Busted: Bankers and The Global Economy

June 24, 2010

The Iron Hand of the Federal Reserve

Filed under: banking, business, corporatism, federal reserve, money — Tags: , , , , , , — digitaleconomy @ 1:23 pm

Banks are notorious for sitting on their can doing little to promote the economic engine, even as they have a wealth of money creating power through the fractional reserve built into the system. They prefer to downgrade your credit worthiness while creating new ways to profit on Wall Street. The national government of the U.S. wants to look as though they are really doing something about regulatory reform. Today, the Federal Reserve has issued today’s “iron edict” for banking, which excludes credit card banks and special purpose banks. They pretend to foster financial literacy. With new powers firmly in place, the Fed intends to correct the banking system through “host state loan-to-deposit ratios.” (Applause) All banking institutions will be measured through revised figures based on compliance with section 109 of the Riegle-Neal Interstate Banking and Branching Efficiency Act of 1994. They evaluate these ratios yearly.

The act “prohibits a bank from establishing or acquiring a branch or branches outside of its home state primarily for the purpose of deposit production.” It “also prohibits branches of banks controlled by out-of-state bank holding companies from operating primarily for the purpose of deposit production.” Would you say that this has worked in the past to keep banks straight in their pursuit of profit? Hardly. That won’t stop the Fed from pretending to get bankers to follow law. It will only work if the Fed uses the law aggressively, especially where loaning money is concerned. Since the Fed shares a similar corporate structure and philosophy to banks, enforcing ratios is unlikely to have much traction.

The act also provides orders to test compliance with the statutory requirements.

“The first step in the process involves a loan-to-deposit ratio screen that compares a bank’s statewide loan-to-deposit ratio to the host state loan-to-deposit ratio for banks in a particular state.

A second step is conducted if a bank’s statewide loan-to-deposit ratio is less than one-half of the published ratio for that state or if data are not available at the bank to conduct the first step. The second step requires the appropriate banking agency to determine whether the bank is reasonably helping to meet the credit needs of the communities served by the bank’s interstate branches.”

With recent publicity, you can see where the Fed announces they are going. “A bank that fails both steps is in violation of section 109 and is subject to sanctions (italics mine) by the appropriate banking agency”: the Board of Governors of the Federal Reserve System, the Federal Deposit Insurance Corporation, or the Office of the Comptroller of the Currency. Don’t you feel all better now?

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May 12, 2009

Wall Street Giddy with High Times to Come

economic crisisWe live in exciting times. The stock market is up 100 points… or who knows what goodness corporate investors are blessed with today. Wall Street mavens and financial wizards are feeling giddy with delight. They want good times so badly that they are already deluding themselves that the recession is over and that runaway prosperity is in the wings. It’s time to start making money all over again the way “we” used to. After all, nothing has changed beyond massive cast infusions to hold up the system. Multitudes of banks, corporate mongers, financial wizards and wishful investors are convinced that we are about to relive heady good times without an ounce of reform or correction in the system that jack built. They may be right.

bear stearns collapseThe longer reform takes, the less likely reform is to happen, at least if financial and corporate simple simons have their way. It’s time to stop pretending that the Wall Street economy is the same as the real economy that everyone lives in. Wall Street hasn’t met with total and final meltdown because the Wall Street economy has been rescued. They have lived to see another day because of government bailout, presumably at taxpayer expense. Yep, Wall Street seems to be showing signs of life along with the giddiness that goes along with having a future without any reform or consequences. A real party is set to ensue at the expense of all. The real economy that the rest of America lives is another matter altogether.

What is truly important where the economy is concerned is whether real Americans can find work. If Americans can’t find work or create work that they use to survive, the country is in trouble, pure and simple. 539,000 Americans lost their jobs last month after many months of ongoing successive unemployment disaster. Since the recession officially began in December 2007, 5.7 million jobs have been given the write off by government employment statistics. The reality is actually even worse.

Still, there has been plenty of impressive talk about the new world of reform that America will enjoy, but little has been done beyond the talk. Regulatory reform is dying on the government vine of important projects.

Geithner has quipped, “We are being dramatically more aggressive than I believe any serious government has ever been, certainly in generations, in responding to financial crises. So if you look at the scale of action, look at the quality of initiative we’ve taken, I think it dramatically exceeds even the best-managed crises we’ve seen before.” Ple-e-ze. The system continues just as before, but without any reform or any real ideas for reform that hold any substance. The Masters of the Economy can’t seem to wrap their minds around the banking deluge that has brought us to our knees, much less figure out a way to reform it. They just don’t want to rock the boat of monetary largess. Geithner told Congress that fixing the system would be accomplished not by “modest repairs”, but by “new rules of the game.” I agree that what is playing out between government, corporate bankers and central bankers is a game. That much is obvious.

People are watching. Are you? ~ E. Manning

February 17, 2009

Federal Reserve Gets Religious Vision

But don’t be quick to forget that the seeds of the current global financial crisis were sown by the near total breakdown of mortgage-lending standards and banking-industry oversight. Most of this can be laid squarely at the feet of arrogant economic and political theoreticians who viewed the borrowing public as little more than a bunch of statistics and a springboard for their next personal bonus or career move.

elizabeth-duke-governorNow the Federal Reserve Board has a new religious vision in the form of eager, bright-eyed and perhaps the naivety of Governor Elizabeth Duke. In her speech to community bankers in Phoenix, Arizona, yesterday, she revealed her vision like a campaign pledge:

* I believe that the banking business plays a special role in the economy and carries with it special responsibilities. These responsibilities come from the role of the financial system as the circulatory system of our economy. And with respect to insured depository institutions, given the federal safety net provided by deposit insurance, access to the payment system, and the availability of discount window borrowings, bankers have a responsibility to operate in a safe and sound manner.
* I believe that rigorous supervision and enforcement are necessary companions to regulation. One of the lessons we have learned in the current crisis is that different levels of supervision and enforcement can cause problems, even when institutions are ostensibly following the same regulations. Nowhere was this more evident than in the mortgage origination market, in which banking organizations and firms outside the banking supervision system were all originating mortgages but were subject to very different levels of oversight.
* I believe in the separation of banking and commerce. The lending policies of banks should have as their purpose the efficient channeling of savers’ funds to their most productive uses. The allowance of banks to affiliate with commercial firms threatens the ability of banks to continue to serve as efficient and objective intermediaries of credit and has the potential to expose banks to the operational, financial, and reputational risks of commercial affiliates. It also has the potential to extend to commercial affiliates the federal safety net afforded to banks in recognition of their role in the economy.
* I believe that a bank holding company should act as a source of financial and managerial strength to its banking subsidiaries. That is, a bank holding company should stand ready to use available resources to provide adequate capital funds to its subsidiary banks during periods of financial stress or adversity, and it should maintain the financial flexibility and capital-raising capacity to obtain additional resources for assisting its subsidiary banks. The reasoning behind these functions is that a bank holding company derives certain benefits at the corporate level that result, in part, from the ownership of an institution that has access to the federal safety net, including deposit insurance. This principle is, naturally, very familiar to almost all bankers, since it is embedded in Federal Reserve regulation, but it is worth repeating from time to time.
* Finally, I believe that strict adherence to consumer protection is necessary to protect consumers and the financial system as a whole. We have now witnessed the severe consequences of inadequate consumer understanding of financial products and of lending to consumers without regard to their ability to sustain the payments. Reasonable regulations, such as the Federal Reserve’s recent rule changes for mortgages and credit cards, can help protect consumers and encourage responsible lending.

seeds-of-victorySure Ms. Duke is a banker-type. For a banker, her commitment in the face of the old cronies in the good old boys’ network of banking is a breath of fresh air, bordering on a religious outlook when we have a U.S. President that is similar in nature. Are the winds of change in the air? Is Ms. Duke the inspiration that ho-hum greedy bankers need? Will the Federal Reserve get the religion of financial literacy where people are concerned? Even more important, will they apply financial literacy to themselves? Are these the seeds of victory that we need or are we too late? Perhaps a little selfless vision never hurt anyone. Then again, do you believe it?

~ E. Manning

January 8, 2009

How Will Obama Create a Wall Street Miracle?

obama-discusses-stimulus-2009Throughout America’s history, there have been some years that simply rolled into the next without much notice or fanfare. Then there are the years that come along once in a generation – the kind that mark a clean break from a troubled past, and set a new course for our nation. So started Barack Obama’s “stimulus speech” today. Perhaps Obama’s opening statement is somewhat understated, but certainly well placed in the realm of psychology.

The emphasis of his speech was largely inspirational in nature, but held a few small pearls where ideas are concerned. One area is of special concern:

“…it means reforming a weak and outdated regulatory system so that we can better withstand financial shocks and better protect consumers, investors, and businesses from the reckless greed and risk-taking that must never endanger our prosperity again. No longer can we allow Wall Street wrongdoers to slip through regulatory cracks. No longer can we allow special interests to put their thumbs on the economic scales. No longer can we allow the unscrupulous lending and borrowing that leads only to destructive cycles of bubble and bust.”

obama-big-brotherSafety in America is rarely a hard sell for a people obsessed with their own security. How is President Obama going to accomplish this miracle of financial national health that not a single man in existence has dared to attempt to act on? How will America create the miracle of coveted and elusive financial transparency without creating a “big brother” situation in the realm of business, privacy and the American Dream? How can a system be created that doesn’t limit freedom while making runaway theft and abuse a topic of the past on Wall Street and in financial circles. Much like Bush’s “war on terror” seemed like a good idea when the twin towers fell, a dramatic change in course including an invasion of privacy where Corporate America and Wall Street are concerned could be a slippery slope.

Unfortunately, the U.S. Federal Government is not a bastion of transparency in any regard, which leaves many Americans pausing to consider: “What will I have to give up to keep America safe from reckless greed and risk-taking that must never endanger prosperity again.” Is America preparing itself for another “war on terror” in the name of financial literacy? What new technology and control system will we use to create this mandated financial transparency or is this a resolution that will fall neatly into the hands of global finance ministers?

Nancy Pelosi and the elected lawmakers are about to make more bailout history in the hope of abating the tide of recession with the intention of avoiding economic depression. There will be no Congressional vacation without a legislative solution for bettering the economy. So far, throwing money and liquidity a la Milton Friedman has done little to help the situation. In desperation, the Feds are looking to avoid the specter of an 25% American unemployment rate and the resulting unpopularity, misery and perhaps rebellion against established authority as millions bite the economic dust in a nation ill equipped to deal with any blight. What America has now is nothing less than political panic.

October 16, 2008

Financial Crime of the Century

Today at the Senate Banking and Housing Committee meeting “Turmoil in the Credit Markets”, Senator Chris Dodd, now the “Congressional champion” for the American consumer against foreclosures along with others, aptly pointed out a fact that most of us have overlooked or conveniently forgotten. President Clinton assigned the Federal Reserve the full duty as regulatory policeman over the nation. The Federal Reserve, in the words of Dodd, ignored the assignment by doing nothing for years. Senators are seeking reelection this year and U.S. citizens would do well to remember that Senators are now trying to cover their lack of action and regulatory oversight for the last eight years. Now, hearings are in order to find the right degree of blame and then an effort made so that another economic tsunami never happens again.

Dodd’s words were perhaps among the most pointed opening comments of a recent hearing. He simply stated that bankers shifted risk through exploitation. You can hear the politics and excuses too. A mandate of Congress doesn’t mean anything with regulation. That has been the flaw behind the entire federal government for the last decade at a minimum. Interestingly, Dodd sees himself as doing a “post-mortem” examination on the U.S. economy. By that definition, the economy is dead. That is not a good comparison unless he knows something most Americans don’t. ~ E. Manning

Senator Dodd’s opening remarks

October 15, 2008

Bernanke Pessimistic About U.S. Political Plans

Ben Bernanke is no longer being vague about his opinions. Bernanke indicated that the U.S. economy is certain to worsen. He suggested the possibility of further interest-rate cuts to lower rates while criticizing economic-rescue plans of both major presidential candidates.

At a question and answer session after his speech, Bernanke reflected on the handling of the Great Depression, saying that Franklin Roosevelt’s fiscal stimulus failed to end the economic troubles after Roosevelt took office. Stimulus spending suggested by Democratic presidential nominee Barack Obama and tax cuts proposed by Republican candidate John McCain are unlikely to end the crisis. Bernanke noted that World War II began to pull the nation from depression because it mobilized the nation.

Monetary policy including capitalizing banks has limits in his eyes. Bernanke is now promoting new regulations to avoid a repeat of problems that the nation is currently enduring. That undoubtedly means new powers for the Fed. ~ E. Manning

October 12, 2008

International Bankers: Time is Short

the IMF in better times

the IMF in better times

The International Monetary Fund, an international organization that oversees the global financial system based on economic policies of its member countries, proclaimed that time is short for consensus on the international financial crisis. The finance members of industrialized nations failed to agree on absolute and unified measures to end the crisis. The IMF expects a systemic meltdown if stability in financial markets is not achieved. While the international body recommends “exceptional vigilance, coordination and readiness to take bold action,” the body is leaving the pressure and responsibility on the collective bodies of national Finance Ministers. All this from an international body that claimed in August that there would be no recession in the Eurozone.

Solvency concerns are cited as the chief concern. The reality is that solvency is determined by a set of regulations that can easy be changed, as has happened in the United States. Therefore, the definition of solvency to a reasonable extent is in the hands of Finance Ministers and national leaders. Where such a change is seen as beneficial, such a move buys time when developing a consensus is especially important.

While consensus has been difficult, developing effective means to counteract the global financial crisis has been no less elusive. Panicked Finance Ministers are looking for support from the IMF or other global authorities in a effort to deal with the crisis. Britain has developed an interbank lending guarantee that has other nations stressing to compete.

In general, G-7 and G-20 ideas are essentially the same and somewhat short on creativity. Whether injecting capital into financial institutions and insurance companies, effectively nationalizing them, or buying up worthless mortgage assets, groups of Finance Ministers are chiefly examining the importance of uniform national guarantees to protect individual economies and to avoid creating a currency run. Encouraging monetary liquidity through central banking auctions has become a mainstay in prime economies.

Most telling perhaps is a statement made by the Brazilian Finance Minister, Guido Mangega, “The problems we are facing today in the global economy must be solved by several countries, they can’t be addressed by only one country or a single continent.” Finance Minsters from the G-20, not wishing to be left out of the loop, want emerging economies to be included within the ranks of G-7 Finance Ministers or by implication, involved as part of a larger authoritarian body.

Even Arab nations, whose prosperity seemed to make them immune from catastrophe are now encountering monetary issues, property value declines and business funding problems that threaten the Arab economic fabric as in much of the world. The Arab nations are largely isolated within the Islamic banking community except from within the burgeoning oil market, which in recent years has fueled inflation rates as high as 25 per cent.

As a result of the growing crisis, the United States is seen on many fronts, notably among Muslim leaders, as having no credibility whatever. Resentment, which is already high in religious circles, is multiplying because of the perception of financial betrayal and lack of wisdom. The push for Islamic banking within Muslim circles will continue despite any devaluation of the dollar experienced.

The issue created by injecting capital into banks dilutes monetary value and ownership of individual banks. While these types of measure can create the appearance of stability, diluting monetary value creates an ongoing increase in national, as well as global inflation. With increases in credit and cash generated for financial rescues, the end result is always inflationary as the devaluation of currency sets in. The only short-term winners are holding the gold and living off the interest for their services: central bankers. Meanwhile, central banking policies are behind the continued growth in inflation because a flawed economic model that mandates liquidity through monetary production. This is currently central banking’s best hope for economic stability. ~ E. Manning

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