Tag Archives: central banks

The Mother of All Margin Calls! The Derivatives Chain May Create “A Domino Effect” which “Locks Up” the Entire Credit System

By Bill Holter
April 21, 2015
Global Research

 

goldThis past Friday, Dave Kranzler of Investment Research Dynamics put out a very thoughtful article and chart regarding the spike in “reverse repurchase agreements”

RRP’s held at the Fed http://investmentresearchdynamics.com/tag/reverse-repo-agreement/

The chart in question shows three very distinctive spikes:

RRP

The first was Sept. of 2008, again in 2011 and the current spike. It is Dave’s contention that something behind the scenes has or is blowing up financially.

Let me explain what I believe is happening, I do not disagree with his theory but I think he may have stopped just one step short of the full story.   By adding one more chart in a moment, I’ll try to explain.  Please read the above article as it is a good explanation of “reverse repurchase agreements” and saves me the need for a long winded rehash.

For years I have described the current financial situation as a “giant margin call” waiting to happen.  The derivatives market is a zero sum game where someone wins and someone loses, the danger of course is someone losing so badly they become insolvent and cannot make payment to the “winner” …which would make all parties a loser in the game.  This is the fear, the derivatives chain breaks somewhere along the way and creates a domino effect both upstream and downstream causing the entire credit system to lock up.

Think about what has happened over just the last six months alone. We have seen unprecedented FOREX movements. The dollar has strengthened close to 30% over this timeframe while oil has dropped about 50%.  The cross between the euro and the Swiss franc saw an almost 30% move in less than 10 minutes oneMonday morning in January.  There have been some very big gains AND some very big losses which would explain the need for “more collateral” which is exactly what these reverse repo’s provide.

  Please look at the following chart:

I believe this is “the rest of the story” as I mentioned above.  You can clearly see the spikes in 2008, 2011 and again currently but “this time is different”.  It is different because of both size and the long lasting duration!  The first chart that Dave put out on Friday was of RRP’s with “Foreign Official and Institutional Accounts” whereas the chart you just looked at are “ALL” RRP’s.

It is my belief the first chart’s movements are a function primarily of international FOREX movements and represents “collateral demand” from the likes of Deutschebank, SocGen, Barclays etc. …AND from The Bank of England, the ECB and other central banks.  The second chart is of ALL players, not just foreign.  This chart in my opinion is “how” the Fed has aided and abetted the system as a whole in “hiding” the losses from derivatives!  The Fed places collateral into the system which gets lent out over and over (rehypothecated) many times and “pledged” as collateral by the loser in derivatives trades… thus the system continues “unbroken” because the collateral is put up to meet the margin calls.

Do you see?  For well over a year I have wondered and even written in disbelief and amazement that no one ever admits to any large losses when in fact there had to be losses well into the multiple $ trillions!  Think about it, there are almost $10 trillion worth of “dollar derivatives” outstanding, a 30% move means someone won and someone else lost about $3 trillion.  I don’t know of any firms that could lose even 5% of this and remain solvent, do you?  And this is just “dollars”, not oil, not interest rates, not equities, not iron ore, copper, gold or anything else!

If you see the buildup of RRP’s over the last year+, this I believe is how the margin calls have been met and the losses hidden …but is it even legal?  In a technical and practical sense, no it is not.  However, from a practical sense, if this is what is being done then we now know how no one has been declared a loser and no one has had to “book” their losses.  The margin calls have been met, the positions stay open and no one is the wiser right?  I do want to point out that under the rule of law, if the Fed “knows” this, it is without a doubt a criminal act.  If they are doing business with bankrupt institutions, one which they know or should have knowledge of as being bankrupt, the Fed is flat out fraudulently and blatantly breaking all banking laws on the planet.

Going just a step further, if this is the case, what does it say about the Fed’s own balance sheet?  If they are doing swaps or RRP’s with bankrupt institutions, will the Fed ever get their collateral back?  As Dave Kranzler so aptly tied together, this is why the “failures to deliver” have spiked.  The collateral which was originally lent out has been re lent 10 times more, or even 100 times more, who knows?

Please walk away from reading this piece with one understanding, the chart above is telling you something very big has changed and been changing for over a year.  I believe it shows the system is in and has been fraudulently meeting a systemic margin call.  Maybe I am wrong but I wouldn’t bet on it.  The chart does however give you proof beyond any doubt that “stress” of some sort has been and is building up “somewhere”.  The stress is now multiples of what we saw in late 2008 …when we were only hours from the system seizing up in a giant meltdown.

I bounced this theory off of Jim Sinclair over the weekend and received a short but very enlightening reply.  He said “The concept is correct.  We have another OTC derivative explosion at hand but no practical way to expand liquidity.  Bad derivatives never die, they just get larger”.   Think about what Jim is saying here, we again have an Autumn of 2008 event triggering …only bigger!  And no way to actually meet the margin calls.  Each episode of QE was used to meet the margin calls and hide the losses.  Each one expanded the risk while pulling more and more collateral out of the system until we reached a tipping point, NOW!

Let me finish with this one point, when this era is looked at in hindsight, “it will all be about counterparty risk”.  Do you know of anything without counterparty risk?  Can you say G O L D?

Economic stagnation, financial parasitism dominate IMF-World Bank meeting

By Nick Beams and Barry Grey
April 18, 2015
World Socialist Web Site

 

The spring meeting of the International Monetary Fund and World Bank being held in Washington this weekend takes place under conditions of continuing stagnation in the real economy, combined with unprecedented levels of financial parasitism and social inequality.

Stock prices in the US, Europe and Asia have hit record highs and global corporations have amassed a cash hoard of some $1.3 trillion, fuelled by cheap credit from central banks and government-corporate attacks on workers’ wages and living standards. Yet the IMF warns in its updated World Economic Outlook published this week that the world economy will remain locked in a pattern of slow growth, high unemployment and high debt for a prolonged period.

In a marked shift from previous economic projections, the IMF acknowledges that there is little prospect of a return to the growth levels that prevailed prior to the 2008 financial crash, despite trillions of dollars in public subsidies to the financial markets. This amounts to a tacit admission that the crisis ushered in by the Wall Street meltdown nearly seven years ago is of a fundamental and historical character, and that the underlying problems in the global capitalist system have not been resolved.

A sample of headlines from articles published in the past week by the Financial Times gives an indication of the deepening malaise. They include: “An economic future that may never brighten,” “IMF warns of long period of lower growth,” “Europe’s debtor paradise will end in tears,” “QE raises fears of euro zone liquidity squeeze,” and “Global property bubble fears mount as prices and yields spike.”

The IMF report focuses on a sharp and persistent decline in private business investment, particularly in the advanced economies of North America, Europe and Asia. It concludes that “potential growth in advanced economies is likely to remain below pre-crisis rates, while it is expected to decrease further in emerging market economies in the medium term.”

It goes on to note, “Unlike previous financial crises, the global financial crisis is associated not only with a reduction in the level of potential output, but also with a reduction in its growth rate… Shortly after the crisis hit in September 2008, economic activity collapsed, and more than six years after the crisis, growth is still weaker than was expected before the crisis.”

This is a stunning confirmation of the analysis of the 2008 crash made by the World Socialist Web Site and the International Committee of the Fourth International. On January 11, 2008, nine months before the Lehman Brothers bankruptcy, the WSWS published a statement that began:

2008 will be characterized by a significant intensification of the economic and political crisis of the world capitalist system. The turbulence in world financial markets is the expression of not merely a conjunctural downturn, but rather a profound systemic disorder which is already destabilizing international politics.

The IMF report adds, “These findings imply that living standards may expand more slowly in the future. In addition, fiscal sustainability will be more difficult to maintain as the tax base will grow more slowly.” The meaning of this euphemistic language is that there is no end in sight to the global assault on the living standards and democratic rights of the working class.

The policies of austerity that have already thrown countless millions into poverty are not temporary. They will continue as long as capitalism continues.

The IMF’s updated Global Financial Stability Report, also released this week, acknowledges that central bank policies of holding interest rates close to zero and pumping trillions of dollars into the banking system by means of “quantitative easing,” i.e., money-printing, are having little impact on the real economy. Rather, they are increasing financial risk. According to the report, financial risks have risen in the six months since the last assessment in October 2014.

The IMF’s World Economic Outlook devotes an entire chapter to the slump in private investment. It notes that private investment in the major capitalist economies—the fundamental driving force of global growth—remains at historic lows. As a percentage of gross domestic product, it is below the level experienced in the aftermath of any recession in the post-war period.

But the report, setting the tone for the discussions this weekend among world finance ministers, central bankers and their myriad economic advisers, skirts the colossal role of financial speculation and parasitism in the investment slump and the crisis as a whole. All over the world, banks and corporations are using their massive profits and cash holdings to increase stock dividends and jack up their share prices by buying back their own stock, rather than investing in production. The speculative frenzy is compounded by near-record levels of corporate buybacks and mergers.

All of these activities are entirely parasitic. They add nothing to man’s productive forces. On the contrary, they divert economic resources from productive activity to further enrich a tiny global aristocracy of bankers, CEOs and speculators.

The IMF-World Bank meeting takes place amidst an exponential growth of financial parasitism, the likes of which has never been seen in the history of the capitalist system. In the past year alone, according to an article published this week in the Financial Times, some $1 trillion has been handed back to shareholders—many of them multi-billion dollar hedge funds and investment houses—in the form of buybacks and increased dividends.

Over the past decade, S&P 500 companies have repurchased some $4 trillion worth of shares. Major companies, including Apple, Intel, IBM and General Electric, play a central role in the ongoing buyback frenzy.

Last week alone, three corporate takeovers totalling over $105 billion were announced, including Royal Dutch Shell’s purchase of Britain’s BG Group. The value of all takeovers announced this year to date is more than $1 trillion, setting the pace for 2015 to be the second biggest year for mergers and acquisitions in history.

The result is massively inflated stock prices, the proceeds from which go overwhelmingly to the rich. Over the past year, the German DAX index has risen by 24 percent, the French CAC has increased 16 percent and Japan’s Nikkei has soared 36 percent.

Bank profits are also up. This week, JPMorgan Chase, Citigroup and Goldman Sachs all beat market expectations, announcing near-record profits for the first quarter of 2015, mainly on the basis of speculative trading activities.

As the real economy is starved of resources, leading to lower wages, declining job opportunities, rising unemployment and the substitution of casual and part-time employment for full-time jobs, fabulous fortunes are being accumulated on the financial heights of society.

The unprecedented degree to which the world economy is wedded to financial parasitism is an expression of the moribund state of the capitalist system.

There is another significant aspect to this weekend’s gathering that points to future developments. For seven decades, the IMF and the World Bank have formed two pillars of the economic hegemony of the United States. But the post-war regime is now cracking.

This week, Chinese authorities announced that some 57 countries—37 from Asia and 20 from the rest of the world—had signed up to the Beijing-backed Asia Infrastructure Investment Bank. The Obama administration bitterly opposed its strategic allies joining the bank, but the floodgates opened after Britain decided to join despite objections from Washington that the bank would undermine US-backed global financial institutions.

The fracturing of the global post-war economic order under conditions of deepening crisis is a sure sign that the major capitalist powers are determined to assert their own economic interests, if necessary against the US. Not only are the economic conditions of the 1930s returning, so are the political and economic divisions that led to world war.

 

 

The Next Financial Tsunami Just Began in Texas

By F. William Engdahl
April 17, 2015
New Eastern Outlook

 

financial collapse

image from thedailysheeple

The last financial Tsunami was a doozer that almost destroyed the global financial system. It was the collapse of the Wall Street Mortgage Backed Securities bubble in March 2007. The results of that collapse are still very much with the world today. Never in the one hundred some years of the Federal Reserve Bank has the Fed held interest rates at an artificial near-zero level for what is soon to mark eight years duration. Not even during the 1930’s Great Depression were rates kept so low so long. It is not a sign of a healthy banking system, friends.

Now a new Financial Tsunami is beginning, this one, of all places, in the Texas, North Dakota and other USA shale oil regions. Like the so-called US sub-prime real estate crisis, the oil shale junk bond default crisis is but the cutting front of the first wave of what promises to be a far more dangerous series of financial Tsunami long waves.

Banking system vulnerability greater

I say more dangerous because of what governments in the USA, EU and elsewhere did after 2007 to make sure no repeat of that bubble-cum-collapse-of bubble cycle could repeat.

In a word, they did nothing. What they did do—explode US Federal debt and bloat the credit of the central bank to historic highs leave the USA in far worse shape to deal with the unfolding crisis.

Aside from a few cosmetic face-saving new laws, they have done nothing. No CEO of a major criminal Wall Street bank went to prison. No mega-bank, “too big to fail” was forced to break up their trillion dollar balance sheet as they were after 1933 when the Congress passed the Glass-Steagall Act forcing banks to divest their in-house stock and bond securities businesses to avoid the same conflicts of interest that reemerged after Bill Clinton signed the Glass-Steagall repeal in 1999 and banks and insurance companies and investment firms merged into giants so large Congress was terrified to touch them. No law has been passed forcing disclosure of the off-balance-sheet bank derivatives positions. Like in 2007 it is all opaque, like bankers prefer.

But something has changed. More than $700 billion of US taxpayer dollars were donated to the health and welfare of the six or seven criminal institutions called Wall Street banks. Four of those Wall Street banks—JP MorganChase, Citigroup, Goldman Sachs, Bank of America—hold 93% of the total USA banking industry notional amounts of derivative contracts, a market that in April 2014 was valued grossly or notionally at $231 trillion, yes, trillion. Were the offsetting derivatives contracts netted out, the bank risks of those four Wall Street banks would still be $279 billion of credit risk bank exposure, all concentrated in the four largest US banks.

In a full-blown meltdown or Tsunami like 2008, when no bank dared trade with any other bank for fear it would default, all calculations are out the window as there is no derivative or hedge against a systemic meltdown. In 2007-2015 the Fed reacted with unprecedented money printing to feed the brain-dead Wall Street banks. It was called Quantitative easing or QE.

The Fed created out of thin air more than $3.3 trillion worth of what they call Reserve Bank Credit after September 2008. In the QE process the Fed bought financial assets from commercial banks, mainly the Big Four or top 25 banks and other private institutions like Fannie Mae or Freddie Mac mortgage companies. The Fed bought US government bonds from the private banks, the heart of the corrupt Federal Reserve private bank system. And more recently the fed has bought $1.7 trillion of toxic mortgage backed securities from the same banks. That Fed buying called QE pumped urgently need liquidity on to those mega banks.

Only this is not 1986 and the US banking system and US economy is not comparable to that in 1986. Today the US Government is choking in $18 trillion in Federal debt. In 1986 it was a “mere” $2 trillion. The US economy in 1986 still produced manufacturing jobs that employed real working people. Today those jobs have been outsourced through to places like Mexico or China or Vietnam or even, yes, Russia. And the banking system of the USA is on year seven of artificial life support known as Quantitative Easing.

According to John Williams who produces a widely-regarded invaluable independent check on government statistical lying in his Shadow Government Statistics, the true unemployment rate in the United States in the beginning of 2015 is not the politically rigged 5% President Obama so proudly points to. Rather is is over 23%, Great Depression levels, and more than double the 12% he reckoned just before the 2007 crisis began.

What have the banks done with the Fed money? They have flooded the stock markets, emerging markets like Brazil or India or even Russia, all in search of new gains just as they flooded into junk real estate loans after the collaose of the dot.com IT bubble in 2000. And they have poured hundreds of billions of dollars into the US shale oil bonanza, creating a new bubble, much like the 1999-2000 dot.com bubble or the 2004-2007 sub-prime bubble. Now that US shale oil bubble is beginning to deflate, fast.

The Saudis strike

Recall that in September 2014, in a misguided attempt to up the heat on the Russian economy and weaken Vladimir Putin, Secretary of State John Kerry flew to Saudi Arabia to meet with the dying King Abdullah. Kerry reportedly proposed the Saudis dump oil, then selling for around $100 a barrel, onto the market at drastically lower prices. It was crude, in the sense not of crude oil but of a poorly thought-out crude rerun of a tactic then Vice President Bush and Secretary of State George Schultz made with the Saudis in 1986 when oil prices plunged to below $10 a barrel and prepared the financial backdrop for the collapse of the Soviet Union three years later.

What Kerry and the Washington neo-conservatives neglected to look at was the double agenda of those sly Saudi Wahhabite royals. They gleefully agreed to Help Washington deepen Russia’s financial crisis and to hitting their Shi’ite foe Iran by hitting oil. But they also saw a golden chance to rid themselves of their new rival for global oil supremacy, namely, the United States, specifically the shale oil sector.

A Sorcerer’s Apprentice

Owing to the geology in extracting gas from shale rock interstices by underground fracturing or fracking, by pumping millions of gallons of chemicals into the rocks, shale oil and gas deposits deplete far far more rapidly than conventional gas or oil deposits. That has meant shale companies had to borrow more and more to drill new wells in order to maintain oil volumes. So long as oil was above $100 a barrel, it was still a profit bonanza for banks as for shale oil companies.

Those new shale oil wells cost money. After 2011 Wall Street banks hungry for new profit in a depressed economy teamed up with shale oil drilling companies in what soon became a remake of the Goethe Sorcerer’s Apprentice, where this time he can’t stop the flow of oil. As a result of shale oil, the USA has surpassed Saudi Arabia to become the world’s largest oil producer, but the rising oil supply is worsening the US oil industry crisis.

When Fed interest rates were zero, Wall Street liquidity seemingly unlimited and oil prices well above $100 a barrel as they were since 2011, the money flowed into shale gas until the gas supplies collapsed the price. At that point, around 2011 shale drilling shifted to far more profitable shale or tight oil drilling. Here the debt began to rise like in every previous speculative bubble. Bankers have short memory on Wall Street when they know the Government will always be there because they are “too big to fail.” So they have created the shale oil bubble with no regard to risk.

Junk bonds

Since the shale oil boom took flight in 2011 Wells Fargo and JP Morgan have both issued shale oil company loans of $100 billion.There has been a huge rise in high risk high return bonds, so called “junk bonds.” They earned the appropriate name because in event of a company’s going bankrupt, they become just that—junk. The bonds have been issued by Wall Street banks to shale oil and gas companies since the bubble started in 2011. The US oil and gas industry share of junk bonds has been the fastest growing portion of the overall US junk bond sector of the bond market.

Now as oil prices hover around $49 a barrel, the shale oil companies that indebted themselves with junk bonds to finance more drilling are themselves facing bankruptcy or default more and more every additional day the US crude oil price remains this low. Their shale projects were calculated when oil was $100 a barrel, less than a year ago. Their minimum price of oil to avoid bankruptcy in most cases was $65 a barrel to $80 a barrel. Shale oil extraction is unconventional and more costly than conventional oil. Douglas-Westwood, an energy advisory firm, estimates that nearly half of the US oil projects under development need oil prices greater than $120 per barrel in order to achieve positive cash flow. 

Now as the Saudi oil price operation enters its eighth month with no end in sight, the shale oil dominoes are beginning to fall. US shale oil producers Quicksilver Resources, American Eagle Energy, Saratoga Resources and BPZ Resources all missed interest payments this year. Houston oil field service firm Cal Dive International just filed for Chapter 11 bankruptcy. Moody’s Investors Service just downgraded Swiss oil rig contractor Transocean’s $9.1 billion in debt.

The US energy sector’s high-yield bonds – so-called “junk bonds” considered at risk of default – have climbed to $247 billion. But the implosion of the shale oil bubble and its debt is just beginning. Because the shale oil producers are desperately trying to stay afloat and hope for higher oil prices to stay alive they are forced into the paradoxical position of pumping as much oil as possible in order to service their debt to the banks to avoid default. That has meant record volumes of oil flooding the US market in recent months, pushing prices even lower.

And to make the oil glut even worse, the Saudis have apparently no intention of easing on the price of oil until far more blood flows in the streets of Laredo and across Wall Street. In the first week of April the US crude oil inventories surged 11 million barrels – three times more than expected – to a modern-day record 482 million barrels, the biggest one-week increase since 2001. Stockpiles in Cushing, Oklahoma, rose by 1.2 million barrels, far more than expected. On top of the flood of oil in the US led by increasingly strapped shale oil producers, Saudi oil production rose to 10.3 million barrels per day in March, their highest monthly total on record.

Saudi oil minister Ali al-Naimi said he was ready to “improve” prices only if producers outside the Organization of the Petroleum Exporting Countries (OPEC) joined the effort. But even in OPEC Iran is boosting oil sales to China and Japan despite sanctions, with prospect of a possible, if increasingly unlikely, US lifting of Iran sanctions in July, bringing a big increase of Iran oil on the market. Iraq and Libya also increased their output in March and Russia is pumping all it can, meaning the world oil glut will likely run to at least end of 2015 according to Olivier Jakob at Swiss-based Petromatrix. The US Energy Department EIA estimates US oil prices will fall now another $5 to $15 a barrel to levels around $35 to $45 a barrel because of the glut continuing, which in turn will trigger a chain reaction of shale oil sector bankruptcies and loss of tens of thousands of well-paying US oilrig jobs from Pennsylvania to Texas to North Dakota to Arizona to California.

There is a symbiotic bond between the shale oil industry and the Wall Street banks that financed the shale bonanza. The banks have an estimated $498 billion in loan exposure to the US energy sector. Wells Fargo bank got 15 percent of its investment banking fee revenue in 2014 from the oil and gas industry. At Citigroup, the business accounted for roughly 12 percent, according to Dealogic. Now, as the problems mount, the Wall Street banks that financed the shale energy deals are having trouble offloading the debt as news of the deepening crisis spreads. This time Wall Street may have trouble finding naïve Chinese bankers willing to buy US toxic waste oil loans as they were lured into buying toxic waste real estate sub-prime mortgage debt before 2008.

It isn’t only oil companies that are beginning to go under. The entire infrastructure of the USA energy boom, one of the only growth areas in a depressed economy, has financed new homes by oil employees, oil company office buildings from Houston Texas to North Dakota, creating growth pockets amid the larger Detroit-like depression regions. Now bank lenders are reassessing risks in shale energy towns as roughly $1.1 trillion of property loans come due across the US over the next three years, according to real estate debt analyst Richard Hill at Morgan Stanley.

The collapse of the shale oil junk bond market will be the start of the next Tsunami underwater financial earthquake. The entire Junk Bond market has boomed as banks in the USA and even in the EU and elsewhere assumed so long as the Fed kept rates at zero, and so long as oil was at $100 a barrel. Bank risk was zero and rewards were double digit interest rates on junk. In the end that junk, shale and other, is now in an early wave Tsunami despite zero fed interest rates, because of the falling oil prices. Martin S. Fridson, a prominent analyst of the high-yield junk bond market, sees as much as $1.6 trillion in high-yield defaults coming in a new wave he expects to begin shortly.

Fridson said that five months ago. The “shortly” has now arrived. The next months promise a bare knuckle ride in the rotted debt-bloated US financial sector that will promise an even more dangerous rerun of the global crisis after 2008. The banks most exposed are JPMorgan Chase & Co., Bank of America Corp., Citigroup Inc. and Wells Fargo & Co.—the same criminal enterprises that created the 2007 mortgage-backed-securities collapse and virtually every financial collapse crisis since 1907. Some might think it high time soon to consider another banking model for the USA, perhaps bringing the CEOs responsible before the courts, nationalizing the banks too big to fail, breaking them up into “bite sized” pieces, removing at least that cancer from the economy to let healthy investment resume by honest banks in honest people in America once more as we did only some sixty years ago.

F. William Engdahl is strategic risk consultant and lecturer, he holds a degree in politics from Princeton University and is a best-selling author on oil and geopolitics, exclusively for the online magazine “New Eastern Outlook”.

The Six Too Big to Fail Banks in the U.S. Have 278 Trillion Dollars of Exposure to Derivatives

By Michael Snyder
April 15, 2015
The Economic Collapse, April 13, 2015

 

Bankers-Public-Domain-300x300The very same people that caused the last economic crisis have created a 278 TRILLION dollar derivatives time bomb that could go off at any moment.  When this absolutely colossal bubble does implode, we are going to be faced with the worst economic crash in the history of the United States.  During the last financial crisis, our politicians promised us that they would make sure that “too big to fail” would never be a problem again.  Instead, as you will see below, those banks have actually gotten far larger since then.  So now we really can’t afford for them to fail.  The six banks that I am talking about are JPMorgan Chase, Citibank, Goldman Sachs, Bank of America, Morgan Stanley and Wells Fargo.  When you add up all of their exposure to derivatives, it comes to a grand total of more than 278 trillion dollars.  But when you add up all of the assets of all six banks combined, it only comes to a grand total of about 9.8 trillion dollars.  In other words, these “too big to fail” banks have exposure to derivatives that is more than 28 times greater than their total assets.  This is complete and utter insanity, and yet nobody seems too alarmed about it.  For the moment, those banks are still making lots of money and funding the campaigns of our most prominent politicians.  Right now there is no incentive for them to stop their incredibly reckless gambling so they are just going to keep on doing it.

So precisely what are “derivatives”?  Well, they can be immensely complicated, but I like to simplify things.  On a very basic level, a “derivative” is not an investment in anything.  When you buy a stock, you are purchasing an ownership interest in a company.  When you buy a bond, you are purchasing the debt of a company.  But a derivative is quite different.  In essence, most derivatives are simply bets about what will or will not happen in the future.  The big banks have transformed Wall Street into the biggest casino in the history of the planet, and when things are running smoothly they usually make a whole lot of money.

But there is a fundamental flaw in the system, and I described this in a previous article

The big banks use very sophisticated algorithms that are supposed to help them be on the winning side of these bets the vast majority of the time, but these algorithms are not perfect.  The reason these algorithms are not perfect is because they are based on assumptions, and those assumptions come from people.  They might be really smart people, but they are still just people.

Today, the “too big to fail” banks are being even more reckless than they were just prior to the financial crash of 2008.

As long as they keep winning, everyone is going to be okay.  But when the time comes that their bets start going against them, it is going to be a nightmare for all of us.  Our entire economic system is based on the flow of credit, and those banks are at the very heart of that system.

In fact, the five largest banks account for approximately 42 percent of all loans in the United States, and the six largest banks account for approximately 67 percent of all assets in our financial system.

So that is why they are called “too big to fail”.  We simply cannot afford for them to go out of business.

As I mentioned above, our politicians promised that something would be done about this.  But instead, the four largest banks in the country have gotten nearly 40 percent largersince the last time around.  The following numbers come from an article in the Los Angeles Times

Just before the financial crisis hit, Wells Fargo & Co. had $609 billion in assets. Now it has $1.4 trillion. Bank of America Corp. had $1.7 trillion in assets. That’s up to $2.1 trillion.

And the assets of JPMorgan Chase & Co., the nation’s biggest bank, have ballooned to $2.4 trillion from $1.8 trillion.

During this same time period, 1,400 smaller banks have completely disappeared from the banking industry.

So our economic system is now more dependent on the “too big to fail” banks than ever.

To illustrate how reckless the “too big to fail” banks have become, I want to share with you some brand new numbers which come directly from the OCC’s most recent quarterly report (see Table 2)

JPMorgan Chase

Total Assets: $2,573,126,000,000 (about 2.6 trillion dollars)

Total Exposure To Derivatives: $63,600,246,000,000 (more than 63 trillion dollars)

Citibank

Total Assets: $1,842,530,000,000 (more than 1.8 trillion dollars)

Total Exposure To Derivatives: $59,951,603,000,000 (more than 59 trillion dollars)

Goldman Sachs

Total Assets: $856,301,000,000 (less than a trillion dollars)

Total Exposure To Derivatives: $57,312,558,000,000 (more than 57 trillion dollars)

Bank Of America

Total Assets: $2,106,796,000,000 (a little bit more than 2.1 trillion dollars)

Total Exposure To Derivatives: $54,224,084,000,000 (more than 54 trillion dollars)

Morgan Stanley

Total Assets: $801,382,000,000 (less than a trillion dollars)

Total Exposure To Derivatives: $38,546,879,000,000 (more than 38 trillion dollars)

Wells Fargo

Total Assets: $1,687,155,000,000 (about 1.7 trillion dollars)

Total Exposure To Derivatives: $5,302,422,000,000 (more than 5 trillion dollars)

Compared to the rest of them, Wells Fargo looks extremely prudent and rational.

But of course that is not true at all.  Wells Fargo is being very reckless, but the others are being so reckless that it makes everyone else pale in comparison.

And these banks are not exactly in good shape for the next financial crisis that is rapidly approaching.  The following is an excerpt from a recent Business Insider article

The New York Times isn’t so sure about the results from the Federal Reserve’s latest round of stress tests.

In an editorial published over the weekend, The Times cites data from Thomas Hoenig, vice chairman of the FDIC, who, in contrast to the Federal Reserve, found that capital ratios at the eight largest banks in the US averaged 4.97% at the end of 2014, far lower than the 12.9% found by the Fed’s stress test.

That doesn’t sound good.

So what is up with the discrepancy in the numbers?  The New York Times explains…

The discrepancy is due mainly to differing views of the risk posed by the banks’ vast holdings of derivative contracts used for hedging and speculation. The Fed, in keeping with American accounting rules and central bank accords, assumes that gains and losses on derivativesgenerally net out. As a result, most derivatives do not show up as assets on banks’ balance sheets, an omission that bolsters the ratio of capital to assets.

Mr. Hoenig uses stricter international accounting rules to value the derivatives. Those rules do not assume that gains and losses reliably net out. As a result, large derivative holdings are shown as assets on the balance sheet, an addition that reduces the ratio of capital to assets to the low levels reported in Mr. Hoenig’s analysis.

Derivatives, eh?

Very interesting.

And you know what?

The guys running these big banks can see what is coming.

Just consider the words that JPMorgan Chase chairman and CEO Jamie Dimon wrote to his shareholders not too long ago

Some things never change — there will be another crisis, and its impact will be felt by the financial market.

The trigger to the next crisis will not be the same as the trigger to the last one – but there will be another crisis. Triggering events could be geopolitical (the 1973 Middle East crisis), a recession where the Fed rapidly increases interest rates (the 1980-1982 recession), a commodities price collapse (oil in the late 1980s), the commercial real estate crisis (in the early 1990s), the Asian crisis (in 1997), so-called “bubbles” (the 2000 Internet bubble and the 2008 mortgage/housing bubble), etc. While the past crises had different roots (you could spend a lot of time arguing the degree to which geopolitical, economic or purely financial factors caused each crisis), they generally had a strong effect across the financial markets

In the same letter, Dimon mentioned “derivatives moved by enormous players and rapid computerized trades” as part of the reason why our system is so vulnerable to another crisis.

If this is what he truly believes, why is his firm being so incredibly reckless?

Perhaps someone should ask him that.

Interestingly, Dimon also discussed the possibility of a Greek exit from the eurozone

“We must be prepared for a potential exit,”  J. P. Morgan Chief Executive Officer Jamie Dimon said. in his annual letter to shareholders. “We continually stress test our company for possible repercussions resulting from such an event.”

This is something that I have been warning about for a long time.

And of course Dimon is not the only prominent banker warning of big problems ahead.  German banking giant Deutsche Bank is also sounding the alarm

With a U.S. profit recession expected in the first half of 2015 and investors unlikely to pay up for stocks, the risk of a stock market drop of 5% to 10% is rising, Deutsche  Bank says.

That’s the warning Deutsche Bank market strategist David Bianco zapped out to clients today before the opening bell on Wall Street.

Bianco expects earnings for the broad Standard & Poor’s 500-stock index to contract in the first half of 2015 — the first time that’s happened since 2009 during the financial crisis. And the combination of soft earnings and his belief that investors won’t pay top dollar for stocks in a market that is already trading at above-average valuations is a recipe for a short-term pullback on Wall Street.

The truth is that we are in the midst of a historic stock market bubble, and we are witnessing all sorts of patterns in the financial markets which also emerged back in 2008right before the financial crash in the fall of that year.

When some of the most prominent bankers at some of the biggest banks on the entire planet start issuing ominous warnings, that is a clear sign that time is running out.

How America Became an Oligarchy

By Ellen Brown
Global Research, April 7, 2015
Web of Debt

 

The politicians are put there to give you the idea that you have freedom of choice. You don’t. . . . You have owners.  — George Carlin, The American Dream

According to a new study from Princeton University, American democracy no longer exists. Using data from over 1,800 policy initiatives from 1981 to 2002, researchers Martin Gilens and Benjamin Page concluded that rich, well-connected individuals on the political scene now steer the direction of the country, regardless of – or even against – the will of the majority of voters. America’s political system has transformed from a democracy into an oligarchy, where power is wielded by wealthy elites.

“Making the world safe for democracy” was President Woodrow Wilson’s rationale for World War I, and it has been used to justify American military intervention ever since. Can we justify sending troops into other countries to spread a political system we cannot maintain at home?

The Magna Carta, considered the first Bill of Rights in the Western world, established the rights of nobles as against the king. But the doctrine that “all men are created equal” – that all people have “certain inalienable rights,” including “life, liberty and the pursuit of happiness” – is an American original. And those rights, supposedly insured by the Bill of Rights, have the right to vote at their core. We have the right to vote but the voters’ collective will no longer prevails.

In Greece, the left-wing populist Syriza Party came out of nowhere to take the presidential election by storm; and in Spain, the populist Podemos Party appears poised to do the same. But for over a century, no third-party candidate has had any chance of winning a US presidential election. We have a two-party winner-take-all system, in which our choice is between two candidates, both of whom necessarily cater to big money. It takes big money just to put on the mass media campaigns required to win an election involving 240 million people of voting age.

In state and local elections, third party candidates have sometimes won. In a modest-sized city, candidates can actually influence the vote by going door to door, passing out flyers and bumper stickers, giving local presentations, and getting on local radio and TV. But in a national election, those efforts are easily trumped by the mass media. And local governments too are beholden to big money.

When governments of any size need to borrow money, the megabanks in a position to supply it can generally dictate the terms. Even in Greece, where the populist Syriza Party managed to prevail in January, the anti-austerity platform of the new government is being throttled by the moneylenders who have the government in a chokehold.

How did we lose our democracy? Were the Founding Fathers remiss in leaving something out of the Constitution? Or have we simply gotten too big to be governed by majority vote?

Democracy’s Rise and Fall

The stages of the capture of democracy by big money are traced in a paper called “The Collapse of Democratic Nation States” by theologian and environmentalist Dr. John Cobb. Going back several centuries, he points to the rise of private banking, which usurped the power to create money from governments:

The influence of money was greatly enhanced by the emergence of private banking.  The banks are able to create money and so to lend amounts far in excess of their actual wealth.  This control of money-creation . . . has given banks overwhelming control over human affairs.  In the United States, Wall Street makes most of the truly important decisions that are directly attributed to Washington.

Today the vast majority of the money supply in Western countries is created by private bankers. That tradition goes back to the 17th century, when the privately-owned Bank of England, the mother of all central banks, negotiated the right to print England’s money after Parliament stripped that power from the Crown. When King William needed money to fight a war, he had to borrow. The government as borrower then became servant of the lender.

In America, however, the colonists defied the Bank of England and issued their own paper scrip; and they thrived. When King George forbade that practice, the colonists rebelled.

They won the Revolution but lost the power to create their own money supply, when they opted for gold rather than paper money as their official means of exchange. Gold was in limited supply and was controlled by the bankers, who surreptitiously expanded the money supply by issuing multiple banknotes against a limited supply of gold.

This was the system euphemistically called “fractional reserve” banking, meaning only a fraction of the gold necessary to back the banks’ privately-issued notes was actually held in their vaults. These notes were lent at interest, putting citizens and the government in debt to bankers who created the notes with a printing press. It was something the government could have done itself debt-free, and the American colonies had done with great success until England went to war to stop them.

President Abraham Lincoln revived the colonists’ paper money system when he issued the Treasury notes called “Greenbacks” that helped the Union win the Civil War. But Lincoln was assassinated, and the Greenback issues were discontinued.

In every presidential election between 1872 and 1896, there was a third national party running on a platform of financial reform. Typically organized under the auspices of labor or farmer organizations, these were parties of the people rather than the banks. They included the Populist Party, the Greenback and Greenback Labor Parties, the Labor Reform Party, the Antimonopolist Party, and the Union Labor Party. They advocated expanding the national currency to meet the needs of trade, reform of the banking system, and democratic control of the financial system.

The Populist movement of the 1890s represented the last serious challenge to the bankers’ monopoly over the right to create the nation’s money.  According to monetary historian Murray Rothbard, politics after the turn of the century became a struggle between two competing banking giants, the Morgans and the Rockefellers.  The parties sometimes changed hands, but the puppeteers pulling the strings were always one of these two big-money players.

In All the Presidents’ Bankers, Nomi Prins names six banking giants and associated banking families that have dominated politics for over a century. No popular third party candidates have a real chance of prevailing, because they have to compete with two entrenched parties funded by these massively powerful Wall Street banks.

Democracy Succumbs to Globalization

In an earlier era, notes Dr. Cobb, wealthy landowners were able to control democracies by restricting government participation to the propertied class. When those restrictions were removed, big money controlled elections by other means:

First, running for office became expensive, so that those who seek office require wealthy sponsors to whom they are then beholden.  Second, the great majority of voters have little independent knowledge of those for whom they vote or of the issues to be dealt with.  Their judgments are, accordingly, dependent on what they learn from the mass media.  These media, in turn, are controlled by moneyed interests.

Control of the media and financial leverage over elected officials then enabled those other curbs on democracy we know today, including high barriers to ballot placement for third parties and their elimination from presidential debates, vote suppression, registration restrictions, identification laws, voter roll purges, gerrymandering, computer voting, and secrecy in government.

The final blow to democracy, says Dr. Cobb, was “globalization” – an expanding global market that overrides national interests:

[T]oday’s global economy is fully transnational.  The money power is not much interested in boundaries between states and generally works to reduce their influence on markets and investments. . . . Thus transnational corporations inherently work to undermine nation states, whether they are democratic or not.

The most glaring example today is the secret twelve-country trade agreement called the Trans-Pacific Partnership. If it goes through, the TPP will dramatically expand the power of multinational corporations to use closed-door tribunals to challenge and supersede domestic laws, including environmental, labor, health and other protections.

Looking at Alternatives

Some critics ask whether our system of making decisions by a mass popular vote easily manipulated by the paid-for media is the most effective way of governing on behalf of the people. In an interesting Ted Talk, political scientist Eric Li makes a compelling case for the system of “meritocracy” that has been quite successful in China.

In America Beyond Capitalism, Prof. Gar Alperovitz argues that the US is simply too big to operate as a democracy at the national level. Excluding Canada and Australia, which have large empty landmasses, the United States is larger geographically than all the other advanced industrial countries of the OECD (Organization for Economic Cooperation and Development) combined. He proposes what he calls “The Pluralist Commonwealth”: a system anchored in the reconstruction of communities and the democratization of wealth. It involves plural forms of cooperative and common ownership beginning with decentralization and moving to higher levels of regional and national coordination when necessary. He is co-chair along with James Gustav Speth of an initiative called The Next System Project, which seeks to help open a far-ranging discussion of how to move beyond the failing traditional political-economic systems of both left and Right..

Dr. Alperovitz quotes Prof. Donald Livingston, who asked in 2002:

What value is there in continuing to prop up a union of this monstrous size? . . . [T]here are ample resources in the American federal tradition to justify states’ and local communities’ recalling, out of their own sovereignty, powers they have allowed the central government to usurp.

Taking Back Our Power

If governments are recalling their sovereign powers, they might start with the power to create money, which was usurped by private interests while the people were asleep at the wheel. State and local governments are not allowed to print their own currencies; but they can own banks, and all depository banks create money when they make loans, as the Bank of England recently acknowledged.

The federal government could take back the power to create the national money supply by issuing its own Treasury notes as Abraham Lincoln did. Alternatively, itcould issue some very large denomination coins as authorized in the Constitution; or it could nationalize the central bank and use quantitative easing to fund infrastructure, education, job creation, and social services, responding to the needs of the people rather than the banks.

The freedom to vote carries little weight without economic freedom – the freedom to work and to have food, shelter, education, medical care and a decent retirement. President Franklin Roosevelt maintained that we need an Economic Bill of Rights. If our elected representatives were not beholden to the moneylenders, they might be able both to pass such a bill and to come up with the money to fund it.

Ellen Brown is an attorney, founder of the Public Banking Institute, and author of twelve books including the best-selling Web of Debt. Her latest book, The Public Bank Solution, explores successful public banking models historically and globally. Her 300+ blog articles are at EllenBrown.com. Listen to “It’s Our Money with Ellen Brown” on PRN.fm.

Why a Stronger Dollar will Lead to Deflation, Recession and Crisis

“Margin Call from Hell”

By Mike Whitney
March 14, 2015
Counter Punch

 

banker“There are no nations…. no peoples…. no Russians.. no Arabs…no third worlds…no West. There is only one holistic system of systems, one vast and immane, interwoven, interacting, multi-variate, multi-national dominion of dollars. Petro-dollars, electro-dollars, multi-dollars, reichmarks, rins, rubles, pounds, and shekels. It is the international system of currency which determines the totality of life on this planet. That is the natural order of things today.”

– Arthur Jensen’s speech from Network, a 1976 American satirical film written by Paddy Chayefsky and directed by Sidney Lumet

The crisis that began seven years ago with easy lending and subprime mortgages, has entered its final phase, a currency war between the world’s leading economies each employing the same accommodative monetary policies that have intensified market volatility, increased deflationary pressures, and set the stage for another tumultuous crack-up. The rising dollar, which has soared to a twelve year high against the euro, has sent US stock indices plunging as investors expect leaner corporate earnings, tighter credit, and weaker exports in the year ahead. The stronger buck is also wreaking havoc on emerging markets that are on the hook for $5.7 trillion in dollar-backed liabilities. While most of this debt is held by the private sector in the form of corporate bonds, the stronger dollar means that debt servicing will increase, defaults will spike, and capital flight will accelerate. Author’s Michele Brand and Remy Herrera summed it up in a recent article on Counterpunch titled “Dollar Imperialism, 2015 edition”. Here’s an excerpt from the article:

“There is the risk for a sell-off in emerging market bonds, leading to conditions like in 1997. The multitrillion dollar carry trade may be on the verge of unwinding, meaning capital fleeing the periphery and rushing back to the US. Vast amounts of capital are already leaving some of these countries, and the secondary market for emerging bonds is beginning to dry up. A rise in US interest rates would only put oil on the fire.

The World Bank warned in January against a “disorderly unwinding of financial vulnerabilities.” According to the Financial Times on February 6, there is a “swelling torrent of ‘hot money’ cascad[ing] out of China.” Guan Tao, a senior Chinese official, said that $20 billion left China in December alone and that China’s financial condition “looks more and more like the Asian financial crisis” of the 1990s, and that we can “sense the atmosphere of the Asian financial crisis is getting closer and closer to us.” The anticipated rise of US interest rates this year, even by a quarter point as the Fed is hinting at, would exacerbate this trend and hit the BRICS and other developing countries with an even more violent blow, making their debt servicing even more expensive.” (Dollar Imperialism, 2015 Edition” Michele Brand and Remy Herrera, CounterPunch)

The soaring dollar has already put the dominoes in motion as capital flees the perimeter to return to risk-free assets in the US. At present, rates on the benchmark 10-year Treasury are still just slightly above 2 percent, but that will change when US investment banks and other institutional speculators– who loaded up on EU government debt before the ECB announced the launching of QE–move their money back into US government bonds. That flush of recycled cash will pound long-term yields into the ground like a tent-peg. At the same time, the Fed will continue to “jawbone” a rate increase to lure more capital to US stock markets and to inflict maximum damage on the emerging markets. The Fed’s foreign wealth-stripping strategy is the financial equivalent of a US military intervention, the only difference is that the buildings are left standing. Here’s an except from a Tuesday piece by CNBC:

“Emerging market currencies were hit hard on Tuesday, while the euro fell to a 12-year low versus the U.S. dollar, on rising expectations for a U.S. interest rate rise this year. The South African rand fell as much as 1.5 percent to a 13-year low at around 12.2700 per dollar, while the Turkish lira traded within sight of last Friday’s record low. The Brazilian real fell over one percent to its lowest level in over a decade. It was last trading at about 3.1547 to the dollar…

The volatility in currency markets comes almost two years after talk of unwinding U.S. monetary stimulus sent global markets reeling, with some emerging market currencies bearing the brunt of the sell-off…

Emerging market (EM) currencies are off across the board, as markets focus back on those stronger U.S. numbers from last week, prospects for early Fed tightening, and underlying problems in EM,” Timothy Ash, head of EM (ex-Africa) research at Standard Bank, wrote in a note.

“In this environment countries don’t need to give investors any excuse to sell – especially still higher rolling credits like Turkey.” (Currency turmoil as US rate-hike jitters bite, CNBC)

Once again, the Fed’s easy money policies have touched off a financial cyclone that has reversed capital flows and put foreign markets in a downward death spiral. (The crash in the EMs is likely to be the financial calamity of the year.) If Fed chairman Janet Yellen raises rates in June, as many expect, the big money will flee the EMs leaving behind a trail of bankrupt industries, soaring inflation and decimated economies. The blowback from the catastrophe is bound to push global GDP into negative territory which will intensify the currency war as nation’s aggressively compete for a larger share of dwindling demand.

The crisis in the emerging markets is entirely the doing of the Federal Reserve whose gigantic liquidity injections have paved the way for another global recession followed by widespread rejection of the US unit in the form of “de-dollarization.” Three stock market crashes and global financial meltdown in the length of decade and a half has already convinced leaders in Russia, China, India, Brazil, Venezuela, Iran and elsewhere, that financial stability cannot be achieved under the present regime. The unilateral and oftentimes nonsensical policies of the Fed have merely exacerbated inequities, disrupted normal business activity, and curtailed growth. The only way to reduce the frequency of destabilizing crises is to jettison the dollar altogether and create a parallel reserve currency pegged to a basket of yuans, dollars, yen, rubles, sterling, euros and gold. Otherwise, the excruciating boom and bust cycle will persist at five to ten year intervals. Here’s more on the chaotic situation in the Emerging Markets:

“The stronger the US boom, the worse it will be for those countries on the wrong side of the dollar. […] The US Federal Reserve has pulled the trigger. Emerging markets must now brace for their ordeal by fire. They have collectively borrowed $5.7 trillion, a currency they cannot print and do not control. This hard-currency debt has tripled in a decade, split between $3.1 trillion in bank loans and $2.6 trillion in bonds. It is comparable in scale and ratio-terms to any of the biggest cross-border lending sprees of the past two centuries. Much of the debt was taken out at real interest rates of 1pc on the implicit assumption that the Fed would continue to flood the world with liquidity for years to come. The borrowers are ‘short dollars’, in trading parlance. They now face the margin call from Hell…. Stephen Jen, from SLJ Macro Partners said that ‘Emerging market currencies could melt down. There have been way too many cumulative capital flows into these markets in the past decade. Nothing they can do will stop potential outflows, as long as the US economy recovers. Will this trend lead to a 1997-1998-like crisis? I am starting to think that this is extremely probable for 2015.’” (Fed calls time on $5.7 trillion of emerging market dollar debt, Ambrose Evans Pritchard, Telegraph)

As the lone steward of the reserve currency, the Fed can boost global liquidity with a flip of the switch, thus, drowning foreign markets in cheap money that inevitably leads to recession, crises, and political unrest. The Fed was warned by Nobel Prize-winning economist, Joseph Stiglitz, that its loosy goosy-monetary policies, particularly QE, would have a ruinous effect on emerging markets. But Fed Chairman Ben Bernanke chose to shrug off Stiglitz’s advice and support a policy that has widened inequality to levels not seen since the Gilded Age while having no noticeable impact on employment , productivity or growth. For all practical purposes, QE has been a total flop.

On Thursday, stocks traded higher following a bleak retail sales report that showed unexpected weakness in consumer spending. The news pushed the dollar lower which triggered a 259 point rise on the Dow Jones. The “bad news is good news” reaction of investors confirms that today’s market is not driven by fundamentals or the health of the economy, but by the expectation of tighter or looser monetary policy. ZIRP (Zero interest rate policy) and the Yellen Put (the belief that the Fed will intervene if stocks dip too far.) have produced the longest sustained stock market rally in the post war era. Shockingly, the Fed has not raised rates in a full nine years due in large part to the atmosphere of crisis the Fed has perpetuated to justify the continuation of wealth-stripping policies which only benefit the Wall Street banks and the nation’s top earners, the notorious 1 percent.

The markets are bound to follow this convoluted pattern for the foreseeable future, dropping sharply on news of dollar strength and rebounding on dollar weakness. Bottom line: Seven years and $11 trillion in central bank bond purchases has increased financial instability to the point that any attempt to normalize rates threatens to vaporize emerging markets, send stocks crashing, and intensify deflationary pressures.

If that isn’t an argument for “ending the Fed”, then I don’t know what is.

MIKE WHITNEY lives in Washington state. He is a contributor to Hopeless: Barack Obama and the Politics of Illusion (AK Press). Hopeless is also available in a Kindle edition. He can be reached at fergiewhitney@msn.com.

 

The ECB’s Noose Around Greece: How Central Banks Harness Governments

By Ellen Brown
Global Research, March 12, 2015
Web of Debt

 

greece-euro-crisisRemember when the infamous Goldman Sachs delivered a thinly-veiled threat to the Greek Parliament in December, warning them to elect a pro-austerity prime minister or risk having central bank liquidity cut off to their banks? (See January 6th post here.) It seems the European Central Bank (headed by Mario Draghi, former managing director of Goldman Sachs International) has now made good on the threat.

The week after the leftwing Syriza candidate Alexis Tsipras was sworn in as prime minister, the ECB announced that it would no longer accept Greek government bonds and government-guaranteed debts as collateral for central bank loans to Greek banks. The banks were reduced to getting their central bank liquidity through “Emergency Liquidity Assistance” (ELA), which is at high interest rates and can also be terminated by the ECB at will.

In an interview reported in the German magazine Der Spiegel on March 6thAlexis Tsipras said that the ECB was “holding a noose around Greece’s neck.” If the ECB continued its hardball tactics, he warned, “it will be back to the thriller we saw before February” (referring to the market turmoil accompanying negotiations before a four-month bailout extension was finally agreed to).

The noose around Greece’s neck is this: the ECB will not accept Greek bonds as collateral for the central bank liquidity all banks need, until the new Syriza government accepts the very stringent austerity program imposed by the troika (the EU Commission, ECB and IMF). That means selling off public assets (including ports, airports, electric and petroleum companies), slashing salaries and pensions, drastically increasing taxes and dismantling social services, while creating special funds to save the banking system.

These are the mafia-like extortion tactics by which entire economies are yoked into paying off debts to foreign banks – debts that must be paid with the labor, assets and patrimony of people who had nothing to do with incurring them.

Playing Chicken with the People’s Money

Greece is not the first to feel the noose tightening on its neck. As The Economist notes, in 2013 the ECB announced that it would cut off Emergency Lending Assistance to Cypriot banks within days, unless the government agreed to its bailout terms. Similar threats were used to get agreement from the Irish government in 2010.

Likewise, says The Economist, the “Greek banks’ growing dependence on ELA leaves the government at the ECB’s mercy as it tries to renegotiate the bailout.”

Mark Weisbrot commented in the Huffington Post:

We should be clear about what this means. The ECB’s move was completely unnecessary . … It looks very much like a deliberate attempt to undermine the new government.

. . . The ECB could . . . stabilize Greek bond yields at low levels, but instead it chose . . . to go to the opposite extreme — and I mean extreme — to promote a run on bank deposits, tank the Greek stock market, and drive up Greek borrowing costs.

Weisbrot observed that the troika had plunged the Eurozone into at least two additional years of unnecessary recession beginning in 2011, because “they were playing a similar game of chicken. . . . [T]he ECB deliberately allowed these market actors to create an existential crisis for the euro, in order to force concessions from the governments of Spain, Italy, Greece, Portugal, and Ireland.”

The Tourniquet of Central Bank Liquidity

Not just Greek banks but all banks are reliant on central bank liquidity, because they are all technically insolvent. They all lend money they don’t have. They rely on being able to borrow from other banks, the money market, or the central bank as needed to balance their books. The central bank (which has the power to print money) is the ultimate backstop in this sleight of hand. If that source of liquidity dries up, the banks go down.

In the Eurozone, the national central banks of member countries have relinquished this critical credit power to the European Central Bank. And the ECB, like the US Federal Reserve, marches to the drums of large international banks rather than to the democratic will of the people.

Lest there be any doubt, let’s review Goldman’s December memo to the Greek Parliament, reprinted on Zerohedge. Titled “From GRecovery to GRelapse,” it warned:

[H]erein lies the main risk for Greece. The economy needs the only lender of last resort to the banking system to maintain ample provision of liquidity. And this is not just because banks may require resources to help reduce future refinancing risks for the sovereign. But also because banks are already reliant on government issued or government guaranteed securities to maintain the current levels of liquidity constant.

In the event of a severe Greek government clash with international lenders, interruption of liquidity provision to Greek banks by the ECB could potentially even lead to a Cyprus-style prolonged “bank holiday”. And market fears for potential Euro-exit risks could rise at that point. [Emphasis added.]

Why would the ECB have to “interrupt liquidity provision” just because of a “clash with international lenders”? As Mark Weisbrot observed, the move was completely unnecessary. The central bank can flick the credit switch on or off at its whim. Any country that resists going along with the troika’s austerity program may find that its banks have been cut off from this critical liquidity, because the government and the banks are no longer considered “good credit risks.” And that damning judgment becomes a self-fulfilling prophecy, as is happening in Greece.

“The Icing on the Cake”

Adding insult to injury, the ballooning Greek debt was incurred to save the very international banks to which it is now largely owed. Worse, those banks bought the debt with cheap loans from the ECB! Pepe Escobar writes:

The troika sold Greece an economic racket ….  Essentially, Greece’s public debt went from private to public hands when the ECB and the IMF ‘rescued’ private (German, French, Spanish) banks. The debt, of course, ballooned. The troika intervened, not to save Greece, but to save private banking.

The ECB bought public debt from private banks for a fortune, because the ECB could not buy public debt directly from the Greek state. The icing on this layer cake is that private banks had found the cash to buy Greece’s public debt exactly from…the ECB, profiting from ultra-friendly interest rates. This is outright theft. And it’s the thieves that have been setting the rules of the game all along.

That brings us back to the role of Goldman Sachs (dubbed by Matt Taibbi the “Vampire Squid”), which “helped” Greece get into the Eurozone through a highly questionable derivative scheme involving a currency swap that used artificially high exchange rates to conceal Greek debt.

Goldman then turned around and hedged its bets by shorting Greek debt.

Predictably, these derivative bets went very wrong for the less sophisticated of the two players. A €2.8 billion loan to Greece in 2001 became a €5.1 billion debt by 2005.

Despite this debt burden, in 2006 Greece remained within the ECB’s 3% budget deficit guidelines. It got into serious trouble only after the 2008 banking crisis. In late 2009, Goldman joined in bearish bets on Greek debt launched by heavyweight hedge funds to put selling pressure on the euro, forcing Greece into the bailout and austerity measures that have since destroyed its economy.

Ambrose Evans-Pritchard wrote in the UK Telegraph on March 2nd:

Syriza has long argued that [its post-2009] debt is illegitimate, alleging that the ECB bought Greek bonds in 2010 in order to save the European banking system and prevent contagion at a time when the eurozone did not have a financial firewall, not to help Greece.

Mr. Varoufakis [the newly-appointed Greek finance minister] said the result was to head off a Greek default to private creditors that would have led to a large haircut for foreign banks if events had been allowed to run their normal course, reducing Greece’s debt burden to manageable levels. Instead, the EU authorities took a series of steps to avert this cathartic moment, ultimately foisting €245bn of loan packages onto the Greek taxpayer and pushing public debt to 182pc of GDP.

The Toxic Central Banking System

Pepe Escobar concludes:

Beware of Masters of the Universe dispensing smiles. Draghi and the … ECB goons may dispense all the smiles in the world, but what they are graphically demonstrating once again is how toxic central banking is now enshrined as a mortal enemy of democracy.

National central banks are no longer tools of governments for the benefit of the people. Governments have become tools of a global central banking system serving the interests of giant international financial institutions. These “too big to fail” behemoths must be saved at the expense of local banks, their depositors, and local economies generally.

How to escape the tentacles of this toxic squid-like banking hierarchy?

For countries with a bit more room to maneuver than Greece has, one option is to withdraw public and private deposits and put them in publicly-owned banks. The megabanks are deemed too big to fail only because the people’s money is tied up in them. They could be allowed to fail if public funds were not at risk.

The German SBFIC (Savings Banks Foundation for International Cooperation) has proposed a pilot project on the Sparkassen model for Greece. Other provocative options have also been proposed, to be the subject of another article.

Ellen Brown is an attorney, founder of the Public Banking Institute, and author of twelve books including the best-selling Web of Debt. Her latest book, The Public Bank Solution, explores successful public banking models historically and globally. Her nearly-300 blog articles are at EllenBrown.com. Listen to “It’s Our Money with Ellen Brown” on PRN here.

QE Inventor: It’s EASY to Create a Full-Blown Recovery, But Central Banks Chose to Make Banksters Rich Instead of Helping Main Street

By WashingtonsBlog
March 6, 2015
Washington’s Blog, March 5, 2015
QE Is a Sham
bankerRichard Werner (economics professor at University of Southampton) is the inventor of quantitative easing (QE).

Werner previously said that QE has failed to help the economy. (Former long-time Fed chair Alan Greenspan agreesNumerous academic studies confirm this. And see this.)

But Werner is now taking off the gloves …

He said recently:

  • It’s easy for central banks to take steps which would quickly create “full-blown recovery” for the economy
  • But the central bankers are instead choosing to act in a way which creates massive profits for the big banks, instead of stabilizing the economy. Werner blames the revolving door between central bankers and private bankers
  • The central banks have twisted the whole concept of easing … pretending that they’re trying to help the economy, when they’re doing something else entirely
  • Credit should be extended to the productive economy – businesses which create goods and services – and not to financial speculators or high levels of consumer debt.  Extending credit to small businesses former creates prosperity; lending to financial speculators only leads to economic instability and soaring inequality; and when too high a percentage of lending goes to luxury consumer consumption, it’s bad for the economy
  • Banks create money and credit out of thin air when they make loans (background)
  • It’s a myth that interest rates drive the level of economic activity. The data shows that rates lag the economy

Indeed, economists also note that QE helps the rich … but hurts the little guy. QE is one of the main causes of inequality (and see this and this). And economists now admit that runaway inequality cripples the economy. So QE indirectly hurts the economy by fueling runaway inequality.

A high-level Federal Reserve official says QE is “the greatest backdoor Wall Street bailout of all time”. And the “Godfather” of Japan’s monetary policy admits that it “is a Ponzi game”.

And – as counter-intuitive as it sounds – QE actually hurts the economy and leads to deflation in the long-run.

Record global stock prices reflect growth of financial parasitism

By Nick Beams
February 27, 2015
World Socialist Web Site

 

This week has seen global stock prices approach record highs under conditions where the German government took the unprecedented step of issuing bonds at a negative yield. The two interrelated developments point to an explosive growth of financial parasitism.

World equity markets are close to their highest levels in history, as measured by the FTSE All-World Index. The FTSE 100, Britain’s index of leading shares, surpassed its previous high, achieved at the end of 1999 on the eve of the bursting of the dot.com share market bubble, to join Wall Street’s Dow and the German DAX in record territory.

This is an extraordinary phenomenon given that large areas of the global economy, most notably Europe and Japan, are either stagnant or in recession; China and the so-called “emerging markets,” which have been the main centre of global growth, are slowing down; and the much-vaunted US growth is still below historical trends.

All of the major reports on the state of the world economy in the recent period—from the World Bank, the International Monetary Fund, and the Organisation for Economic Cooperation and Development—have downgraded previous growth projections and warned that the economy is increasingly characterised by a vicious cycle.

Investment has fallen to historic lows because of the lack of demand and profit opportunities. The decline in investment is leading, in turn, to a further decline in demand and profit expectations.

Notwithstanding these powerful trends, the stock markets continue to power on, providing a graphic demonstration of the degree to which the accumulation of wealth by global financial elites has become divorced from the actual process of production.

One of the main factors boosting Wall Street in recent days was the estimation, following the testimony by US Federal Reserve Chairwoman Janet Yellen to the US Congress, that the central bank was in no hurry to start lifting official interest rates, ensuring that the flow of cheap money into financial markets would continue.

European markets also took heart from Yellen’s remarks and were boosted as well by the approach of the European Central Bank’s money-printing “quantitative easing” (QE) program, slated to begin next week.

In addition, they were warmed by the news that the European Union and the financial oligarchy it represents had obtained the Syriza-led Greek government’s abject capitulation, including the renunciation of the pseudo-left party’s election promises to fight the EU’s austerity program. The Greek developments, ensuring the further impoverishment of the Greek working class, was a source of satisfaction not only because of its implications for Greece, but also for the message they sent across Europe that any demand for an end to austerity would meet the same fate.

The emergence of negative bond yields, underscored by the German government’s issuance of five-year notes at a negative rate, signifies that the bond market is being transformed into a gigantic Ponzi scheme, in which the ability to make money depends on the continuous flow of new cash—largely emanating from central banks—into the financial system. It is increasingly operating according to the “bigger fool” principle. While it may be considered foolish to invest in a high-priced bond that offers a negative yield, speculators bet that there is an even bigger fool who will buy the bond when its price rises even further.

When negative yields first made their appearance, it was thought they were a transitory phenomenon, the result of the search for a “safe haven” for cash. But now they are becoming a permanent feature of the financial landscape.

Besides Germany, five-year bonds issued by Denmark, Finland, the Netherlands and Austria, as well as corporate bonds issued by Nestlé and Shell, have come with negative yields.

The immediate impetus for the growth in negative yields is the decision by the European Central Bank to begin bond purchases from March 1 at the rate of €60 billion per month for at least the next 16 months.

Speaking to the Financial Times, Divyang Shah, a global strategist at IFR Markets, said: “It should not be ruled out that, once the ECB QE program begins, we will see German 10-year yields trade through zero and into negative territory.” Swiss 14-year bonds were already trading at negative yields, so such an outcome could not be ruled out, he said, adding that “instead of safe haven-related demand we have QE-related demand.”

The yield on the German 10-year bond yesterday touched a record low of 0.28 percent, with 10-year yields in France, Portugal and Spain also falling to record levels.

The truly explosive growth of financial parasitism, expressed in the negative yield phenomenon, is highlighted by data compiled by JPMorgan Chase. It estimates that in the past year alone the value of negative-yielding bonds in Europe has escalated exponentially—from $20 billion to $2 trillion, a hundred-fold increase. It is calculated that at least one-third of all European bonds now show negative yields. Nothing remotely resembling this has been seen in economic history.

One of its immediate effects is to destroy the financial modus operandi of pension funds and insurance companies. Throughout their history, they have invested in government debt in order to secure a steady and safe rate of return over the long term, often under legal requirements to do so. However, this strategy is increasingly unviable, and in order to meet their commitments, they are being forced to make riskier investments or join the bond market speculation.

The rise of financial parasitism has decisive economic and political implications. As the whole of economic history demonstrates, and the events of the past decade have again revealed, the maintenance of this house of cards cannot continue indefinitely.

A major bankruptcy, produced by a sudden shift in the value of one or another of the major currencies, for example, (such as took place earlier this year with the dramatic leap in the value of the Swiss franc), a corporate default, a sudden shift in sentiment due to an interest rate rise, or one of any number of seemingly accidental events can trigger a chain reaction that brings the entire rotten financial edifice crashing down.

Furthermore, because trillions of dollars have been injected into the financial system by central banks over the past six years, the consequences have the potential to be even more serious than those that followed the collapse of Lehman Brothers in September 2008.

The consequent closures, sackings and mass unemployment and the intensification of the assault on social services will fuel the eruption of social and political struggles that will be met with an immediate and ruthless response from the financial oligarchy. That is the lesson of Greece.

Acutely aware that they have no economic solution to the crisis of the profit system, the ruling elites in every country have spent the past six years boosting police and security forces to deal with the inevitable outbreak of mass struggles.

The international working class must likewise make its own preparations. They centre on the fight for an independent socialist and internationalist program aimed at the overthrow of the financial oligarchy, and the construction of a revolutionary party to lead this struggle.

Gold versus Fiat Money: The Global Economy is a Banana Republic

By Bill Holter
February 26, 2015
Global Research

 

In case you had not noticed, we live in a crazy upside down sort of world.  We could go into the social aspect of this but it would only make our collective blood pressures go up.  The same thing goes for politics, religion and let’s not forget an entire industry that used to pride itself on digging for the truth, the media.  Nothing, and I do mean NOTHING “is” really as it seems today.  Everything is spun, everything is either glossed over or not even discussed (reported on) and nothing is real anymore.  Somehow, I think Goebbels is blushing in his grave and Orwell kicking himself for not being outrageous enough when he wrote 1984.

Now would be a good time to revisit something we’ve looked at many times before, namely which is the better deal?  Is one ounce of gold better than 1,200 one dollar bills?  Or euros, yen, pounds or what have you?  The reason this has come to my mind in this fashion is because our world of fiat money now has negative interest rates for about 15% of all sovereign debt (and growing quickly).  Zerohedge just released an article talking about 20 central banks already in this new year cutting their interest rates.

The obvious takeaway from this is investors are being forced to scramble for yield, any yield no matter how dangerous.  Savers have been and now even more so, are being forced to do things (invest) they would never in their wildest dreams have done 10 years ago.  As mentioned a few weeks back, there are now even negative interest rates on mortgages in Denmark.  This means your mortgage will get paid down by your institution over time as long as you can make the monthly amortization payment.  Who in their right mind would not borrow as much as they could to buy as big a property as possible?  Think about it, you get to borrow in a paper currency where the central bank WANTS inflation (a debasing currency) and the issuing bank will help you pay down the principle.  This is a no brainer!

On the other side of the ledger however are “savers”.  Who in their right mind would “lend” currency at negative interest rates?  Your prospects in the real world and in black and white are ridiculous.  You are lending money where your “balance” decreases each year and then, what will you receive upon maturity?  You will receive “currency” the central banks are telling you ahead of time …they wish to, plan to and will do everything they can …to devalue!  Does this make any sense?  Locking in a shrinking balance in a currency the issuer wishes to “shrink”?  Which then is better?  An ounce of gold which is unshrinkable or 1,200 one dollar bills which shrink every time you do your laundry.

So the world’s central banks are continuing to lower interest rates and “zero percent” is no longer a lower bound, why?  Why are central banks pushing so hard for lower interest rates?  Yes I know, they say “lower rates will help the economy” … blah blah blah.  Really?  Has it worked?  Would you like to know the REAL reason interest rates have been pushed down?  Because if they were not, sovereigns from A-Z would already be seen to be insolvent.  A large and growing percentage of the world’s sovereign nations now have a debt to GDP ratio of 100% or more.  Big deal right?  Well, yes it really is but for “now” it isn’t “seen” as one.  Historically, whenever a nation went beyond 100% debt to GDP ratio …they soon became a banana republic where their issued currency collapsed and sovereign bonds offloaded in panic fashion.  This of course meant that interest rates exploded higher and more currency was needed to be issued to support the debt market …setting off a cycle of hyperinflation.  Not an isolated problem, the globe is on the verge of becoming one big unhappy banana republic!

Globally, banana republic status is the crossroads the world now stands at.  Yes, we currently live in a world with deflationary tendencies because the giant sized debt loads are crushing everything …including the sovereigns themselves.  With little to no warning at all, this will turn on a dime because of human nature.  Human’s are a funny animal.  Greed is a powerful emotion, fear is even greater.  In the monetary world, once “fear” becomes the predominant notion then another factor will kick in.  Just as a dog with a bowl full of food wants the other dogs food, man always craves what he cannot have.  When, not if, gold and silver go into hiding, “man” will want them even more.  It is this emotion which will collide with a mine supply which has already peaked while Western vaults are substantially empty.

I decided to write this because I believe hyperinflation is broadly misunderstood by most.  Most believe hyperinflation can only happen when a central bank creates too much “money”.  The over creation of money is certainly one necessary condition but alone will not spark hyperinflation.  It is a break in confidence which ignites the fire.  We stand today in a world where all of the conditions exist for a massive fire which will destroy much of the accumulated paper wealth of the last 100 years or more.  The only thing lacking to get this bonfire raging is a break in confidence.

Looking back to the very dark fourth quarter of 2008, you can see nearly ALL official actions aimed squarely at keeping confidence high.  Bogus economic reports, the cancellation of mark to market, central banks propping up brain dead banks and financial institutions …and on down the line to rigging all markets from supporting stocks and bonds to suppressing gold and silver.  Everything is and has been about perception, once this perception shifts, hyperinflation can literally begin overnight.  In case you have not noticed or followed, the rest of the world has already “moved” or is “moving” away from the dollar as  they have already figured this out.  Hyperinflation of the dollar will not be “cost push” or the inflation we WERE used to.  It will be a currency event caused by a break in confidence where dollars are massively sold and refused for acceptance,… as the “printing part” is already in place.  THIS is what “policy”, ALL policy has been about since 2008 …retaining confidence in the dollar!  Understand this and you understand 90%+ of the entire game.