So what would Paul Revere warn us were he to time travel to the United States today? There is no apparent threat of foreign invasion but there are still dire warnings you should heed. Mr.Revere would likely storm through the cities exclaiming “The bail-ins are coming! The bail-ins are coming!”
Have you ever wondered why your cash in a bank account is expected to generate interest? This is because the depositor is entering into a partnership with the bank. As a depositor you are nothing more than an unsecured creditor. The bank uses the deposits to build reserves or base money which allows it to grow the money supply and create more loans. This system of banking is known as fractional reserve banking. In an easy to understand example, let’s pretend the bank hold’s 10% of the reserves on hand, even though it’s normally much lower than that. If you deposit $1000 dollars in the bank, the bank will hold $100 as reserves in their vaults and can create another loan for $900. So the next person who has received this loan either puts it in a bank (probably the same bank and further growing that bank’s reserves), or they spend it. If they spend it at a business the money will likely return to the banking system again. So, let’s say the $900 finds its way into a bank. The bank which has this $900 deposit then turns around and creates another loan for $810, holding $90 as it’s 10% reserve. That $810 winds up in the banks again and this time another loan goes out for $729 with $81 on reserve.This cycle can keep going and increases the money supply many times over. Since the bank only holds a minor fraction ( normally 3% in the U.S. and U.K. but in some cases even less) of the actual cash that should be on deposit, it would create a problem were all the depositors to request their funds at once.(A-A). Many critics view the fractional reserve banking system as a Ponzi scheme because when new money is created, it is only enough to pay back the loan but not the interest. This means, if all the loans were paid back at once then there wouldn’t be the cash available to cover the interest and another loan would be needed to pay the interest. In effect, a never ending snowball of debt, ever growing.
The way banks profit is that they give long term loans generating higher interest rates than the interest rate they pay their depositors. The bank borrows your money as a short term loan at a low interest rate while generating a loan to someone else at a higher long term rate. In a normal healthy market, the short term interest rate may be around 2-3 % and a long term loan would yield around 5-6%. So the bank could pay the depositor 3% interest while charging a lender 6%, getting to keep the spread as profit.
Today’s financial markets are not healthy. This is reflected in the extremely low, near zero interest rates the banks offer depositors. Low interest rates reflect weakness in the financial system. Normally due to a low demand for loans or widespread inability of the public to qualify for them. Additionally, as the depositor is the creditor to the bank, should the bank go under, the depositors cash is at risk. Sure, there is the FDIC(Federal Deposit Insurance Corporation), but the funds at the FDIC are minuscule as to the actual amount of cash at risk. Recently the FDIC has increased the insured amount from $100,000 to $250,000, but this only provides the illusion that depositors will be covered in the instance of a financial crisis. To shed some perspective on this, the FDIC as of 2008, held around $52.4 billion in funds available to cover some $4.29 trillion in insured deposits. By law the FDIC is only mandated to hold a balance equal to or greater than 1.15 % of it’s exposure to insured deposits and has maintained levels around that amount.(A).In a real crisis the FDIC would just be a drop in the bucket.
The world’s debt was one of the root causes of the last financial crisis. In an attempt to stimulate the economies of the world, governments have borrowed and spent, while central banks have fueled the debt thru money printing. World debt has increased some 40 percent( from 70 trillion to 100 trillion) since 2008.(B). The solution by world leaders to too much debt has been more debt. It’s akin to an alcoholic drinking to deal with the problem that he drinks too much. Add to this the high stakes derivatives trading by the banks and it’s easy to see why your money isn’t safe in a bank.The last financial crisis was due to a combination of derivatives trading and a vastly over leveraged debt to GDP ratio world wide.
This time, when things get ugly, the threat is more than likely a bail-in rather than a bail-out. Governments and bankers have been preparing for the next crisis for some time now. They know the fundamental problems from the last crisis haven’t been addressed. On November 15-16th of this year, the G-20 summit in Brisbane Australia, leaders of the world promised no more bank bail-outs.(C). What they didn’t tell the public is that there won’t be bail-outs because there will instead be bail-ins (If you’re unfamiliar with what a “bail-in” is, just do a google search of “bail-in” and “Cyprus” to find it’s meaning).
In preparation for the coming crisis, the G- 20 nations created the Financial Stability Board, or FSB.(D). The FSB was created with the purpose of guiding and instructing the member nations on economic policy and cooperation, to help make a concerted plan to deal with the various economic issues – such as bank insolvency and government debt. The G-20 meets annually now, and pretty much rubber stamps any recommendations by the FSB at the expense of their citizens in order to prop up the banks. The Board’s current chairman is Mark Carney, also currently the governor of The Bank of England (England’s version of The Federal Reserve).(E). Before the meeting, Carney wrote a letter addressed to the G-20 leaders, revealing The FSB’s proposals for the group.
Some notable sections of the FSB letter to the G-20 leaders will be detailed. (F).
Under part 2 of the letter titled “ENDING TOO BIG TO FAIL” it is written:
“The first agreement is a proposal for a common international standard on the total loss absorbing capacity that globally systemic banks must have. It will ensure that shareholders and creditors who benefit in the normal course of business also absorb losses when banks fail.”
This first excerpt is the proposal that there be international standards in place for creditors of banks(I.E. the general public) to take the losses in the event of a banking failure. The letter continues.
“The second is an industry agreement to overcome the lack of a global framework to prevent cross-border counterparties taking their money before others when a bank needs to be resolved.”
As for what this means, they are again suggesting there be a framework for preventing bank runs (they term as “ cross-border counter parties taking their money before others”). They intentionally obfuscate the language used, but a bank that needs to be resolved means that the bank is, well, bankrupt.
“Going forward, the support of Leaders is needed to deliver national implementation of resolution regimes and standards for banks; to empower national authorities to work with counterparts in other countries to agree and execute plans to resolve individual banks; and to end Too Big To Fail outside the banking sector.”
So the FSB is suggesting the nations of the world coordinate to protect the banking sector. It is also worth noting the language in that last sentence stating “to end Too Big To Fail outside of the banking sector.” What does that mean? How do they plan to end TBTF outside of the banking sector rather than within it? While the claimed goal is ending TBTF, it really seems they’re just further enabling TBTF’s continued existence.
The letter by Carney is followed by an “Implementation Progress Dashboard” written two days later. Here, we find some of the most unearthing language of all. Again under the TBTF section, part 3 it is written -
“Most members have not yet adopted bail-in powers or mechanisms to give effect to foreign resolution actions, and fewer than half of FSB jurisdictions have adopted recovery and resolution planning for all systemic domestically incorporated banks.”
So it is noted that as of now, most of the members have not yet implemented bail-in powers to “resolve” the failing banks. The key word being “yet”. Once the G-20 summit had concluded the members agreed to resolutions allowing depositors money to be collateral in a banking failure and promised no more government bail-outs.
Some members have already adopted bail in powers. For example Canada already has such laws on the books and even had it’s credit downgraded by credit rating agency Moody’s upon legislating their bail-in regime. Worth noting is that Canada passed the law by sneaking it into their 2013 omnibus spending bill.(G). It’s easier for the government to hijack the budget with such provisions than to hold a public debate letting it’s citizens know it’s real plans.
Interestingly enough, more sneaky legislation has passed another country’s omnibus spending bill. This time it was the U.S. budget deal for fiscal year 2015. They have removed the teeth in the dodd-frank act that was established in light of the 2008 financial crisis which prohibited banks from using depositor money to gamble in derivatives trading. Now commercial banks will be once again performing commodity swaps and trading. (H). This allows the banks to socialize their losses and pass them on to the depositor when (not if) there is a loss of significant magnitude, while at the same time any profits made will stay with the bank. Since the banks aren’t lending as much these days, gambling with depositor funds will be the new way to get rich.
What’s worse is that the amount of money trading in derivatives is many multiples of the cash on deposit, so a considerable enough loss can easily wipe out a bank. According to Forbes magazine, banks trade in derivatives totaling more than ten times the global economy, holding a notional value of $700 trillion. (I). While there is no way the cash on deposit would be enough to cover a big enough loss, this doesn’t mean banks won’t make their customers be the first to suffer those losses.
Signs that the U.S. is actively preparing and expecting a crisis appear to be aligning. As if taking the budget deal hostage wasn’t enough, the US treasury has began issuing emergency survival kits to banks also known as “ bug out bags”. These kits include items such as emergency food and water, two way radios, solar blankets, gas masks, first aid kits, etc. The major banks such as JP Morgan, Bank of America, Capital One, BMO financial corp., Citigroup, American Express Bank, amongst others were the first to receive these kits.(J). All of this begs the question, “ what are the banks and the government worried about and what specifically are they preparing for?”
Should there be a bail-in “a la Cyprus” then shareholders, brokerage accounts,pensioners and depositors are all at risk. The first and most at risk are the depositors with large accounts as they make up the biggest liability for banks. The puny FDIC funds only insure the first $250,000 on deposit so any account with more than that can be fully expected to receive a nice “ haircut” as the banks themselves have termed it. Some big depositors have chosen to not have all their cash in one account but rather spread themselves out into many different banks so as to not cross the $250,000 threshold. Should you use different banks that are affiliated it would still be the combined amount in those banks reaching the $250,000 that would be insured. While it’s better than leaving all your funds in just one account, it still seems doubtful that the FDIC can meet it’s obligations to insure everyone. Remember that the FDIC only has reserves to cover a little more than 1% of total deposits and that’s the same reason the FDIC needed the US taxpayer foot the bill for the bail-outs in the 2008 financial crisis.
Even if you don’t have much money in a bank account a bail in would almost surely affect you. There would be a domino effect. Banks would lose credibility overnight and the system would change for years, if not generations to come, with very little public trust left in banks. Businesses would be affected gravely and the job losses would be enormous due to business accounts suffering crippling shrinkages. The chances of rioting and violence in the streets would swell. When financial times get rough, life gets rough.
In 1983, 90% of the media was owned by 50 different companies. Today that same percentage has been consolidated into just 6 corporations.(K). It’s no wonder the mainstream financial press chooses not to report this. The media lies by not reporting that which doesn’t serve it’s interest. Deceit by omission. This is why websites such as RULE THE WASTELAND and other alternative media are so critical. No spin. No hidden agenda. Real news brought to you by real people.
With the recent plunge in oil prices and many other commodities, a derivatives failure by the banks isn’t at all out of the question.So the world will eventually get to see what happens when an immovable object meets an unstoppable force in the financial world. Something’s got to give and you can bet the little guy will get screwed again. Let this be your “Paul Revere” moment of warning. How the whole house of cards comes falling down is anybody’s guess but the banks are preparing. What are you doing to prepare?