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Guest Post: Why the Fed Can't Stop Fueling The Shadow Bank Kiting Machine

Tyler Durden's picture


Submitted by Bill Frezza via Menckenism blog,

Fractional reserve banking is unlike most other businesses. It's not just because its product is money. It's because banks can manufacture their product out of thin air. Traditional commercial banks essentially create money through a well understood and time honored pyramiding of loans. Depositors who understand that their deposits are thereby placed at risk choose their banks accordingly.

Under the bygone rules of free market capitalism, only one thing kept banks from creating an infinite amount of money, and that was fear of failure. Failure occurs when depositors come to believe that their bank has lent out too much manufactured money to too many dodgy borrowers and may not be able to cover depositors’ withdrawals. When this happens, depositors rush to reclaim their money while there is still some left, leading to the bank’s collapse.

Under free market capitalism, banks compete along a spectrum of risk and reward. Conservative banks offer a higher degree of safety by maintaining larger reserves, thereby manufacturing and lending out less money. Through word and deed they let depositors know that they lend to only the most creditworthy borrowers, who generally must post valuable collateral. These banks remain profitable because they successfully attract prudent depositors willing to accept lower rates of interest.

Banks of a more speculative bent offer a lower degree of safety, maintaining smaller reserves to create and lend out more money. Seeking higher returns, they often lend to less creditworthy borrowers who may put up poor quality collateral or none at all. These banks attract risk-taking depositors looking for a higher rate of interest. They can be very profitable during periods of economic expansion but often fall into distress during economic downturns.

Periodic bank failures remind depositors of the connection between risk and reward. When caveat emptor rules, smart depositors who pay attention make money and dumb depositors who don't lose theirs.

Because the latter outcome is intolerable in a democracy, we have government-provided deposit insurance and other taxpayer-financed backstops that shield most depositors from the risk of loss. In theory banks pay premiums to fund this insurance. In practice these premiums are not risk-based. Banks are not penalized for making riskier loans, in turn often leaving the premiums too low to finance payouts. This creates a huge moral hazard, as it frees depositors to seek the highest return without regard for safety.

Worse, it removes conservative banks’ competitive advantage. Under a government-guaranteed deposit insurance regime, conservative bankers who want to stay in business must take on more risk in order to pay the higher interest rates necessary to attract depositors. This often sets off a race to the bottom, which results in periodic banking crises.

After each of these crises, politicians promise taxpayers that it will never happen again. And each time it does, the government creates a new set of labyrinthine regulations that attempt to mimic the business judgment of conservative bankers. Minimum reserve requirements are established, which normally become the maximum as there is little advantage in exceeding them. And both depositors and the bankers themselves become complacent about the banks’ investments because it is so easy to privatize gains and socialize losses.

Banks also learn that competitive advantage can be obtained by either gaming the regulations or having cronies write them. As regulations get more intrusive and complex, politicians discover that they can be used to advance social policies, such as increasing home ownership among voters with poor credit, thereby increasing the risk on banks’ loan books.

This mixed economic system is the one that replaced free market capitalism in hopes that it would prevent bank failures. Despite, and some even say because of, a regulatory regime that discouraged conservative banking and rewarded reckless mortgage lending, the banking system crashed - again - in 2007-2008.

What is not widely appreciated is that the ensuing government bailouts allowed an underlying shadow banking system to not only survive but grow even larger. It is called the shadow banking system because it operates outside most government-regulated banking laws. This is primarily because regulations and accounting standards haven’t caught up with the practices of these banks, which are relatively new and poorly understood.

It was the seizing up of the commercial paper and repo markets that funds the shadow banking system that abruptly halted the flow of liquidity that kept the mortgage bubble propped up. This revealed the underlying insolvency of Fannie Mae, Freddie Mac, and many commercial banks stuffed with subprime mortgage securities accumulated under the mixed economic system described above.

Powered by an exclusive club of primary reserve dealers, a group that once included high flyers like Lehman Brothers, MF Global, and Countrywide Securities, these shadow banks work hand in glove with the Federal Reserve to manufacture money by pyramiding loans atop the base money deposits held in their Federal Reserve accounts.

To the frustration of Keynesians, and despite an unprecedented Quantitative Easing (QE) by the Federal Reserve, conventional commercial banks have broken with custom and have amassed almost $2 trillion in excess reserves they are reluctant to lend as they scramble to digest all the bad loans still on their books. So most of the money manufactured today is actually being created by the shadow banks. But shadow banks do not generally make commercial loans. Rather, they use the money they manufacture to fund proprietary trading operations in repos and derivatives.

Where does the pyramiding come from if shadow banks aren’t making loans that get redeposited to fuel the cycle? Securities held as collateral by counterparties in a repo contract can be rehypothecated by the lender to obtain additional loans. (So can securities held in customer accounts, unless their brokerage agreements expressly prohibit it. This was an unwelcome discovery by MF Global’s hapless clients, who saw their assets whooshed off to London where different brokerage rules allow such hypothecation.) Loans made against securities held as collateral can then be used to either buy more securities, which can be fed back into the repo market, or trade a bewildering array of complex synthetic derivatives.

If this sounds like circular check kiting that’s because it is, especially when you add in the issuance of commercial paper required to grease the wheels. The biggest difference is that an embezzler kiting checks does not have the support of a central bank providing steady injections of liquidity, beefing up balance sheets that create confidence in their debt instruments.

How much of the original high quality collateral must shadow banks hold in reserve should some of their derivatives implode, as many did during the last crisis? Zero. By repeatedly spinning the wheel, the top 25 U.S. banks have piled up over $200 trillion  in leveraged bets atop a thinning wedge of collateral, claims to which are spread across an opaque and complex chain of counterparties residing in multiple legal jurisdictions. These collateral claims are co-mingled with an estimated $400 trillion to $1.3 quadrillion in notional outstanding derivatives made by other banks around the world, altogether amounting to more than 20 times global GDP.

Due to the fact that accounting standards have not kept up with these innovative practices, banks are not required to report the gross notional value of the outstanding derivative contracts on their books, only their net asset positions. These theoretical Value at Risk positions, which would only be netted out if all the contracts were unwound in an orderly manner—as one might unwind a check kiting scheme before getting caught—can only be realized in a liquidity crisis if the counterparty chains across which these contracts are hedged hold up.

These counterparty chains froze in spectacular fashion during the last financial crisis. After the collapse of Lehman Brothers and with the insolvency of AIG looming, a chorus of politicians, bankers, and bureaucrats browbeat the government into delivering a system-wide bailout. As a result, many reckless banks and bankers that should have been driven out of the market are back doing business as usual.

The largest banks learned that they need not worry about the possibility of bankruptcy. When the next crisis hits, all they have to do is shout “systemic collapse” and another bailout will appear. Being Too Big To Fail, they can maximize profits without having to hold reserves against the risk of counterparty failure, knowing that the taxpayer will always be there to make them whole.

The solution is not more regulations, which will never keep up with the financial wizards whose lobbyists end up writing these rules anyway. In addition, trades can be made anywhere in the world, so to be effective the regulations would have to be global. As long as governments continue to prop up failing banks, regulation will always be inadequate to mitigate the moral hazard that accompanies bailouts. And, ironically, the added costs of regulatory compliance will make it harder still for smaller and more prudent banks to compete.

True to form, Congress has not solved the TBTF problem but has actually made it worse, loading ever more regulations on commercial banks through Dodd-Frank. Meanwhile, taxpayer exposure to the banking system has grown even larger.

Optimists believe that as long as everyone remains calm and keeps believing everything is fine, then everything will be. Central planning advocates hope that the kiting scheme can be unwound by extending banking regulations to cover the shadow banks while the Fed somehow weans them off of Quantitative Easing. Cynics believe that asking Washington to get the situation under control is a hopeless quest, especially since few Congressmen have a clue what is really going on.

Meanwhile uncertainty hangs over the system since bankruptcy laws, which differ from country to country, have not kept up with hyper-hypothecation. Moreover, the government’s handling of the auto bailout shows that investors cannot rely on existing bankruptcy law even when it speaks clearly on an issue. Therefore, no one really knows who will have first dibs on the collateral when the music stops. And just what are those high quality assets? Sovereign bonds and mortgage CDOs, which are themselves subject to precipitous losses.

As the debate drags on and global economic conditions worsen, the growing pyramid is being kept afloat by the easy money policies of central banks too frightened to withdraw their support lest a stock market correction trigger a cascade of margin calls that brings down the whole system—much like last time.

All this money creation has not yet generated much visible consumer price inflation. This is partly because official inflation measures are suspect but mostly because the bulk of the new money being created is flowing into financial assets and not the consumer economy. This has inflated asset bubbles to levels impossible to justify based on underlying economic conditions, in particular the stock market where investors have fled in search of yield. No one knows when the bubble will pop, but when it does a donnybrook is going to break out over that thin wedge of collateral whose ownership is spread across counterparties around the world, each looking for relief from their own judges, politicians, bureaucrats, and taxpayers.

When that happens and the clamor for regulation, nationalization, confiscation, and demonization arises there is only one thing we can be sure of. The disaster will once again be blamed on a free market capitalism that has not existed in this country for over 100 years.


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Mon, 06/03/2013 - 18:03 | 3621646 Rakshas
Rakshas's picture


Mon, 06/03/2013 - 18:05 | 3621661 Rakshas
Rakshas's picture


Mon, 06/03/2013 - 18:17 | 3621701 flacon
flacon's picture

"Under the bygone rules of free market capitalism" --> Fractional reserve capitalism is the same as a virgin HOOKER. 

Mon, 06/03/2013 - 20:07 | 3621984 espirit
espirit's picture

Keynesian Economics my ass, this is full blown Kenyensian Economics.

Mon, 06/03/2013 - 22:23 | 3622417 Jreb
Jreb's picture

I logged in just to up arrow that comment.... well done. I am going to use it elsewhere... shoulda trade marked it.

Mon, 06/03/2013 - 18:03 | 3621652 neidermeyer
neidermeyer's picture

I can see why we can't leave fractional reserve banking ,, the problem is that the reserves/assets are not accounted for properly ... The favorite scam back in the S&L crisis was for S&L "A" to trade worthless stock certs to S&L "B" and "B" to sell worthless certificates to "A" and both of them would book the asset at a huge valuation ... we have that same problem today ...


I have a SIMPLE solution ... get the watchdogs to DO THEIR JOB... AUDITS every year at a minimum ... what do they think .. we pay them to cruise or something?

Mon, 06/03/2013 - 18:12 | 3621687 Rakshas
Rakshas's picture

I have never understood the valuation of fiction or in this case confidence, but i really miss the days when a Confidence (person) was reviled rather than revered - how did it all come to this.........

At least Jesus got to boot fuck the money changers out of the temple, now western society just drops to thier knees and ....... fuck it I'm moving to thailand with farber

Mon, 06/03/2013 - 19:19 | 3621855 DaddyO
DaddyO's picture

Raj, is that you?


Mon, 06/03/2013 - 18:18 | 3621712 New_Meat
New_Meat's picture

"hat do they think .. we pay them to cruise or something?"

Why, that is an easy one: "YES"

Mon, 06/03/2013 - 18:40 | 3621763 Melin
Melin's picture

"...get the watchdogs to do their job..."

At some point you'll realize the "watchdogs" are doing their job, as "watchdogging" is merely a works program.  What will you then screech for?  Oh, I know.  You'll cry out for another layer of tax payer funded watchdoggery, right? 


Mon, 06/03/2013 - 21:00 | 3622075 New World Chaos
New World Chaos's picture

Yes, more watchdogs are a mental can kick to help DailyKos types maintain their faith in the system. 

"We are, yet again, just one more regulatory agency short of bureaucratic-collectivist Nirvana!"

"We just need to get the right people (i.e. our people) in there, and they will be incorruptible!"

"Give the new agencies time!  Obama is a great being of Light, and he is playing 11-dimensional chess.  Listen to his speeches.  He obviously cares!"

Watchdogs are also there to watch the little people and punish them if they compete with the big corporations that buy the laws.  Even if the big guys didn't end up running the watchdogs they would still want more, because competitors who can't afford legal compliance departments will be driven out of business.

Tue, 06/04/2013 - 06:54 | 3622890 August
August's picture

Truly, he IS a great being of Light. 

If Heaven smiles upon our nation, Obama will be our leader for many, many years to come, as is the ancient custom among our African ancestors. Kumbaya.

Mon, 06/03/2013 - 18:06 | 3621669 kchrisc
kchrisc's picture

Off topic, but check this out:

Illinois is so broke, "how broke are they?!" (Couldn't resist) Roseland Community Hospital is threatening to stop taking new patients on Wednesday unless the state pays up money the hospital says it’s owed. ($6 million)

Gov. Pat Quinn’s office said the state has advanced all of this year’s payments to the Far South Side hospital and has tried working with Roseland to create a viability plan, a spokeswoman said.

Illinois is so broke that they sound like a debtor talking to a collector. LOL

Mon, 06/03/2013 - 18:50 | 3621783 Ness.
Ness.'s picture

This isn't going to help.

Fitch Downgrades Illinois, Drowing in Pensions

Fitch said that the state’s long-term liabilities are very high. As of the June 30, 2012 actuarial valuation, the unfunded actuarial accrued liability was reported at $94.6 billion and that generated a 40.4% reported funded ratio

Mon, 06/03/2013 - 19:24 | 3621870 kchrisc
kchrisc's picture

I have been following the pension thing with amusement.

It is so bad that none of the current pols and crats want to actually do anything about the pension mess that might have their name become associated with it.

That's bad.

My bet is that Illinois will be the first state to "go under," de facto and otherwise.

Mon, 06/03/2013 - 19:25 | 3621872 ebworthen
ebworthen's picture

Anyone showing up in the emergency room will be treated.

Illegal, bankrupt, no assets get the best deal.


Mon, 06/03/2013 - 21:59 | 3622339 SafelyGraze
SafelyGraze's picture

what they need is an affordable care act



Mon, 06/03/2013 - 18:07 | 3621671 disabledvet
disabledvet's picture (sounds pretty good on computer speakers actually. normally these things are total shit.)

Mon, 06/03/2013 - 18:09 | 3621678 disabledvet
disabledvet's picture

here's the visual... quality bongo's going on there too.

Mon, 06/03/2013 - 18:12 | 3621690 disabledvet
disabledvet's picture

and here's another perfectly good kid pissing off dad again. Billy's what kids do. it's not your fault. it's just kids.

Mon, 06/03/2013 - 18:13 | 3621694 disabledvet
disabledvet's picture

just tell her "no helicopter. no private planes."

Mon, 06/03/2013 - 18:23 | 3621724 New_Meat
New_Meat's picture

dude, u b talkin' to u-sef.  u can do the "edit" thingie, until some little piglet comes along and breaks the chain.


- Ned

Mon, 06/03/2013 - 22:13 | 3622368 SafelyGraze
SafelyGraze's picture

SEC/DOJ entrance examination:

question 1: read the examples on the check kiting page

what evidence of fraud do you find?

(correct answer: "none, if the entity is a financial institution")

question 2: deficit spending = checks from the UST based on the expectation of future funds from income tax receipts to cover the payments

explain how this is different from check kiting

Mon, 06/03/2013 - 18:10 | 3621677 Colonel Klink
Colonel Klink's picture

Wow I read the T in kiting as a K.  I've been reading too much criminal ponzi stuff.

Mon, 06/03/2013 - 18:49 | 3621775 machineh
machineh's picture

... or maybe reading the US attendee list at the Bilderberg meeting.


Mon, 06/03/2013 - 18:16 | 3621692 LetThemEatRand
LetThemEatRand's picture

"When caveat emptor rules, smart depositors who pay attention make money and dumb depositors who don't lose theirs."

The problem with this hypothesis is that in a true free market, "smart depositors" in this scenario will generally include mostly those with influence and access to insider information.   They know which banks have the best investment portfolio because they have access the average person does not.  The average person with no insider connections who wants to put her $75K life savings into a "safe" savings account has no way to determine if bank A, B, or C has a better porfolio of risk.  So if she picks wrong through no fault of her own, she loses everything.    The better solution is not to dismantle all regulations and government protections. It is to get rid of the rampant crony capitalism and replace it with a balanced system of free market with meaningful but minimal regulations and protections.

Mon, 06/03/2013 - 18:18 | 3621713 Oldwood
Oldwood's picture

You feeling OK? I always took you as more of a couped chicken than the free range variety such as myself.

Mon, 06/03/2013 - 18:19 | 3621715 fonzannoon
fonzannoon's picture

LTER we are so far past the point of reasoned debate it's not even funny. Other things have to happen first. Most of them unpleasant.

Mon, 06/03/2013 - 19:29 | 3621884 smlbizman
smlbizman's picture

has anyone seen francis_ lately? would really be bothersome if he was suicided...lets face it, there is absolutely nothing that comes close to being on the up and up.....which brings us to 0 hedge....i like to trick myself into believing that we are in fightclub, but i know better....however i do expect a higher level of integrity....and if you are man enough to be here, than you are man enough to tolerate any and all comments.....if anyone here "reports" comments, than you need to go....if its the hands on the machine that decide   the "francis_ 's are not welcome....than that means the hedge for all of the good it does is no different than any other untrustworthy source......if they feel the need to exspell someone than i think i want an explanation of why, at that point at least i can decide if the hedge had a point...

Mon, 06/03/2013 - 19:37 | 3621915 fonzannoon
fonzannoon's picture

I saw him on here several times today.

Mon, 06/03/2013 - 19:37 | 3621916 dick cheneys ghost
dick cheneys ghost's picture

the ZH comment section sucks without ~francis_saywer~


Mon, 06/03/2013 - 18:35 | 3621754 daxtonbrown
daxtonbrown's picture

So even a dumb Grandma should be smart enough to spread the risk over a few banks. A few failures and everyone would know this.

Mon, 06/03/2013 - 18:54 | 3621799 andrewp111
andrewp111's picture

Or to use Treasury Direct. then there is no risk of loss at all.

Mon, 06/03/2013 - 18:52 | 3621789 Nue
Nue's picture

The average depostiors has been losing their money for 90 years now through REAL Inflation and loss of purchasing power. The Smart money all own hedgefunds and High Frequency Trading computers.

Mon, 06/03/2013 - 19:27 | 3621880 FreeMktFisherMN
FreeMktFisherMN's picture

Yes, that person actually does have means to verify the trustworthiness of the institution: it's called reputation, and this can be made known through friends' experiences or the inevitable ratings agencies/Yelp-like entities. Nobody would put up with the fraud. Mattresses would be the default unless an institution is truly proven worthy, has insurance to cover losses, etc.

Free markets are always providing alternatives. 

Mon, 06/03/2013 - 19:30 | 3621893 FreeMktFisherMN
FreeMktFisherMN's picture

I would't want an institution storing my gold speculating anyway. And I think you underestimate how, when it is caveat emptor, people really take seriously trustworthiness. In my great grandfather's house after he had passed on we found tons of cash literally in bricks in the wall and all throughout the house. He had had bad experience in the Depression. But as you can see people respond, and obviously guarding one's money is about as high a priority as anything, so people wouldn't be so careless. Unlike now where .gov FDIC means people don't care; it is abdication of personal responsibility, and all these 'safeguards' cost money, too you know, to pay for bureaucrats who implement them, and also considering how bad .gov is at managing anything. 

Mon, 06/03/2013 - 21:05 | 3622129 shovelhead
shovelhead's picture

They'll care when they find out there's no 'I' in FDIC

Mon, 06/03/2013 - 23:33 | 3622577 jimijon
jimijon's picture

Socialocracy can address this spectacularly.

Mon, 06/03/2013 - 18:13 | 3621697 Oldwood
Oldwood's picture

So are you saying our economy and banking system are NOT sustainable? Does anyone else know?

Mon, 06/03/2013 - 18:17 | 3621707 fonzannoon
fonzannoon's picture

Everyone knows. But the thing is that Adam guy on American idol said "I hate this country" last week so we need to deal with that first. Then Angelina's tits.

Mon, 06/03/2013 - 18:23 | 3621725 Oldwood
Oldwood's picture

He likely just had his little panties in a wad, but Angelina should at least publish some nude photos before she loses them, so the world can mentally fondle them in remembrance. But hell she will probably get new ones even better. As far as I can tell most women in the public eye are faking it one way or another. She's probably making a smart move for her health and her publicist.

Mon, 06/03/2013 - 18:16 | 3621702 Schmuck Raker
Schmuck Raker's picture

Good article. Thanks.

Mon, 06/03/2013 - 20:58 | 3622112 dryam
dryam's picture

This article is absolutely spot on.

Mon, 06/03/2013 - 18:17 | 3621708 jmc8888
jmc8888's picture

Glass-Steagall separates the deposits from the derivatives, which then allows countries to let the worthless bets collapse under their own weight. 

If deposits aren't risked there is no reason for bailouts either. Afterall it's the fear of an FDIC payout that was the hostage Wall Street held over Washington like a sword of Damocles.

Now we're at the point where they want to (and in Cyprus and Spain already have) use deposits to bail-in the derivatives.

Dodd-Frank puts derivatives senior to everything else.   Bail-ins will be used to prop up the worthless derivatives bets.  All under the guise of market stabiliteeeeeee.


So yes, the answer is legislation. 

The same simple legislation that worked for about 66 years, and would stop the madness in its tracks.


No need for bailouts.

No need for bail-ins.

No need for QE to keep the faltering products from taking out a link in the counterparty chain.

Allow money for the physical economy, not loot and plunder everything for worthless derivatives.

It's always been about Glass-Steagall


Mon, 06/03/2013 - 18:25 | 3621729 Oldwood
Oldwood's picture

No, its always been about theft.

Mon, 06/03/2013 - 18:52 | 3621788 oddjob
oddjob's picture

Sounds like somebody wants to give Fiat an umpteenth do over.

Mon, 06/03/2013 - 19:22 | 3621861 ebworthen
ebworthen's picture


Re-instate legislation that was enacted to address the wanton excesses of the 1929 crash?

Heresy!  You speak heresy!  The Ponzi must continue!  The spice must flow!  The heroin must be supplied to the "investment" banks!

Mon, 06/03/2013 - 20:05 | 3621971 Kirk2NCC1701
Kirk2NCC1701's picture

Isn't it interesting how Texas keeps cropping up when topics like S&L Crisis, the repeal of the Glass Staegall Act (Phil Gramm, R-TX) come up?  Wasn't some 'penis sucker'* from TX also involved way back in 1913, to get the Fed established?  Col. Ed Mandell House**, if I recall correctly.

Deregulation and playing it fast & loose... "look, just 'trust' the big boys to do the right thing, bubba". /sarc

Or how Texas comes to mind in a word-association game, with names like Enron, death sentences, Bush, Daley Plaza, Koresh, Tom Delay, Waco, W, ...

What is it about that state?  Can't possibly be anything in its (business or political) culture.  Must be a big-state, power-state thing -- like CA or NY, no doubt.  Else Iowa, North Dakota or Oregon would have its share of infamy.  :-)

Is it "ok" to ask, or do you get shot down for that also? /s

* pejorative reference to someone who is prepared to do menial and unpleasant acts for someone in power?


Mon, 06/03/2013 - 20:29 | 3622039 Cthonic
Cthonic's picture

Old money, oil money.

Mon, 06/03/2013 - 20:17 | 3621993 BigJim
BigJim's picture

Glass Steagal was better than nothing, but when our monetary system lost all link to gold - the only real restraining factor - it was off to the races. Look at a graphs of the money supply - Glass Steagal was repealed in 1999, but M2 and M3 starting accelerating after 1971 after Nixon ended Bretton Woods.

Even if Glass Steagal were reinstated, the existence of government-backed deposit insurance would ensure the kiting would continue. As the article points out, if all bets are covered by the government, it's business suicide not to take greater and greater risks with depositors' cash because your competitors will be doing it (knowng they'll get bailed out if it all goes to hell) and the higher interest they'll be offering will take away your depositors, who no longer have to take any notice of the risk their bank is taking.

Mon, 06/03/2013 - 18:41 | 3621765 max2205
max2205's picture

Electronic failure of money on an epic scale.  

The crash will take about 10 minutes world wide


2150:  just why did those people have money in a bankl

Mon, 06/03/2013 - 19:10 | 3621835 sschu
sschu's picture

All the "money" will be gone so fast you will not have a chance.  In the end it will be about possession, who has what "money" is left will never give it up.  Take me to court they will say.  Yea sure.

I tell this to my friends and they think I am crazy.  They cannot imagine their precious 401K going to zero in a few minutes.  The lessons of Lehman have been studied by the Wall Street gangsters, they know what will happen.  

When it blows up, there is going to be some very unhappy people.  Such is life. 


Mon, 06/03/2013 - 19:27 | 3621881 kchrisc
kchrisc's picture

"...and it's gone!"

Tue, 06/04/2013 - 00:05 | 3622636 Vooter
Vooter's picture

"When it blows up, there is going to be some very unhappy people. Such is life."

Yeah, and it won't just be the people who lose their money who are going to be very unhappy...

Tue, 06/04/2013 - 10:02 | 3623319 Pseudo Calm
Pseudo Calm's picture

"Such is life" - a quote by an iconic Aussie while about to be hung for an illegal pollice search, robbing banks, shooting back at his opressors and trying to change the system to a republic.  I think this spirit has been lost a little in these parts - now banks rob us and who gets hung? - people are kept to ocupied to notice the enslavment by subversion.


Mon, 06/03/2013 - 18:52 | 3621791 andrewp111
andrewp111's picture

This is wrong:

To the frustration of Keynesians, and despite an unprecedented Quantitative Easing (QE) by the Federal Reserve, conventional commercial banks have broken with custom and have amassed almost $2 trillion in excess reserves they are reluctant to lend as they scramble to digest all the bad loans still on their books.

QE creates bank reserves. Even if a bank decides to get rid of its reserves by increasing lending, the money will end up on the books of some other bank when the money gets deposited. Total reserves in the system remain unchanged. It can't leave the system except as FRN's (cash). Only the Fed can drain excess reserves. That's it.  The frustration is not that excess reserves remain high, but that the velocity of money is very low.

Mon, 06/03/2013 - 19:19 | 3621853 ebworthen
ebworthen's picture

Keep going...

...your thought is only 1/3 formed.

Mon, 06/03/2013 - 21:41 | 3622271 Urban Redneck
Urban Redneck's picture

There is also VELOCITY OF COLLATERAL to consider in the shadow banking system...

Should be required reading...

BIS - Asset encumbrance, financial reform and the demand for collateral assets

IMF - Shadow Banking: Economics and Policy


Mon, 06/03/2013 - 22:58 | 3622502 css1971
css1971's picture

I think the key word is "excess".

Mon, 06/03/2013 - 18:52 | 3621792 Kirk2NCC1701
Kirk2NCC1701's picture

Seems that Barnie Frank did plenty of fagging for the big banks.

Mon, 06/03/2013 - 19:18 | 3621850 ebworthen
ebworthen's picture

Central Banks are the enabler's of their heroin addicted bank children in a dysfunctional vortex that pummels responsible individuals while rewarding mammon lusting institutions and gamblers.

Mon, 06/03/2013 - 19:21 | 3621859 buzzsaw99
buzzsaw99's picture

This is all such not a problem. there are no derivatives, there is only the bernank.

Mon, 06/03/2013 - 19:45 | 3621936 Cthonic
Cthonic's picture

And he too shall pass.  Honorary knighthood in store for him as well?

Mon, 06/03/2013 - 19:50 | 3621944 buzzsaw99
buzzsaw99's picture

Rule #1: The big banks win.

Rule #2: If the big banks don't win refer to Rule #1.

Mon, 06/03/2013 - 19:57 | 3621955 Tombstone
Tombstone's picture

Did we really think the Kommies would act like free market capitalists? They never have in Russia or China.  So why would they in Amerika?

Mon, 06/03/2013 - 19:57 | 3621957 RaceToTheBottom
RaceToTheBottom's picture

This is a very accurate article

Especially the parts about how Accounting has failed and even become very much weaker

Mon, 06/03/2013 - 19:58 | 3621960 newworldorder
newworldorder's picture

"Optimists believe that as long as everyone remains calm and keeps believing everything is fine, then everything will be. Central planning advocates hope that the kiting scheme can be unwound by extending banking regulations to cover the shadow banks while the Fed somehow weans them off of Quantitative Easing. Cynics believe that asking Washington to get the situation under control is a hopeless quest, especially since few Congressmen have a clue what is really going on."

You did not analyse the failure of Congress to play the role of the responsible adult. Why? Could it be that the same shadow banking system provides Congress with the ability to fund all its pet projects, foreign aid, world wide military commitments, pay interest on the national debt, fund current social programs and make up any revenue shortfall from taxation?

Under the concept of "hear no elvil, see no evil, speak no evil," the US Government has been co-opted by the current bankster run system. Governments unlimited ability to fund its operations beyond its taxing ability is the ultimate moral hazard. It is the ultimate corruption of the political system. There is nothing that can survive this corruption.

Mon, 06/03/2013 - 20:01 | 3621965 John Law Lives
John Law Lives's picture

In the same vein, here is the P-A-T-H-E-T-I-C financial news headline of the day:

Wall Street ends up on optimism Fed stimulus to remain
Reuters – Thu, May 30, 2013



Mon, 06/03/2013 - 20:51 | 3622088 1C3-N1N3
1C3-N1N3's picture

TBTF are nothing more than a gaggle of trailer-trash single moms kiting amongst themselves to keep their balances afloat until they can each find a new working man (or three, or millions) to phlebotomize.

Heads up, TBTF. The remaining working men have seen what you've done. And we've seen your loud, bratty little hellions on CNBC. We won't be having any of that. Your future suitors will be few, far between, and foolish.

Mon, 06/03/2013 - 21:13 | 3622162 MrBoompi
MrBoompi's picture

I disagree we don't need new regulations. We need to make it illegal to use depositor money to fund proprietary speculative bets. We need to make it illegal for pure speculators, parties that don't produce or consume commodities, to speculate in commodity markets. In short, we need to go back to the regulatory structure that existed before the bankers bought off Congress and began to do their bidding. Then we need to pass a law that protects innocent taxpayers from derivatives. The problem is not about traditional deposit and lending banking. The problem is failure to protect it.

Mon, 06/03/2013 - 21:43 | 3622282 RMolineaux
RMolineaux's picture

Good post.  I agree all.  It would also be nice if the regulators started enforcing existing law and regulation.

Mon, 06/03/2013 - 22:52 | 3622482 css1971
css1971's picture

It would be nice if a larger proportion of the population had a fucking clue what a bank is. They've been spectacularly good at obfuscating how they really work.

Then we'd get less stupid legislation and regulation which can't possibly work.

Mon, 06/03/2013 - 22:49 | 3622471 css1971
css1971's picture

Depositor money IS banker's money.

When you put money in to a bank account. You are investing in that bank. You are just a creditor. The bank owes you the amount recorded. The money in the account is NOT THERE and still wouldn't be your money even if it was there.

Do you still hold your position now your misconceptions have been challenged?

Mon, 06/03/2013 - 21:40 | 3622270 RMolineaux
RMolineaux's picture

Frezza is mistaken in asserting that only fear of collapse has kept the commercial banking system from expanding the money supply indefinitly.  Reserve requirements and capital limitations have been the usual mechanism for restraining the expansion of credit by the commercial banks.  Fed intervention has, of course, expanded deposits at the commercial banks as well as paying interest (for the first time) on their excess reserves at the Fed--a double gift to malefactors.

Tue, 06/04/2013 - 00:34 | 3622672 One World Mafia
One World Mafia's picture

Is this to say securities in a cash account at, eg Ameritrade, can be used as collateral? What if you convert your electronic shares to paper and ditch the brokerage?

Tue, 06/04/2013 - 00:52 | 3622695 snblitz
snblitz's picture

I want to give this article a 6

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