One Ring To Rule the World

Bankers Want Entire Industry To Become One Giant MF Global

by Bill Sardi

Recently by Bill Sardi: Stealth Withdrawal of Wealth From China By Its Entrepreneurs Unwittingly Helped China Avert Runaway Inflation. But That Practice Is About To Be Halted.

Prior to the housing market collapse of 2008, about 70% of the revenues of US banks were comprised of profits made off of real estate loans. But with a self-induced real estate bubble where lenders relaxed loan requirements and offered low teaser interest rates to induce new home buyers, and then palmed off bad loans onto the public ledger via Fannie Mae and Freddie Mac, they were recklessly allowed to keep speed processing home loans so banks could play fast and loose with their depositors' money which they were using as reserve capital to make these loans.

When the banks began losing real estate loans as a profit center they petitioned to be allowed to invest their own money in Wall Street investments, that is, take greater risks to make up for the lost profits from the collapse of the real estate market. Thereafter a blur between investment banks like the old Lehmann Brothers and Goldman Sachs and regular consumer banks like B of A and Citibank was created.

Banks also invented debit cards and began charging transaction fees for people to access their own money. This brought in billions in profits till these fees were limited by regulators.

Now former Federal Reserve chairman Paul Volcker wants to reign in the banks on their speculative trading on Wall Street. The new Volcker rule would take effect 5 months from now so bankers are lodging their protests in advance of the date when the rule goes into effect.

Mr. Volcker basically says banks can do what they want with their own money, but not if they want to be taxpayer supported. Basically, with all of the recent bank bailouts, and the conversion of bank revenues from real estate loans to stocks and bonds, the federal government finds itself guaranteeing the trades these banks make. Without risk, trading may be more reckless, knowing the government will bail out the institution if it makes an investment that goes sour.

US banks cry foul, saying the new Volcker rule will handcuff them, make them less competitive with foreign banks (some which operate in the US), and will result in fewer trades on the stock market which suggests a measured collapse of the markets.

The Clearing House Association, representing American banks, says: "the proposal will severely limit banking entities' ability to hedge their own risk." But ultimately the government is underwriting that risk if it continues to offer bailout money, money at low interest rates, etc.

It's like the banks want to take their depositors' money to the brink of temptation, just like what happened at MF Global, where clients' funds were mingled with house funds to make speculative trades and enter into credit default swaps. With $8.5 trillion of interest bearing accounts at risk in America's 7436 FDIC-insured banks, Volcker sees trouble ahead and wants banks to stop becoming gambling parlors. If banks take undue risks and advance to the edge of insolvency, and they are holding billions of dollars of depositors' money, they could force the government to once again underwrite their losses. Volcker wants to eliminate that possibility.

The problem is, just what should replace the lost revenues that American banks once made in making home loans, debit card transaction fees and market investments? Ben Bernanke recently made an overture that the Federal Reserve would launch a new entity, a land bank, operating with government guarantees and tax incentives, to acquire foreclosed properties and put them on the market as rentals. This would further bury American banks and any future possibility they could regain revenues in the real estate home loan market.

So what is the future of American banking? Gone are the days of conservative banking. Playing fast and loose with the public's money is the order of the day. The public should be withdrawing their interest-earning banked money out of accounts as rapidly as possible now that inflation (7-10%: far exceeds the rate of interest offered on savings accounts at banks (less than 1%). Series I US Savings Bonds still are being offered at 3.06% interest, which is still a net loss when taxes and inflation are calculated, but a must smaller loss than the 0.9% interest being offered by banks today.

Withdraw that $8.5 trillion of reserve capital that American banks are holding in saving accounts and there is nothing left but some empty shell bank buildings, some ATMs and non-interest-bearing accounts that businesses and individuals use to pay their bills. American banks are fast becoming ghost institutions.

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