Just imagine how angry the American public would be if they knew the whole story.
For months, we have listened to the whining from Wall Street. U.S. banks are having a record year, and they want to be paid a lot of money. Billions and billions of dollars.
Public indignation is deep. After all, over the past year, we have watched as hundreds of billions of dollars of public money has been poured into bank balance sheets. We have--we are assured--taken steps that were necessary to bring our financial system back from the brink. We may not have liked it, but we had no choice.
But now that we have stemmed the tide, now that the Great Panic of 2008 has abated, we have been forced to watch these same institutions moan about how bad they have it. Citigroup--the one that received $45 billion in taxpayer funds, plus a couple hundred billion extra in public underwriting of bad assets--wants to wipe the slate clean by paying the money back and calling it even. So they can pay themselves billions of dollars in bonuses.
Wells Fargo, the arriviste among the financial elite, is complaining about the competitive disadvantages that they face as a consequence of federal compensation constraints. Constraints that prevent them from paying themselves billions of dollars in bonuses.
Goldman Sachs--caught in a lie by a federal Inspector General who refuted Goldman's sanctimonious claim that even if the world had collapsed, they would have been fine--is trying to fend off accusations of unwarranted hubris and greed--which reached a pinnacle when they announced plans to pay themselves $21 billion in bonuses--by announcing that their senior partners will take their share of the billions in stock.
But what if the public understood the whole story? How is it that the banks are now having one of their most profitable years ever? Given that there is not much lending going on, and that the newly increased credit card fees have only just begun to flow into bank coffers, where is all that money coming from?
It is coming from proprietary trading. "Prop trading" is the kind of betting with the bank balance sheet that was made illegal for commercial banks back during the Great Depression, when the FDIC and deposit insurance was created. The price of having the federal government guarantee bank deposits was separating the lending and depositary functions of commercial banking from trading and risk activities of investment banking. Thus, in 1935, the commercial bank J.P. Morgan & Company was separated from the investment firm Morgan Stanley.
But this separation was undone in 1999 to facilitate the creation of the megabanks that we have today. However, while the Financial Services Modernization Act of 1999 ended the separation of activities, FDIC deposit insurance remained in place. And this year, the elite of the financial world--JP, Citi, Wells, BofA, Goldman and Morgan Stanley--have finally emerged for what they are: Gigantic hedge funds backed up by the full faith and credit of the United States of America. Wall Street bankers making big bets with our money, content in the knowledge that if they win their bets, they will pocket the cash. And if they lose, we will all pick up the mess.
But it really does get better. So exactly how did they make all that money this year?
Well, the trade of the moment has been the U.S. dollar carry trade. A foreign currency carry trade is simple in concept. Borrow money where interest rates are low, and invest where interest rates are high. Or simply stated: Short the U.S. dollar. Buy the currency of a country where interest rates are higher. The beauty part is that by continually assuring the world that U.S. interest rates will remain near zero for the foreseeable future, the Federal Reserve has assured traders that they can keep the trade in place for some time.
So the Wall Street elite, just months removed from their near-death experience, are now making a fortune shorting the U.S. dollar. One year ago, faced with the greatest financial panic in generations, the American people swallowed hard and bailed out the banks. Today, the banks have moved on, and are tearing down the currency of the nation that saved them.
But it is nothing personal. It is strictly business.
And the carry trade will work out fine. Until it doesn't. Then the trade will unwind quickly, and those who do not get out in time will get hurt badly.
But the banks are not worried. If the unwinding of what NYU economist Nouriel Roubini has labeled "the mother of all carry trades" takes a bank or two down with it, everything will be all right. Because the bank deposits are still insured, and we now know to an absolute certainty that if one of the elite institutions fails, we will bail it out. Again.
It is time that we come to grips with the depravity of the current situation, and potential damage that continuing down this path may yet do to the financial system and to our economy.
Our commercial banks are not, and should not be, hedge funds. U.S. dollar carry trades and writing credit default swaps are not core commercial banking functions. They are not necessary to the efficient functioning of our financial system.
The U.S. dollar carry trade is destructive to our currency, and is creating asset bubbles across the world, as leverage is transferred from our markets into others. For their part, credit default swaps serve no useful purpose in proportion to the systemic risks they create.
It is time to go back to basics. Commercial banks provide essential services in our economy. They enable the Fed to control the distribution and pricing of capital to the productive sectors of the economy. They provide secure depositary and asset management services.
Unfortunately, pending Congressional legislation has done nothing to address the central risks that the new financial landscape presents to our economy. Rather than reinstitute restrictions on bank activities or restrain institution size, Congress is looking to regulatory solutions that hold little promise of success when the next crisis emerges. And rather than recognizing the problem of moral hazard, this week Congress took the first step of embracing it in statute.
This year, Wall Street has shown its true colors, but the public has yet to understand the depth of the betrayal. It is not the continuing absence of lending, or jacking up credit card fees, or hiking consumer interest rates, or even the constant refrain of complaints about limitations on executive compensation. No, the greatest betrayal is that with the American economy as weak as it has been in years, with the dollar weakness threatening to unravel the international commitment to the role of the dollar as the reserve currency, Wall Street has shown no shame about attacking the currency of the nation that came to its aid.
If this is the path that the elite commercial banks have chosen, if they have been fully seduced by the lucre of trading, Congress needs to revisit the fundamental rules of the game, and revisit the central rationale for deposit insurance and the structure of the commercial banking system.
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The bankers do care what form of government, and they very much care who is in control. This is why some populists here urge throwing the bankers out of the window if they don't have the courage to jump on their own. Historically, the bankers have been boosters and have done some good things.
Nonetheless, I do agree that there's a whole lot of blame to go around for both parties. Glass-Steagal needs to be reinstated and the GLB legislation to be repealed. This won't answer all of the problems, but it would reinstitute some badly needed banking controls.
Of course, that'll get rejected as Republican, which won't get support from Republican sellouts.
A quick purge and giant house cleaning of all of the government regulations from top to bottom, White House to village court houses, which would find and remove all regulations and policies which impede efficiencies, cost containment, fairness and open competition is essential.
Today’s biggest profits are generated by operators dragging taxpayer dollars from government programs, or diminishing our savings, retirement, and investment money, through programs that financial firms manipulate to reward themselves.
We are floundering now because of an endless array of self inflicted wounds caused by unfair regulatory actions put in place by both Republicans and Democrats to favor those who can and will purchase advantages at the expense of those targeted to be exploited.
Using a carrot and stick, by offering amnesty for cooperation or pursuing prosecutions for lawbreakers who try to hide, would save tons of money and years of time investigating, which did what, and how they did it, while creating our melt down.
For everyone who confesses everything, embarrassment could be the limit of their punishment, let them keep their ill gotten gains, it would be a small price to pay if we could quickly get our country back.
A wartime effort to eliminate our enemies from within is critical.
(They really did, you know. I don't like to blame Bush for everything; but take the example of Enron looting California. You can find quotes where Bush and Cheney said that was "market forces.")
I don't like all that the current administration does, but there is a chance of the Clinton-like resumption, given time. Obama, too, is a smart guy with some feel for regular people since he was a community organizer working professionally on the behalf of society's less fortunate (all of us, now).
http://www.huffingtonpost.com/2009/12/08/china-executes-corrupt-tr_n_384809.html
What we need is a website dedicated to brainstorming ideas and ideas as to how to implement the best ideas. And I don't mean just on this debacle but rather on the whole mess the robber barons that run the USA have loosed on us.
Hey, this is not my area, but just wonder, why don't we organize something like a Y2K day to do a run on our local bank and pull out all our savings? We could call it Y2FU day. Would that get some attention? Maybe we could even convince a few of those Wall Street fat cats to jump out their 100th floor posh office windows holding tight to the neckties of a few screaming congressfolks.
Wouldn't that be a kick – I’ve got my withdrawal slip written out -- how about you?
But emptying savings accounts might begin to crumble their dung-made dike with no risk to us.
Yes, the People to revolt and take back our country: Maybe we should start with a pot of hot tar, a feather pillow, a rail, and one bug-eyed senator from Connecticut.
What is happening to our country??? More importantly...can our system be saved from the money interests and warped ideologies that pervert and dominate it, to the detriment of all??? We need strong LEADERSHIP desperately! Step up, O......NOW!