adjustments.
Gold could recapture 21 DMA resistance if RSI turns bullish
Gold price is consolidating Thursday’s impressive rebound from near $1,940, having yo-yoed within a $30 weekly range. Gold price could see a range breakout on Friday should the end-of-the-week flows trigger intense volatility.
Binance.US to suspend USD deposits, citing aggressive and intimidating tactics by the SEC
BinanceUS, the American arm of Binance.com, has indicated plans to suspend USD deposits, noting that its banking partners would do the same for withdrawal beginning June 13.
Eurozone in recession, but why?
It appears that a technical recession has indeed materialized, although the statistical offices took some time to officially declare it. The slight decline of 0.1% in both the fourth and first quarters is rather minimal.