During “normal times” – an economic growth phase accompanied or generated by rising systemic leverage – central banks have incentive to promote nominal growth and inflation, which make banking systems profitable and their free-spending political overseers happy. In such times, commercial banks have fiduciary responsibilities to shareholders to constantly increase their market values, which they do by expanding their balance sheets. Now that economies are highly leveraged, extinguishing debt would require banks to reduce the sizes of their loan books, which would shrink their market values. Thus, it seems economic policy makers never have incentive to promote debt extinguishment in the banking system, regardless of economic conditions or prospects.
"Too Big To Fail Is A License For Recklessness" America's Banking System Is A "Fragile House Of Cards"Submitted by Tyler Durden on 05/01/2015 17:45 -0400
"Too Big to Fail is a license for recklessness. These institutions defy notions of fairness, accountability, and responsibility... They benefit from the upside and expose the rest of us to the downside of their decisions. These banks are too powerful politically as well... Effectively we're hostages because their failure would be so harmful. They're likely to be bailed out if their risks don't turn out well and the largest financial firms in America can hide an enormous amount of risk in derivatives which creates a house of cards — a very fragile system."
"One day while Sarao is busy trying to trick the U.S. stock market into falling, the market collapses, more sensationally than it has ever collapsed. And instead of digging some hole in Hounslow in which he might hide for a decade or so, or fleeing to Anguilla, where he has squirreled away his profits, he stays in his parents’ home and keeps right on spoofing the U.S. stock market -- and then is shocked when people turn up to accuse him of wrongdoing. He’s not some kind of exception to the standard operating procedure in finance. He’s a parody of it."
My advice to Ben Bernanke is simple. If you consider yourself a public servant, spend less time trying to concoct ways to defend your legacy, and spend more time on what you did that didn’t work, what can be learned from it, and what current policy makers can change and do better. Here is a theoretical title to a Bernanke blog post that I would like to read, but don’t think will ever get wrriten “Things I was wrong about, what I learned, and what the Fed should do differently going forward.”
With the Fed supposedly steeling itself at last to remove a little of its emergency ‘accommodation’, it has suddenly become fashionable to warn of the awful parallels with 1937 as an excuse The Fed must not act today. We strongly refute the analogy. Instead, the real Ghost of ’37 takes the form of mean-spirited and, counter-productive 'pitchfork populism' politics and the spectre should not be conjured up to excuse the central bank from further delaying its overdue embarkation on the long road back to normality and policy minimalism.
It matters not who is in charge of the Fed or what rules Congress may insist that it adopts. Once money printing, via fiat or fractional reserve credit creation, is seen to be both feasible, justified, and legal nothing and no one can stop it. The political pressure to fund government programs will be irresistible. Everyone knows that the Fed seemingly has the ability to solve their problem by monetizing the federal debt. Should it refuse to do so, we would see riots in the streets similar to what is happening in Europe as protesters target the European Central Bank. The only solution is to destroy the monster that makes it all possible, the Fed.
"Perhaps the central bankers and economists from all over the world should take a break from the theory and their focus on economic models and instead have a look at the real world and spend some time talking to Volcker in order to remember that deflation is not the disaster they imagine it to be."
With the bond market appearing ripe for a dramatic correction, many are wondering whether a crash could drag down markets for other long-term assets, such as housing and equities. Bond-market crashes have actually been relatively rare and mild. According to our model, long-term rates in the US should be even lower than they are now, because both inflation and short-term real interest rates are practically zero or negative. Even taking into account the impact of quantitative easing since 2008, long-term rates are higher than expected. Regarding the stock market and the housing market, there may well be a major downward correction someday. But it probably will have little to do with a bond-market crash.
Part I of this series provided what (for some) is a revelation: the absurd, $1 & $5 face-value on our legal tender, minted silver coins is not some totally arbitrary anomaly. Rather, it was a part of the strategy of the One Bank to pretend that its fraudulent paper currencies were not (and are not) losing value at a catastrophic rate.
One of the “mysteries” of our modern (i.e. fraudulent) precious metals markets is explaining the face-value of our gold and silver minted coins, meaning relating their nominal price to their actual value. The face-value on U.S./Canadian silver 1-oz coins is $1 and $5, and the face-value for our 1-oz gold coins is $50. For those investors (including this analyst) who began using precious metals as a vehicle for wealth-protection at a relatively late date; the face-value of these coins seems totally arbitrary.
Most Canadian readers (in particular) will be aware by now of an extremely important trial currently taking place, a lawsuit by a citizens’ action group against the Bank of Canada: COMER vs Bank of Canada. It is extremely important, both in specific and symbolic terms, which is precisely why the Corporate media has totally censored any/all coverage of this legal challenge, which goes to the very heart of the corruption of our current monetary system.
The monetary politburo has every reason to fear Rand Paul’s demand for a “policy audit” of the Fed. An honest one would show that its so-called “independence” has been monumentally abused in a manner which is deeply threatening to both political democracy and capitalist prosperity. Needless to say, we can’t have that audit soon enough. In short, what the nation really needs is not an “independent” Fed, but one that is shackled to a narrow and market-driven liquidity function. The rest of its current remit is nothing more than the self-serving aggrandizement of the apparatchiks who run it; and who have now managed to turn the nation’s vital money and capital markets into dangerous, unstable casinos, and the nations savers into indentured servants of a bloated and wasteful banking system.
There’s a fairly easy way to tell if a firm is a marketing firm or an investment firm. Do you see its advertising on buses, cabs and posters? Do they have a practically limitless range of funds? This is not to denigrate marketing firms entirely. But as the financial markets lurch between unprecedented bouts of bad policy, and achieve valuations that we strongly suspect are unlikely to persist, it may be worthwhile to consider the motives of the people charged with managing your money. Are they asset managers, or asset gatherers?
The old joke is "In America, you correct newspaper, but in Soviet Union, newspaper corrects you.” Switzerland is now experiencing the bond market equivalent.