Bigger Isn't Better

It’s now been over a decade since the world’s major central banks reacted to the financial crisis with record-low interest rates and quantitative easing. Major central banks gave themselves a blank check with which to resurrect problematic banks; purchase government, mortgage, and corporate bonds; and in some cases -- as in Japan and Switzerland -- stocks, too. They have not had to explain to the public where those funds were going or why. Instead, their policies have inflated asset bubbles while coddling private banks and corporations under the guise of helping the real economy.

When money is cheap because interest rates are low or near zero, the beneficiaries are those with the most direct access to it. That means, of course, that the biggest banks, members of the Fed since its inception, get the largest chunks of fabricated money and pay the least amount of interest for it.  The biggest six U.S. banks have been rewarded with an endless supply of cheap money in bailouts and loans for their dangerous behavior. They have been given open access to these funds with no major consequences, and no rules on how they should utilize the Fed’s largess to them to help the real economy.

The zero interest rate and bond-buying central bank policies that prevailed in the U.S., Europe and Japan were part of a coordinated effort that has plastered over potential financial instability in the largest countries and in private banks. It has, in turn, created asset bubbles that could explode into an even greater crisis the next time around.  The risks posed by the largest of the private banks still exist, only now they’re even bigger than they were in 2007-2008 and operating in an arena of even more debt.

Today the big banks are bigger than ever and the amount of de‌bt in the system is larger than ever. There’s been no substantial reform since the financial crisis, just some cosmetic moves that have been passed off as major reform. The big banks are always ahead of the regulators.  It’s just one part of a system rigged in favor of Wall Street that has been deemed too big to fail. It’s a corrupt and incestuous system filled with perverse incentives and conflicts of interest.

-- Nomi Prins, The Daily Reckoning (Dec. 13 & 19, 2019) edited

liquidity to inflation

[T]he problems in the economy today are structural, not liquidity-related. Federal Reserve officials have of course misperceived the problem. The Fed is trying to solve structural problems with liquidity solutions. That will never work, but it might destroy confidence in the dollar in the process.

Fiat money can work but only if money issuance is rule-based and designed to maintain confidence. Today’s Fed has no rules and is on its way to destroying confidence. Based on present policy, a complete loss of confidence in the dollar and a global currency crisis is just a matter of time.

Consumer price inflation has remained persistently low, despite the Fed’s best efforts. This has led many people to ask where the inflation is, because the Fed has created trillions of dollars since the financial crisis.  But there has been inflation. It’s just been in assets like stocks, bonds, real estate, etc. The market’s back to record highs again, in case you haven’t heard.  The bottom line is, we’ve seen asset price inflation, and lots of it, too.

But the question everyone wants to know is when will we finally see consumer price inflation; when will all that money creation catch up at the grocery store and the gas pump?

-- Jim Rickards, The Daily Reckoning (Dec. 9, 2019)

bank regulation

The Board of Governors of the Federal Reserve System recently published their annual Supervision and Regulation Report which measures the financial condition of major U.S. banks, including loan growth and liquidity in the banking system.  Overall, 45% of U.S. banks with more than $100 billion in assets received a supervisory rating of “less than satisfactory.”  That’s not good. As we learned during the 2008 crisis, the stability of these large banks is essential to the health of our banking system.

Furthermore, this rating should not sit well with hardworking Americans who bailed out many banks during that last major crisis.  As bank lobbyists continuously push for more deregulation, it's prudent to remember what happened a decade ago with bank bailouts and a market crash.  We need more regulation, not less, if banks continue to receive less than a “C” grade on their report cards.

-- Nomi Prins, The Daily Reckoning (edited) (Dec. 7, 2019)