“I’m tired, Joey Boy, of the makings of men,
I would like to be cheerful again.”
I’m Tired Joey Boy, Van Morrison
There are a number of different takes on how much the Financial Crash of 2008 cost the average American. The New York Times ran a story on January 21, 2014, Recession’s True Cost Is Still Being Tallied, that pegs losses at a minimum of $20,000 per individual and as high as $120,000. The figure that I have the most confidence in, which I cited in a previous post, Hillary’s Albatross, and which falls pretty much in the middle of the NYT story’s range, is $58,000 per household (vs. per individual), which comports pretty well with my family’s own personal tally of loss.
But those estimates are based on the government’s official figures of the cost of the bail-out. The real cost to taxpayers exceeds $16.8 trillion dollars, according to the Special Inspector General for TARP, with $7.7 trillion of secret emergency lending only disclosed to the public after Congress forced a one-time audit of the Federal Reserve in November of 2011.
Regardless of how high the actual cost is to you and me, it’s far too high because it didn’t have to happen. It all came about as a result of the Big Banks playing Big Casino with their depositors’ money in the service of rampant greed. As the NYT article stated: “The portrait of loss, tentative as it is, suggests that even the most far-reaching measures might be justified to ensure it never happens again.”
But the Big Banks and the US Congress are taking precisely those actions necessary to ensure that it does happen again and that it will create an even worse financial disaster than the Crash of 2008. What’s more, it appears to be part of a plan.
A few weeks ago, on June 8, 2017, on a nearly party-line vote of 233-186 (with only one Republican opposed), the US Congress passed The Financial CHOICE Act of 2017 (HR 10), a bill that would roll back many of the protections of The Dodd–Frank Wall Street Reform and Consumer Protection Act. It was a very important event in the economic lives of nearly all Americans, but one which garnered very little coverage by the media or analysis by pundits, who were mesmerized by former FBI Director James Comey’s testimony to the Senate Intelligence Committee.
The 2017 Choice Act strips the federal government of its power to regulate risky behavior by the Big Banks, while simultaneously blocking it from managing a bank failure to prevent systemic damage. In short, the 2017 Choice Act is a major enabler for the Big Banks to profit handsomely from another financial disaster already in the making. A few of the changes the 2017 Choice Act calls for include:
♦ Repeal of Volcker Rule restrictions on speculative investments by banks;
♦ Eliminating the Orderly Liquidation Authority of the Federal Deposit Insurance Corporation (FDIC) and establishing new, self-directed provisions covering bankruptcy of large financial institutions with respect to winding-down failing banks; and
♦ Allowing certain banks self-exemption from regulatory standards if they maintain a certain ratio of capital to total assets and meet other requirements.
The Volker Rule is a federal regulation implemented in 2015 that prohibits a bank or any institution that owns a bank from engaging in proprietary trading, and from owning or investing in a hedge fund or private equity fund, and also limits the liabilities that the largest banks can hold. The Volker Rule prohibits banks from conducting investment activities using their depositors’ money. Its purpose is to prevent banks from engaging in the kind of risky investment strategies that were primary contributors to the financial meltdown. Among those speculative investments is derivatives trading, which earns nice profits for the bank but provides no direct benefit to depositors … investments that privatize profit and socialize risk in the event the bank should fail.
It’s important to understand that proprietary trading occurs when a bank invests money for its own direct gain. Banks engage in proprietary trading because it earns them profits far in excess of the small margins they make from processing trades on behalf of its customers and clients. Repeal of the Volker Rule would again allow the Big Banks to gamble on high-risk, high-reward investments and acquisitions using their depositors’ money without restriction.
It’s also important to understand that when a depositor puts money in a bank, they are legally transferring ownership of that money to the bank. What they get in return is essentially a promise of repayment (an IOU) with interest. Since repeal of the Glass-Steagall Act, which separated depositors’ money from money the bank could use for investments, both depositors’ funds and a banks’ funds go into a general pool that the banks can use for proprietary trading.
The Volker Rule currently allows banks to engage in market-making, underwriting, hedging, securities trading, and selling hedge funds and private equity funds unless the service or products offered create material conflicts of interest between the bank and depositors or creditors, or expose the bank to high-risk settlements, or may generate instability within the bank or within the overall U.S. financial system [emphasis mine]. Eliminating the Volker Rule would eliminate restrictions on high-risk trading and speculative investments, which would again allow the Big Banks to play Big Casino with your money. But it includes not just the money from private depositors: it also includes money from pension funds, bond-holders, and the general funds of local and state governments.
All this becomes really important in light of how much exposure the Big Banks currently have in derivatives obligations.
Derivatives are financial contracts with values derived from the behavior of something else – interest rates, mortgages, precious metals and other commodities, etc. In the same way as home-buyers take on mortgage debt with a fractional down payment and a contractual promise of repayment, derivatives traders only need to put up a small amount of cash to take on a large amount of debt. Unlike a mortgage loan, however, for which the property itself serves as collateral, and can be repossessed in the event of default, one derivative contract can serve as collateral for another derivative contract, which can serve as collateral for yet another derivative contract, in an unending interconnected web of inter-collateralized debt obligation, or what financial writer Ellen Hodgson Brown calls a “Web of Debt“. The result is the creation of a massive structure of derivative contracts supported by a relatively small amount of real money. The worldwide nominal value – also known as the “face value” – of derivative contracts tripled in the five years leading up to the Crash of 2008, at which time it was around $600-700 trillion according to the Bank for International Settlements (BIS). Since then, the total value of the derivatives market has actually grown quite a bit larger. Estimates in 2015 put the notional value of all derivative investments at $1.2 quadrillion, or more than 10 times the total GDP of all the nations on earth that year.
More Scare Below the Fold