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A Masterpiece of Government Idiocy, or a Calculated Collapse?
The United States Approaches an Impending Financial Catastrophe of Unprecedented Magnitude, Surpassing the Devastation of 2008
There exist two primary paths that could potentially lead to a financial crisis in the United States. Given the significant financial dominance of the US and the intricate interconnections resulting from globalism—a decision widely regarded as a major error for humanity—such a crisis would have international repercussions.
One avenue to this crisis stems from the current policy of the Federal Reserve, which involves increasing interest rates. This approach follows numerous years of maintaining near-zero nominal interest rates, accompanied by negative real interest rates.
Throughout this extended period, financial institutions, including banks, accumulated various low-interest financial assets, such as bonds. However, when the central bank (Federal Reserve) raises interest rates, the value of these lower-yielding financial instruments declines. Consequently, the asset side of banks' balance sheets shrinks while their liabilities remain unaffected.
Hence, the current policy of the central bank is effectively driving banks towards the brink of insolvency. This unsettling situation arises when depositors come to the realization that their funds, particularly those exceeding $250,000, may face the risk of being frozen or lost. Such larger accounts are often held by corporations for payroll purposes or by certain individuals.
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In response to this realization, depositors start withdrawing their funds from the banks. However, the banks find themselves unable to meet these withdrawal demands due to two key reasons. Firstly, the value of their assets has significantly diminished compared to the deposits held, exacerbating the liquidity strain. Secondly, as the banks sell off these devalued assets to generate cash for withdrawals, the prices of these troubled assets plummet even further.
One example of the adverse impact of these circumstances is Silicon Valley Bank, which held a substantial portion of its assets in low-interest-rate US Treasury bonds. The value of these bonds nosedived due to the Federal Reserve's decision to raise interest rates. Another factor contributing to the predicament is the inclusion of cryptocurrency in the balance sheets of certain banks. The volatility inherent in cryptocurrencies renders them unsuitable for maintaining the stability of a bank's balance sheet, making these banks susceptible to financial turmoil.
To prevent the potential failure of US banks from triggering a widespread panic, a strategy was devised. It was announced that the central bank would inject sufficient cash into all banks to fulfill withdrawal requests, and furthermore, all deposits would be insured, surpassing the standard insured amount. This measure aimed to instill confidence and prevent a panic-driven run on the banking system.
Nevertheless, if the central bank persists in its approach of raising interest rates, more banks could find themselves teetering on the edge of insolvency. Central banks, like any other entity, are susceptible to making mistakes. A clear example of this can be seen in Europe, where Credit Suisse, a prominent international bank, faces significant challenges. Surprisingly, despite this precarious situation, the European Central Bank has announced an increase in interest rates earlier this year, which further compounds the risks faced by financial institutions.
The delicate balance between monetary policy decisions and the stability of the banking sector warrants careful consideration. The consequences of misguided actions by central banks have the potential to trigger cascading effects, jeopardizing the overall health of the financial system.
A banking crisis can be squarely attributed to the actions of the Federal Reserve. The central bank mistakenly perceives inflation as a monetary phenomenon, disregarding the fact that it is largely driven by supply disruptions resulting from the Covid lockdowns and Russian sanctions. By persistently raising interest rates, the Federal Reserve exacerbates supply problems by curbing production. In essence, the policy adopted by the Federal Reserve proves, yet again, to be counterproductive.
It has always bewildered me that Americans tend to seek solutions from government entities, despite the prevailing attribute of deliberate incompetence within the government.
Another concerning path that could potentially lead to a financial crisis in the United States lies in the vast amount of derivatives held by the country's five largest banks, which engage in international transactions. Recent reports indicate that these banks have a staggering $188 trillion worth of derivative exposure, surpassing their capital base by a significant margin. The true extent of risk associated with these derivatives remains unknown, but the sheer magnitude of the sum involved exceeds that of 2008, heightening the potential for an even more severe crisis. It takes only a single mistake by one bond trader within a large institution to trigger a crisis of considerable magnitude.
The derivative crisis of 2008, which gradually unfolded during 2006 and 2007, can be traced back to the repeal of the Glass-Steagall Act in 1999. This Act had effectively prevented financial crises for 66 years since its enactment in 1933. Proponents of the repeal argued that “financial markets are self-regulating and do not need regulators setting rules.” However, as events unfolded nine years later, it became evident that they were gravely mistaken.
The repeal of the Glass-Steagall Act removed important regulatory barriers and created an environment where the unchecked growth and complexity of derivatives could flourish. This lack of oversight and regulation eventually culminated in the 2008 financial crisis, which had far-reaching consequences for the global economy.
The proponents of deregulation failed to recognize the critical role that effective regulation and oversight play in safeguarding the stability of the financial system. The belief in the self-regulating nature of financial markets proved to be misguided and detrimental in practice, as evidenced by the subsequent crisis.
The current situation, with an even larger exposure to derivatives, raises concerns about the potential risks and vulnerabilities within the banking system. Although I generally oppose government regulation, the banking sector has consistently demonstrated its unreliability and lack of trustworthiness, necessitating regulation. Effective regulation and prudent oversight are apparently needed to prevent a repeat of past mistakes and to maintain the stability and integrity of the financial sector.
The need for a comprehensive understanding of the risks posed by derivatives and the implementation of robust regulatory frameworks has never been more pressing. By learning from the lessons of history and adopting prudent measures, policymakers and regulators can work towards mitigating the potential threats and protecting the economy from another devastating financial crisis—not that they actually want to.
The Glass-Steagall Act was implemented to establish a clear separation between commercial and investment banking activities. It aimed to ensure that commercial banks, which accepted deposits and provided loans based on those deposits, were not allowed to engage in high-risk and speculative endeavors like investment banks, which relied on the personal fortunes of their partners for capitalization. This separation safeguarded depositors' funds by preventing commercial banks from engaging in speculative activities.
However, the repeal of Glass-Steagall removed these restrictions and enabled commercial banks to utilize depositors' funds, rather than their own capital, to engage in investment banking activities. Consequently, large commercial banks, commonly referred to as “too big to fail,” amassed significant exposure to derivatives. Unfortunately, the risks associated with derivatives were not adequately understood by the banks, rating agencies, or regulators. Eventually, these risks culminated in the 2008 crisis, leading to taxpayer-funded bailouts of banks and a decade of low interest rate policies aimed at rebuilding banks' balance sheets.
The bailout following the financial crisis generated public discontent. As a response, the Dodd-Frank Act was introduced, although it was misrepresented by politicians, economists, and financial media as a solution to the issues arising from the Glass-Steagall repeal. However, Dodd-Frank did not address the core problems effectively; instead, it gave rise to a new dilemma. (Everything called “Frank” sucks for me, so no surprise there.)
The primary focus of the Dodd-Frank Act was to prevent taxpayer-funded bailouts. It aimed to implement a system of “bail-ins” wherein troubled banks would be allowed to rescue themselves by utilizing depositors' funds. Essentially, this meant that if a bank encountered difficulties, it could seize depositors' money to stabilize its financial position. Consequently, the Dodd-Frank Act inadvertently created a strong incentive for bank runs. Even if a bank was facing challenges that might not necessarily lead to its failure, depositors, unwilling to take any risks, would withdraw their funds, ultimately causing the bank to collapse.
The repeal of Glass-Steagall and the enactment of Dodd-Frank have created a situation where smaller, cautious banks investing in supposedly secure assets like US Treasury bonds are susceptible to bank runs. On the other hand, larger banks carrying massive derivative risks are just one misstep away from triggering a catastrophic collapse of the financial system. This crisis, along with the potential for future crises, is solely attributable to the misguided actions of the US government and economists, demonstrating a complete failure of intelligence.
This raises the question: Is this level of incompetence genuine, or is there a deliberate plot unfolding to intentionally dismantle the existing financial system and introduce central bank digital currency as a supposed solution? Are we witnessing a transition from the remnants of democracy and self-governance to an era of total tyranny? I think we all know the answer.
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