Finance

There is a banking crisis. Again. Banking regulators were asleep at the switch. Again.

The present crisis is not a replay of 2007-08, which was centered around housing. In that crisis, lenders took on too much credit risk. Additionally, financial institutions relied on exotic financial products to protects, such as derivatives, to protect against risk. The products failed to do so. Lawmakers and regulators reacted by placing new constraints on credit risk.

Thomas Hoenig, former President of the Federal Reserve Bank of Kansas City and former Vice-Chairman of the FDIC, argues that “Another Banking Crisis was Predictable.” In response to the last banking crisis, the Fed’s risk models were focused on credit risk, while Silicon Valley Bank’s portfolio was heavily exposed to interest-rate (“duration”) risk. Once the Fed began hiking interest rates, the value of SVBs assets began falling.

There needs to be a safe place for businesses to place their reserves and working capital

There are five main causes of the SVB collapse and the subsequent knock-on problems facing the US and global financial system: the Federal Reserve’s anti-inflation obsession causing it to raise interest rates too high and too fast; the inherent fragility of banking which for centuries has periodically erupted in crises; inadequate regulation of this fragile system which often leads to high profits that accrue to bankers’ and their wealthy owners; the corruption and self-dealing that often result from banks’ insufficient supervision; and the lack of public alternatives for financial institutions and services that could perform many of the key functions of banking and finance with less risk and without the private financiers taking their cut. Some of the huge profits the financiers make from this system are funneled back to buy support from the politicians to prevent adequate regulation, and to secure bail-outs when the system crashes.

Morale hazard can turn into a darker ‘moral’ hazard

Our current banking crisis -- and our government’s responsibility for and response to it -- underscore risks facing citizens and taxpayers backing up our banking system.

Government programs like deposit insurance and the Fed’s role as lender of last resort have been sold as “stabilization” schemes. But we are learning again some unlearned lessons from the past. Those lessons relate to two of the most important words in finance -- moral hazard.

Insured parties may take more risk, once they are insured. This isn’t necessarily immoral, just rational behavior reacting to the fact that they have insurance.

But at some point, ‘morale’ hazard can become ‘moral’ hazard, particularly if depositors and other creditors of banks are protected by the government and the public purse. Protected parties and their friends in high places may become willfully blind to downside consequences imposed on others, and use the government as a vehicle for gain for well-connected insiders while losses are socialized.

In the following conversation, law and economics expert Walker Todd explains how a financialized system creates havoc and why it’s time to rethink banking

Over the last two weeks, you could hear rumblings under the global financial system as one large, ugly crack appeared after another. Soon everybody was bracing for an earthquake.

We have just witnessed the second and third biggest bank failures in American history, putting the health of the financial system on high alert. Events have sent global markets reeling with fears of fallout not seen since the 2008 financial crisis.

By Ellen Brown / Original to ScheerPost On Friday, March 10, Silicon Valley Bank (SVB) collapsed and was taken over by federal regulators. SVB was the 16th largest bank in the country and its bankruptcy was the second largest in U.S. history, following Washington Mutual in 2008. Despite its size, SVB was not a “systemically […]

The post Ellen Brown: The Looming Quadrillion Dollar Derivatives Tsunami  appeared first on scheerpost.com.

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How the Corporate Takeover of American Politics Began

The corporate takeover of American politics started with a man and a memo you’ve probably never heard of.

In 1971, the U.S. Chamber of Commerce asked Lewis Powell, a corporate attorney who would go on to become a Supreme Court justice, to draft a memo on the state of the country.

Powell’s memo argued that the American economic system was “under broad attack” from consumer, labor, and environmental groups.