Financial System

Have You Heard About The 16 Trillion Dollar Bailout The Federal Reserve Handed To The Too Big To Fail Banks?

What you are about to read should absolutely astound you.  During the last financial crisis, the Federal Reserve secretly conducted the biggest bailout in the history of the world, and the Fed fought in court for several years to keep it a secret.  Do you remember the TARP bailout?  The American people were absolutely outraged that the federal government spent 700 billion dollars bailing out the “too big to fail” banks.  Well, that bailout was pocket change compared to what the Federal Reserve did.  As you will see documented below, the Federal Reserve actually handed more than 16 trillion dollars in nearly interest-free money to the “too big to fail” banks between 2007 and 2010.  So have you heard about this on the nightly news?  Probably not.  Lately Bloomberg has been reporting on some of this, but even they are not giving people the whole picture.  The American people need to be told about this 16 trillion dollar bailout, because it is a perfect example of why the Federal Reserve needs to be shut down.  The Federal Reserve has been actively picking “winners” and “losers” in the financial system, and it turns out that the “friends” of the Fed always get bailed out and always end up among the “winners”.  This is not how a free market system is supposed to work.

According to the limited GAO audit of the Federal Reserve that was mandated by the Dodd-Frank Wall Street Reform and Consumer Protection Act, the grand total of all the secret bailouts conducted by the Federal Reserve during the last financial crisis comes to a whopping $16.1 trillion.

That is an astonishing amount of money.

Keep in mind that the GDP of the United States for the entire year of 2010 was only 14.58 trillion dollars.

The total U.S. national debt is only a bit above 15 trillion dollars right now.

So 16 trillion dollars is an almost inconceivable amount of money.

But some other dollar figures have been thrown around lately regarding these secret Federal Reserve bailouts.  Let’s take a look at them and see what they mean.

$1.2 Trillion

A recent Bloomberg article made the following statement….

The $1.2 trillion peak on Dec. 5, 2008 — the combined outstanding balance under the seven programs tallied by Bloomberg — was almost three times the size of the U.S. federal budget deficit that year and more than the total earnings of all federally insured banks in the U.S. for the decade through 2010, according to data compiled by Bloomberg.

The $1.2 trillion figure represents the peak outstanding balance on these loans, not the total amount of all the loans.  On December 5, 2008 the “too big to fail” banks owed this much money to the Federal Reserve.  Many of them could not pay these short-term loans back right away and had to keep rolling them over time after time.  Each time a short-term loan got rolled over that represented a new loan.

$7.7 Trillion

Bloomberg is reporting that the Federal Reserve had made a total of $7.77 trillion in financial commitments to the big banks by the end of March 2009….

Add up guarantees and lending limits, and the Fed had committed $7.77 trillion as of March 2009 to rescuing the financial system, more than half the value of everything produced in the U.S. that year.

But as mentioned above, a one-time limited GAO audit of the Federal Reserve that was mandated by the Dodd-Frank Wall Street Reform and Consumer Protection Act covered an even broader time period and revealed even more bailout loans.

According to the GAO audit, $16.1 trillion in secret loans were made by the Federal Reserve between December 1, 2007 and July 21, 2010.  The following list of firms and the amount of money that they received was taken directly from page 131 of the GAO audit report….

Citigroup – $2.513 trillion
Morgan Stanley – $2.041 trillion
Merrill Lynch – $1.949 trillion
Bank of America – $1.344 trillion
Barclays PLC – $868 billion
Bear Sterns – $853 billion
Goldman Sachs – $814 billion
Royal Bank of Scotland – $541 billion
JP Morgan Chase – $391 billion
Deutsche Bank – $354 billion
UBS – $287 billion
Credit Suisse – $262 billion
Lehman Brothers – $183 billion
Bank of Scotland – $181 billion
BNP Paribas – $175 billion
Wells Fargo – $159 billion
Dexia – $159 billion
Wachovia – $142 billion
Dresdner Bank – $135 billion
Societe Generale – $124 billion
“All Other Borrowers” – $2.639 trillion

This report was made available to all the members of Congress, but most of them have been totally silent about it.  One of the only members of Congress that has said something has been U.S. Senator Bernie Sanders.

The following is an excerpt from a statement about this audit that was taken from the official website of Senator Sanders….

“As a result of this audit, we now know that the Federal Reserve provided more than $16 trillion in total financial assistance to some of the largest financial institutions and corporations in the United States and throughout the world”

So where is everyone else?

Why aren’t leading Republicans and leading Democrats crying bloody murder over this report?

This scandal should have been front page news for months when it was revealed.

But it wasn’t.

And Guess what?

Not only did the Federal Reserve give 16.1 trillion dollars in nearly interest-free loans to the “too big to fail” banks, the Fed also paid them over 600 million dollars to help run the emergency lending program.  According to the GAO, the Federal Reserve shelled out an astounding $659.4 million in “fees” to the very financial institutions which caused the financial crisis in the first place.

In addition, it turns out that trillions of dollars of this bailout money actually went overseas.  According to the GAO audit, approximately $3.08 trillion went to foreign banks in Europe and in Asia.

So why were our dollars being used to bail out foreign banks while tens of millions of American families were deeply suffering?

That is a very good question.

Also, it is important to remember that many of these bailout loans were made at below market interest rates, and this enabled many of these financial institutions to rake in huge profits.

According to a recent Bloomberg article, the big banks brought in an estimated $13 billion by taking advantage of the Fed’s below-market rates….

While the Fed’s last-resort lending programs generally charge above-market interest rates to deter routine borrowing, that practice sometimes flipped during the crisis. On Oct. 20, 2008, for example, the central bank agreed to make $113.3 billion of 28-day loans through its Term Auction Facility at a rate of 1.1 percent, according to a press release at the time.

The rate was less than a third of the 3.8 percent that banks were charging each other to make one-month loans on that day. Bank of America and Wachovia Corp. each got $15 billion of the 1.1 percent TAF loans, followed by Royal Bank of Scotland’s RBS Citizens NA unit with $10 billion, Fed data show.

So once the financial crisis was over, were adjustments made to the financial system to make sure that this type of thing would never happen again?

Of course not.

Today, the “too big to fail” banks are larger than ever.  The total assets of the six largest U.S. banks increased by 39 percent between September 30, 2006 and September 30, 2011.

So now they are more “too big to fail” than ever.

But this is what happens when we allow unelected central bank bureaucrats to run our financial system.

Most Americans do not realize this, but the truth is that the Federal Reserve is not part of the government.  In fact, it is about as “federal” as Federal Express is.  The Federal Reserve has admitted that they are a privately owned institution in court many times, and you can see video of a Federal Reserve employee admitting that the Federal Reserve is privately owned right here.

The Federal Reserve is an out of control monster that is throwing around trillions of dollars whenever it wants to.  Nobody should be allowed to do this.  Nobody should be allowed to give bailouts to banks and corporations without the express permission of the U.S. Congress and the president of the United States.

This is a point that I made in my article yesterday.  The Federal Reserve decided this week that it is going to provide “liquidity support” to Europe.  If the American people do not like this move, that is just too bad.  We do not get a say in the matter.

Are you starting to understand why I keep pushing the idea that it is time to shut down the Federal Reserve?

Please share this information about the secret 16 trillion dollar Federal Reserve bailout with your family and your friends.

If we can get enough people to wake up, perhaps there is still time to change the direction that this country is headed.

Trouble

The global economy is heading for a massive amount of trouble in the months ahead.  Right now we are seeing the beginning of a credit crunch that is shaping up to be very reminiscent of what we saw back in 2008.  Investors and big corporations are pulling huge amounts of money out of European banks and nobody wants to lend to those banks right now.  We could potentially see dozens of “Lehman Brothers moments” in Europe in 2012.  Meanwhile, bond yields on sovereign debt are jumping through the roof all over Europe.  That means that European nations that are already drowning in debt are going to find it much more expensive to continue funding that debt.  It would be a huge understatement to say that there is “financial chaos” in Europe right now.  The European financial system is in so much trouble that it is hard to describe.  The instant that they stop receiving bailout money, Greece is going to default.  Portugal, Italy, Ireland, Spain and quite a few other European nations are also on the verge of massive financial problems.  When the financial dominoes start to fall, the U.S. financial system is going to be dramatically affected as well, because U.S. banks have a huge amount of exposure to European debt.  The other day, I noted that investor Jim Rogers is saying that the coming global financial collapse “is going to be worse” than 2008.  Sadly, it looks like he is right on the money.  We are in a lot of trouble my friends, and things are going to get really, really ugly.

The sad thing is that we never have recovered from the last major financial crisis.  Right now, the U.S. economy is far weaker than it was back in 2007.  So what is going to happen if we get hit with another financial tsunami?  The following is what PIMCO CEO Mohamed El-Erian said recently….

“What’s most terrifying, we are having this discussion about the risk of recession at a time when unemployment is already too high, at a time when a quarter of homeowners are underwater on their mortgages, at a time then the fiscal deficit is at 9 percent and at a time when interest rates are at zero.”

Can things really get much worse than they are now?

Unfortunately, yes they can.

Not that things are not really, really bad right now.

In Los Angeles earlier this week, approximately 10,000 people lined up for free turkey dinners.

So how many people will be lining up for free food when the unemployment rate in the U.S. soars into double digits?

Right now there is so much economic pain in America that it is hard to describe.  According to a recent report from one nonprofit group, 45 percent of all people living in the United States “do not have enough money to cover housing, food, healthcare and other basic expenses”.

If this is where we are at now, how much trouble will we be in as a nation if a financial crisis worse than 2008 hits us in 2012?

The primary cause of the coming financial crisis will almost certainly be the financial meltdown that we are seeing unfold in Europe.

The economic downturn that began in 2008 caused the debt levels of quite a few European nations to soar to unprecedented heights.  It has gotten to the point where the debts of many of those nations are no longer sustainable.

So investors are starting to demand much higher returns for the much greater risk associated with investing in the bonds of those countries.

But that makes it much more expensive for those troubled nations to fund their debts, and that means that their financial troubles get even worse.

Over the past 12 months, what we have seen happen to bond yields over in Europe has been nothing short of amazing.

Just check out this chart of what has been happening to the yield on 2 year Italian bonds over the past 12 months.

And keep in mind that these bond yields have been spiking even while the European Central Bank has been buying up unprecedented mountains of bonds in an attempt to keep bond yields low.

There has been a fundamental loss of faith in the financial system, and it is not just happening in Europe.

Just check out this chart.  As that chart shows, credit default swap spreads all over the globe are absolutely skyrocketing and are now higher than we have seen at any point since the great financial crisis that shook the world during 2008 and 2009.

Panic and fear are everywhere – especially in Europe.  In fact, it looks like a run on the banks has already begun in Europe.

The following comes from a recent article in The Economist….

“We are starting to witness signs that corporates are withdrawing deposits from banks in Spain, Italy, France and Belgium,” an analyst at Citi Group wrote in a recent report. “This is a worrying development.”

Nobody wants to lend money to European banks right now.  There is a feeling that they are all vulnerable and could fail at any time, and this lack of confidence actually makes that possibility even more likely.

The following is a short excerpt from a recent CNBC article….

Money-market funds in the United States have quite dramatically slammed shut their lending windows to European banks. According to the Economist, Fitch estimates U.S. money market funds have withdrawn 42 percent of their money from European banks in general.

And for France that number is even higher — 69 percent. European money-market funds are also getting in on the act.

So what can be done?

Well, in a different CNBC article, Mitchell Goldberg was quoted as saying that even “a bazooka” is not going to be good enough to fix this situation….

“It’s too late for a bazooka,” said Mitchell Goldberg, president of ClientFirst Strategy. “Now we need inter-continental ballistic missiles. This is getting worse very quickly.”

This is kind of like watching a horrific car wreck happen in very slow motion.

The financial system of Europe is dying and everybody can see what is happening but nobody can seem to find a way to fix it.

Not that we are solving our own problems here in the United States.

The vaunted “supercommittee” that was supposed to get a handle on our debt problem was a complete and utter failure.

Barack Obama has shown that he has no clue what to do when it comes to the economy, and Ben Bernanke has been preoccupied with roaming around the country trying to get people to feel more “warm and fuzzy” about the Federal Reserve.

The Federal Reserve actually has more power over our economy than anyone else.  But instead of fixing things they only keep making things even worse.

The only people that the Fed seems to be helping are the banksters.

What you are about to read should really, really upset you.  According to a recent article in the Wall Street Journal, the Federal Reserve has actually been tipping off their upcoming moves to top financial professionals.  In turn, these financial professionals have been using that information to make a lot of money for themselves and for their clients….

Hours after an Aug. 15 meeting with Federal Reserve Chairman Ben Bernanke in his office, Nancy Lazar made a hasty call to investor clients: The Fed was dusting off an obscure 1960s-era strategy known as Operation Twist.

The news pointed to a boom in long-term bonds.

It was a good call. Over the next five weeks, prices on 10-year Treasury bonds soared, offering double-digit returns in an otherwise dismal year.

By the time the Fed announced its $400 billion Operation Twist on Sept. 21, the window for quick profits had all but slammed shut.

Ms. Lazar is among a group of well-connected investors and analysts with access to top Federal Reserve officials who give them a chance at early clues to the central bank’s next policy moves, according to interviews and hundreds of pages of documents obtained by The Wall Street Journal through open records searches.

You just can’t make stuff like this up.  The corruption at the Federal Reserve is totally out of control.  After nearly 100 years of total failure, it is time to shut down the Federal Reserve.

Not that Barack Obama should get a free pass for the role that he has played in this economic downturn.  He inherited a complete mess from Bush and has made it even worse.

Today, millions of business owners are so frustrated with Washington D.C. that they don’t know what to do.

For example, one business owner down in Georgia has posted signs with the following message on all of his company’s trucks….

“New Company Policy: We are not hiring until Obama is gone.”

The business environment in this country becomes more toxic with each passing year, and the federal government has already strangled millions of small businesses out of existence.

In addition, politicians from both parties continue to stand aside as tens of thousands of businesses, millions of jobs and hundreds of billions of dollars of our wealth get shipped out of the country.

During 2010, an average of 23 manufacturing facilities a day were shut down in the United States.  We are committing national economic suicide, and the top politicians in both political parties keep cheering for more.

Well, millions of ordinary Americans can see what is happening and they are preparing for the worst.

The following report comes from an article that was recently posted on the website of the local CBS affiliate in St. Louis….

A chain of three stores that sells survival food and gear reports a jump in sales to people who are getting prepared for the “possible collapse” of society.

“We had to order fifty cases of the meals ready to eat to keep up with the demand in the past three months,” said manager Steve Dorsey at Uncle Sam’s Safari Outfitters Inc. in Webster Groves. “That’s not normal.  Usually we sell 20 to 30 cases in a whole year.”

So are you prepared for the coming collapse?

If you still have a great job and things are still going well for you, then you should definitely be thankful.  Compared to the rest of the world, most of us are incredibly blessed.

But let there be no doubt, the U.S. economy is going to get a lot worse in the years ahead.

Just because you have a job today does not mean that you will have one tomorrow.

Just because you have a nice car and a big home today does not mean that you will have them tomorrow.

We all need to try to become a lot less dependent on “the system”, because “the system” is failing.

A whole lot of trouble is coming.

You better get ready.

This Is Only Just The Beginning

For a long time, there have been those that have warned that economic riots are coming to this nation.  Anger and frustration with the economy and with our financial system have grown to unprecedented levels, and this has fueled the rise of the various protest movements that we have seen over the last couple of years.  People are fed up and they want solutions.  Unfortunately, anger and frustration can express themselves in dangerous and unpredictable ways.  What we have seen in Oakland, in Seattle and in other major U.S. cities this week is only just the beginning of the massive economic riots that are coming to this country.  Yes, “anarchists” were responsible for quite a bit of the violence that we have seen this week, but they were not the only ones involved.  Some protesters were getting violent too, and there has also been quite a bit of police brutality.  Of course the vast majority of Occupy Wall Street protesters do not want anything to do with violence and they recognize that violence is not the answer.  But that is the thing with anger and frustration.  It is hard to contain them in neat, self-disciplined packages.  As the economy continues to get worse, the protests will grow and unfortunately so will the violence.  You can preach the benefits of non-violence all day long to some people but they just will not get it.  America has reached a turning point, and what we are seeing now is only just the beginning of the madness.  In the years ahead we are going to see rioting that is going to be absolutely unprecedented.

According to a recent Associated Press-GfK poll, 43 percent of all Americans believe that the economy is in “very poor” shape.  Millions of Americans have lost their jobs, millions of Americans have lost their homes and tens of millions of Americans have been sickened by what they have seen happen on Wall Street over the last four or five years.  It is easy to understand why people are frustrated and are marching in the streets.  As I wrote about yesterday, approximately one out of every seven Americans is on food stamps.  Poverty is rapidly spreading and large numbers of families have lost everything.  People want answers, and it is understandable why so many are joining these protest movements.

Over the last couple of years, people such as Gerald Celente and myself have been warning that economic riots are coming.  Those of us that have written about such things have been called “doom and gloomers” and “conspiracy theorists”.

But after the events of the last couple of months, almost everyone is starting to realize that something big is happening.

On Wednesday, huge crowds of protesters brought the city of Oakland, California to a standstill.  Some media organizations said that there were 5,000 protesters, but others claimed that there may have been up to 20,000 people marching at one point.

A group of approximately 3,000 protesters marched over and shut down the Port of Oakland, which is the fifth largest deepwater port in the United States.

In other areas of the city, windows were smashed, graffiti was sprayed on buildings and senseless acts of vandalism were committed.  There were also quite a few intense confrontations with police and dozens of protesters ended up getting arrested.

The following is how an article in USA Today described what went down….

Riot police arrested more than 80 protesters in the city’s downtown, where bands of demonstrators threw chunks of concrete and metal pipes as well as lit roman candles and firebombs, police said. Five protesters and several officers were injured.

You can see shocking pictures of some of the vandalism that was going on during these protests right here.

At one point, one group of protesters took over an empty building that had once been used to help the homeless.  The following is what an article in the Los Angeles Times says happened next….

Demonstrators managed to gain entry to an empty building that had housed the Traveler’s Aid Society, a nonprofit organization that assists the homeless but had suffered funding cuts. Leaflets indicated that protesters had targeted the building for “reuse.” They branded it a new “community center” in Twitter feeds. Video from a local ABC affiliate’s helicopter showed jubilant crowds flowing in and out of the building, where a banner marked “Occupy Everything” hung. Others built a barricade nearby, presumably to discourage police.

Shortly before midnight, local media reported that police officers from various agencies were suiting up in riot gear. Some demonstrators set the barricade aflame. Firefighters doused it. A police statement later said protesters had hurled rocks, explosives, bottles and flaming objects at officers.

Does any of this solve anything?

Of course not.

But when people are angry and frustrated it can be difficult to talk sense to them.

America has become a powder keg, and it is going to be very difficult for anyone to control what is going on.

However, it also must be noted that not all of the violence was initiated by Occupy Oakland protesters.  There were dozens of Black Bloc “anarchists” that were running around committing random acts of violence.  Some Occupy Oakland protesters were actually seen trying to prevent these “anarchists” from committing acts of violence.

In fact, it is certainly possible that someone may be using these Black Bloc “anarchists” to discredit the protests.  It has happened to other protest movements in the past.

In any event, it is very true that the “anarchists” were very much involved with much of the violence.  You can see some video of “anarchists” in action right here.

But Oakland was not the only city where protesters were becoming more aggressive.

In Seattle, protesters surrounded a Sheraton hotel where JPMorgan CEO Jamie Dimon was giving a speech. According to some media reports, some of the protesters were actually planning to make a “citizen’s arrest”.

Their plans were cancelled, however, when police dispersed them with a shower of pepper spray.

The funny thing is that Dimon was actually promoting some of the ideas of the Occupy Wall Street movement during his speech.

The following excerpt from his speech comes from the Seattle Times….

“America has become more inequitable in the last 10 or 20 years. That’s a fact,” he said. “I don’t personally think that’s a good thing. I’ve been a big supporter of progressive taxes.”

But that is the funny thing about economic riots.  Just because you agree with the crowd, that does not mean that the crowd is not going to turn on you anyway.

Earlier that same day in Seattle, there was quite a bit of violence as police confronted groups of protesters.  The following is how the Seattle Times described the action….

Earlier in the day, Seattle police arrested six people, five of whom had sprawled across the floor inside a Chase Bank on Capitol Hill.

Officers launched pepper spray, shoved protesters out of the way and yanked others from under a police van during a tense 30-minute confrontation. Police said at least 10 officers were physically assaulted during the arrests, and at least two of them had minor injuries.

In New York City, a different kind of confrontation took place.  Approximately  100 military vets showed up in uniform and marched over to the New York Stock Exchange.  Once they arrived, they stopped directly in front of the building which was protected by a line of heavily armed NYPD officers.  It was a tense moment, but fortunately there was no violence.

This kind of “stare down” cannot be a sign of good things.  What would have happened if even a single person had lost their cool?

While standing in formation in front of the New York Stock Exchange, the vets were heard chanting the following slogans….

“We are veterans! We are the 99 percent!”

“Corporate profits on the rise, soldiers have to bleed and die!”

Things are certainly getting very, very interesting.

The Occupy Wall Street protests started off very peacefully, but sadly there is no guarantee that the violence we are seeing now is not going to escalate even further.

One recent survey found that 31 percent of those involved with the Occupy Wall Street protests “would support violence to advance their agenda”.

That is a frightening statistic.

Hopefully everyone will calm down and the protesters will realize that they will get much farther ahead by non-violent means.

But once again, anger and frustration are difficult to predict or control.  The more angry and frustrated that the American people get, the more chaotic the streets of our cities are going to become.

Sadly, while the vast majority of Americans agree that we have major problems, there is tremendous disagreement about what the solutions are.  There are some good ideas floating around out there, but there are also some groups that are promoting some very, very bad ideas.

For example, there are some elements involved in the Occupy Wall Street protests that are actually promoting communism as the answer.

During the recent craziness in Oakland, some protesters actually hung a very large black banner downtown that said the following: “DEATH TO CAPITALISM“.

But is that really the answer?

Of course not.

Yes, our system is deeply, deeply corrupt and deeply, deeply broken.

Yes, it is understandable that people are very frustrated with it.

But communism is not the answer.

Look, when Republicans defend the abuses of the big banks and the big corporations they are wrong to do so.

When Democrats defend big government and advocate even more big government as the answer, they are also very wrong.

The truth is that neither side is right.

We need to dramatically reduce the size of government and we need to dramatically reduce the size and the power of the big corporations.  That would mean a lot more liberty and freedom for the rest of us, and it would empower individuals and small businesses.

But most people don’t understand this.  Most people think that they have to either take the side of the big corporations or the side of big government.

Sadly, the cold, hard truth is that most of the time big government and the big corporations are working together, and it is not for our benefit.

Most people feel a sense of powerlessness these days.  Most people feel like things never seem to change no matter who they vote for.

People want things to change, but they don’t feel as though they have a way of bringing that change about.

This is not just happening in the United States.  As the global economy has faltered, anger and frustration have been growing all over the planet.

In fact, the International Labor Organization is warning that civil unrest could erupt all over the globe if the current economic crisis gets even worse.

We are moving into unprecedented times.

Nobody is quite sure what is going to happen next.

But the warning signs are there.

Pressure just keeps building and building and building.

According to a recent Fox News poll, 76 percent of all Americans are “dissatisfied with how things are going in the country”.  At the beginning of this year, that number was only at 61 percent.

When people get desperate, they do desperate things.

We can certainly hope that things will settle down, at least for a little while, but at some point another major financial crisis is going to erupt and the economy is going to get even worse.

So what will this country look like when that happens?

This is not the America that your grandparents grew up in.

Prepare accordingly.

The Coming Derivatives Crisis That Could Destroy The Entire Global Financial System

Most people have no idea that Wall Street has become a gigantic financial casino.  The big Wall Street banks are making tens of billions of dollars a year in the derivatives market, and nobody in the financial community wants the party to end.  The word “derivatives” sounds complicated and technical, but understanding them is really not that hard.  A derivative is essentially a fancy way of saying that a bet has been made.  Originally, these bets were designed to hedge risk, but today the derivatives market has mushroomed into a mountain of speculation unlike anything the world has ever seen before.  Estimates of the notional value of the worldwide derivatives market go from $600 trillion all the way up to $1.5 quadrillion.  Keep in mind that the GDP of the entire world is only somewhere in the neighborhood of $65 trillion.  The danger to the global financial system posed by derivatives is so great that Warren Buffet once called them “financial weapons of mass destruction”.  For now, the financial powers that be are trying to keep the casino rolling, but it is inevitable that at some point this entire mess is going to come crashing down.  When it does, we are going to be facing a derivatives crisis that really could destroy the entire global financial system.

Most people don’t talk much about derivatives because they simply do not understand them.

Perhaps a couple of definitions would be helpful.

The following is how a recent Bloomberg article defined derivatives….

Derivatives are financial instruments used to hedge risks or for speculation. They’re derived from stocks, bonds, loans, currencies and commodities, or linked to specific events such as changes in the weather or interest rates.

The key word there is “speculation”.  Today the folks down on Wall Street are speculating on just about anything that you can imagine.

The following is how Investopedia defines derivatives….

A security whose price is dependent upon or derived from one or more underlying assets. The derivative itself is merely a contract between two or more parties. Its value is determined by fluctuations in the underlying asset. The most common underlying assets include stocks, bonds, commodities, currencies, interest rates and market indexes. Most derivatives are characterized by high leverage.

A derivative has no underlying value of its own.  A derivative is essentially a side bet.  Usually these side bets are highly leveraged.

At this point, making side bets has totally gotten out of control in the financial world.  Side bets are being made on just about anything you can possibly imagine, and the major Wall Street banks are making a ton of money from it.  This system is almost entirely unregulated and it is totally dominated by the big international banks.

Over the past couple of decades, the derivatives market has multiplied in size.  Everything is going to be fine as long as the system stays in balance.  But once it gets out of balance we could witness a string of financial crashes that no government on earth will be able to fix.

The amount of money that we are talking about is absolutely staggering.  Graham Summers of Phoenix Capital Research estimates that the notional value of the global derivatives market is $1.4 quadrillion, and in an article for Seeking Alpha he tried to put that number into perspective….

If you add up the value of every stock on the planet, the entire market capitalization would be about $36 trillion. If you do the same process for bonds, you’d get a market capitalization of roughly $72 trillion.

The notional value of the derivative market is roughly $1.4 QUADRILLION.

I realize that number sounds like something out of Looney tunes, so I’ll try to put it into perspective.

$1.4 Quadrillion is roughly:

-40 TIMES THE WORLD’S STOCK MARKET.

-10 TIMES the value of EVERY STOCK & EVERY BOND ON THE PLANET.

-23 TIMES WORLD GDP.

It is hard to fathom how much money a quadrillion is.

If you started counting right now at one dollar per second, it would take 32 million years to count to one quadrillion dollars.

Yes, the boys and girls down on Wall Street have gotten completely and totally out of control.

In an excellent article that he did on derivatives, Webster Tarpley described the pivotal role that derivatives now play in the global financial system….

Far from being some arcane or marginal activity, financial derivatives have come to represent the principal business of the financier oligarchy in Wall Street, the City of London, Frankfurt, and other money centers. A concerted effort has been made by politicians and the news media to hide and camouflage the central role played by derivative speculation in the economic disasters of recent years. Journalists and public relations types have done everything possible to avoid even mentioning derivatives, coining phrases like “toxic assets,” “exotic instruments,” and – most notably – “troubled assets,” as in Troubled Assets Relief Program or TARP, aka the monstrous $800 billion bailout of Wall Street speculators which was enacted in October 2008 with the support of Bush, Henry Paulson, John McCain, Sarah Palin, and the Obama Democrats.

Most people do not realize this, but derivatives were at the center of the financial crisis of 2008.

They will almost certainly be at the center of the next financial crisis as well.

For many, alarm bells went off the other day when it was revealed that Bank of America has moved a big chunk of derivatives from its failing Merrill Lynch investment banking unit to its depository arm.

So what does that mean?

An article posted on The Daily Bail the other day explained that it means that U.S. taxpayers could end up holding the bag….

This means that the investment bank’s European derivatives exposure is now backstopped by U.S. taxpayers. Bank of America didn’t get regulatory approval to do this, they just did it at the request of frightened counterparties. Now the Fed and the FDIC are fighting as to whether this was sound. The Fed wants to “give relief” to the bank holding company, which is under heavy pressure.

This is a direct transfer of risk to the taxpayer done by the bank without approval by regulators and without public input.

So did you hear about this on the news?

Probably not.

Today, the notional value of all the derivatives held by Bank of America comes to approximately $75 trillion.

JPMorgan Chase is holding derivatives with a notional value of about $79 trillion.

It is hard to even conceive of such figures.

Right now, the banks with the most exposure to derivatives are JPMorgan Chase, Bank of America, Goldman Sachs, Citigroup, Wells Fargo and HSBC Bank USA.

Morgan Stanley also has tremendous exposure to derivatives.

You may have noticed that these are some of the “too big to fail” banks.

The biggest U.S. banks continue to grow and they continue to get even more power.

Back in 2002, the top 10 U.S. banks controlled 55 percent of all U.S. banking assets.  Today, the top 10 U.S. banks control 77 percent of all U.S. banking assets.

These banks have gotten so big and so powerful that if they collapsed our entire financial system would implode.

You would have thought that we would have learned our lesson back in 2008 and would have done something about this, but instead we have allowed the “too big to bail” banks to become bigger than ever.

And they pretty much do whatever they want.

A while back, the New York Times published an article entitled “A Secretive Banking Elite Rules Trading in Derivatives“.  That article exposed the steel-fisted control that the “too big to fail” banks exert over the trading of derivatives.  Just consider the following excerpt from the article….

On the third Wednesday of every month, the nine members of an elite Wall Street society gather in Midtown Manhattan.

The men share a common goal: to protect the interests of big banks in the vast market for derivatives, one of the most profitable — and controversial — fields in finance. They also share a common secret: The details of their meetings, even their identities, have been strictly confidential.

So what institutions are represented at these meetings?

Well, according to the New York Times, the following banks are involved: JPMorgan Chase, Goldman Sachs, Morgan Stanley, Bank of America and Citigroup.

Why do those same five names seem to keep popping up time after time?

Sadly, these five banks keep pouring money into the campaigns of politicians that supported the bailouts in 2008 and that they know will bail them out again when the next financial crisis strikes.

Those that defend the wild derivatives trading that is going on today claim that Wall Street has accounted for all of the risks and they assume that the issuing banks will always be able to cover all of the derivative contracts that they write.

But that is a faulty assumption.  Just look at AIG back in 2008.  When the housing market collapsed AIG was on the wrong end of a massive number of derivative contracts and it would have gone “bust” without gigantic bailouts from the federal government.  If the bailouts of AIG had not happened, Goldman Sachs and a whole lot of other people would have been left standing there with a whole bunch of worthless paper.

It is inevitable that the same thing is going to happen again.  Except next time it may be on a much grander scale.

When “the house” goes “bust”, everybody loses.  The governments of the world could step in and try to bail everyone out, but the reality is that when the derivatives market comes totally crashing down there won’t be any government on earth with enough money to put it back together again.

A horrible derivatives crisis is coming.

It is only a matter of time.

Stay alert for any mention of the word “derivatives” or the term “derivatives crisis” in the news.  When the derivatives crisis arrives, things will start falling apart very rapidly.

 

20 Quotes From European Leaders That Prove That They Know That The Financial System In Europe Is Doomed

The financial crisis in Europe has become so severe that it has put the future of the euro, and indeed the future of the EU itself, in doubt.  If the financial system in Europe collapses, it is going to plunge the entire globe into chaos.  The EU has a larger economy and a larger population than the United States does.  The EU also has more Fortune 500 companies that the United States does.  If the financial system in Europe breaks down, we are all doomed.  An economic collapse in Europe would unleash a financial tsunami that would sweep across the globe.  As I wrote about yesterday, the nightmarish sovereign debt crisis in Europe could potentially bring about the end of the euro.  The future of the monetary union in Europe is being questioned all over the continent.  Without massive bailouts, there are at least 5 or 6 nations in Europe that will likely soon default.  The political will for continued bailouts is rapidly failing in northern Europe, so something needs to be done quickly to avert disaster.  Unfortunately, as anyone that has ever lived in Europe knows, things tend to move very, very slowly in Europe.

If the bailouts end and Europe is not able to come up with another plan before then, mass chaos is going to unleashed.  Most major European banks are massively exposed to European sovereign debt, and most of them are also very, very highly leveraged.  If we see nations such as Greece, Portugal and Italy start to default, we could have quite a few major European banks go down in rapid succession.  That could be the “tipping point” that sets off mass financial panic around the globe.

Of course the governments of Europe would probably step in to bail out many of those banks, but when the U.S. did something similar back in 2008 that didn’t prevent the world from plunging into a horrible worldwide recession.

Right now, the way that the monetary union is structured in Europe simply does not work.  Countries that are deep in debt have no flexibility in dealing with those debts, and citizens of wealthy countries such as Germany are becoming deeply resentful that they must keep shoveling money into the financial black holes of southern Europe.

These bailouts cannot go on indefinitely.  Political and financial authorities all over Europe know this and they also know that Europe is rapidly heading toward a day of reckoning.

The quotes that you are about to read are absolutely shocking.  In Europe they openly admit that the financial system is dying, that the euro is in danger of not surviving and that the EU does not work in its present form.

The following are 20 quotes from European leaders that prove that they know that the financial system in Europe is doomed….

#1 Polish finance minister Jacek Rostowski: “European elites, including German elites, must decide if they want the euro to survive – even at a high price – or not. If not, we should prepare for a controlled dismantling of the currency zone.”

#2 Stephane Deo, Paul Donovan, and Larry Hatheway of Swiss banking giant UBS: “Under the current structure and with the current membership, the euro does not work. Either the current structure will have to change, or the current membership will have to change.”

#3 EU President Herman Van Rompuy: “The euro has never had the infrastructure that it requires.”

#4 German President Christian Wulff: “I regard the huge buy-up of bonds of individual states by the ECB as legally and politically questionable. Article 123 of the Treaty on the EU’s workings prohibits the ECB from directly purchasing debt instruments, in order to safeguard the central bank’s independence”

#5 Deutsche Bank CEO Josef Ackerman: “It is an open secret that numerous European banks would not survive having to revalue sovereign debt held on the banking book at market levels.”

#6 ECB President Jean-Claude Trichet: “We are experiencing very demanding times”

#7 International Monetary Fund Managing Director Christine Lagarde: “Developments this summer have indicated we are in a dangerous new phase”

#8 Prince Hermann Otto zu Solms-Hohensolms-Lich, the Bundestag’s Deputy President: “We must consider whether it would not be better for the currency union and for Greece itself to go for debt restructuring and an exit from the euro”

#9 Alastair Newton, a strategist for Nomura Securities in London: “We believe that we are just about to enter a critical period for the eurozone and that the threat of some sort of break-up between now and year-end is greater than it has been at any time since the start of the crisis”

#10 Former German Chancellor Gerhard Schroeder: “The current crisis makes it relentlessly clear that we cannot have a common currency zone without a common fiscal, economic and social policy”

#11 Bank of England Governor Mervyn King: “Dealing with a banking crisis was difficult enough, but at least there were public-sector balance sheets on to which the problems could be moved. Once you move into sovereign debt, there is no answer; there’s no backstop.”

#12 George Soros: “We are on the verge of an economic collapse which starts, let’s say, in Greece. The financial system remains extremely vulnerable.”

#13 German Chancellor Angela Merkel: “The current crisis facing the euro is the biggest test Europe has faced for decades, even since the Treaty of Rome was signed in 1957.”

#14 Stephane Deo, Paul Donovan, and Larry Hatheway of Swiss banking giant UBS: “Member states would be economically better off if they had never joined. European monetary union was generally mis-sold to the population of the Europe.”

#15 Professor Giacomo Vaciago of Milan’s Catholic University: “It’s clear that the euro has virtually failed over the last ten years, even if you are not supposed to say that.”

#16 EU President Herman Van Rompuy: “We’re in a survival crisis. We all have to work together in order to survive with the euro zone, because if we don’t survive with the euro zone we will not survive with the European Union.”

#17 German Chancellor Angela Merkel: “If the euro fails, then Europe fails.”

#18 Deutsche Bank CEO Josef Ackerman: “All this reminds one of the autumn of 2008”

#19 International Monetary Fund Managing Director Christine Lagarde: “There has been a clear crisis of confidence that has seriously aggravated the situation. Measures need to be taken to ensure that this vicious circle is broken”

#20 German Chancellor Angela Merkel: “The euro is in danger … If we don’t deal with this danger, then the consequences for us in Europe are incalculable.”

Most of the individuals quoted above desperately want to save the euro.  They are not going to go down without a fight.  The overwhelming consensus among the political and financial elite in Europe is that increased European integration in Europe is the answer.

For example, EU President Herman Van Rompuy is very clear about what he believes the final result of this crisis will be….

“This crisis in the euro zone will strengthen European integration. That is my firm belief.”

Many of the elite in Europe are now openly talking about the need for a “United States of Europe”.  Just consider what former German chancellor Gerhard Schroeder recently had to say….

“From the European Commission, we should make a government which would be supervised by the European Parliament. And that means the United States of Europe.”

But as mentioned above, things in Europe tend to move very, very slowly.  The debt crisis in Europe is rapidly coming to a breaking point, and it is very doubtful that Europe will be able to move fast enough to head it off.

What we may actually see is at least a partial collapse of the euro and a massive financial crisis in Europe first, and then much deeper European integration being sold by authorities in Europe as “the solution” to the crisis.

This would be yet another example of the classic problem/reaction/solution paradigm.

The “problem” would be a horrible financial crisis and economic downturn in Europe.

The “reaction” would be a cry from the European public for someone to “fix” things and return things back to “normal”.

The “solution” would be a “United States of Europe” with much deeper economic and political integration which is something that many among the political and financial elite of Europe have wanted for a long, long time.

Right now, the people of Europe are very much opposed to deeper economic and political integration. For example, 76 percent of Germans says that they have little or no faith in the euro and one recent poll found that German voters are against the introduction of “Eurobonds” by about a 5 to 1 margin.

It looks like it may take a major crisis in order to get the people of Europe to change their minds.

Unfortunately, it looks like that may be exactly what is going to happen.

18 Signs That Global Financial Markets Smell Blood In The Water

Can you smell it?  There is blood in the water.  Global financial markets are in turmoil.  Banking stocks are getting slaughtered right now.  European bond yields are absolutely soaring.  Major corporations are announcing huge layoffs.  The entire global financial system appears to be racing toward another major crisis.  So could we potentially see a repeat of 2008?  Sadly, when the next big financial crisis happens it might be worse than 2008.  Back in the middle of 2008, the U.S. national debt was less than 10 trillion dollars.  Today it is over 14 trillion dollars. Back in 2008, none of the countries in the EU were on the verge of financial collapse.  Today, several of them are.  This time if the global financial system starts falling apart the big governments around the world are not going to be able to do nearly as much to support it.  That is why what is happening right now is so alarming.  As signs of weakness spread, the short sellers and the speculators are starting to circle.  They can smell the money.

Back in 2008, bank stocks led the decline.  Today, that appears to be happening again.  The “too big to fail” banks are getting absolutely pummeled right now.  Most people don’t have much sympathy for the banksters, but if we do see a repeat of 2008 they are going to be cutting off credit and begging for massive bailouts once again, and that would not be good news for the economy.

In Europe, the EU sovereign debt crisis just seems to get worse by the day.  Bond yields for the PIIGS are going haywire.  The higher the yields go, the worse the crisis is going to get.

Meanwhile, as I have written about previously, a bad mood has descended on world financial markets. Pessimism is everywhere and fear is spreading.  The short sellers and the speculators are eager to jump on any sign of weakness.  Investors all over the globe are extremely nervous right now.

So what happens next?

Well, nobody knows for sure.

But things certainly do not look good.

The following are 18 signs that global financial markets smell blood in the water….

#1 Banks stocks are absolutely getting hammered right now.  Bank of America hit a 52 week low on Monday.  Bank of America shares declined 4 percent to $9.61.

#2 So far this year, Bank of America stock is down about 27 percent.

#3 Bloomberg is reporting that Bank of America may be forced to increase its capital cushion by 50 billion dollars.

#4 Shares of Goldman Sachs and Morgan Stanley are near two year lows.

#5 Shares in Citigroup fell 2.5 percent on Monday.

#6 Moody’s recently warned that it may be forced to downgrade the debt ratings of Bank of America, Citigroup and Wells Fargo.

#7 Barclays Capital, Goldman Sachs, Bank of America, JPMorgan Chase and Morgan Stanley are all either considering staff cuts or are already laying workers off.

#8 The deputy European director of the International Monetary Fund says that the Greek debt crisis is “on a knife’s edge“.

#9 Moody’s has slashed Ireland’s bond rating all the way to junk status.

#10 The yield on 2 year Portuguese bonds is now over 20 percent, the yield on 2 year Irish bonds is now over 23 percent and the yield on 2 year Greek bonds is now over 35 percent.

#11 Shares of Italy’s largest bank dropped by a whopping 6.4% on Monday.

#12 On Monday, the yield on 10 year Italian bonds was the highest it has been since the euro was adopted.

#13 On Monday, the yield on 10 year Spanish bonds was also the highest it has been since the euro was adopted.

#14 Shares of Germany’s largest bank fell by a staggering 7% on Monday and are down a total of 22% so far this month.

#15 Citigroup’s chief economist, William Buiter, says that without direct intervention by the ECB there is going to be a wave of sovereign defaults across Europe….

“Nothing stands in the way of multiple sovereign defaults except the ECB: they are the only game in town, there is nothing else”

#16 Cisco has announced plans to axe 16 percent of its workers.

#17 Borders Group has announced that it will be liquidating all remaining assets.  That means that 399 stores will be closed and 10,700 workers will lose their jobs.

#18 During times of great crisis, many investors seek safe havens for their money.  On Monday, the price of gold shot past $1600 an ounce.

These are not normal financial times.  The worldwide debt bubble is starting to burst and nobody is quite sure what is going to happen next.  Certainly we are going to continue to see financial authorities all over the world do their best to keep the system going.  But as we saw in 2008, things can spiral out of control very quickly.

Just remember, back at the beginning of 2008 very few people would have ever imagined that the biggest financial institutions in America would be begging for hundreds of billions of dollars in bailouts by the end of that year.

When confidence disappears, the game can change very quickly.  To the vast majority of economists it would have been unimaginable that the yield on 2 year Greek bonds would be over 35 percent in mid-2011.

But here we are.

The entire global financial system is a house of cards built on a foundation of sand.  It is more vulnerable today than it has been at any other time since World War II.  When a couple of major dominoes fall, it is likely to set off a massive chain reaction.

The global financial system of today was not designed with safety and security in mind.  It was designed for greedy people to be able to make as much money as possible as quickly as possible.  The banksters don’t care about the greater good of mankind.  What they care about is making huge piles of cash.

There is way too much risk, way too much debt and way too much leverage in the global financial marketplace.  You would have thought that 2008 should have been a major wake up call for financial authorities around the world, but very few significant changes have been made since that time.

The financial news is just going to keep getting worse.  This financial system is simply unsustainable.  It is fundamentally unsound.  The reality is that financial bubbles cannot keep expanding forever.  Eventually they must burst.

Over the next few weeks, keep a close eye on banking stocks and keep a close eye on European bond yields.

Hopefully things will stabilize.

Hopefully the next wave of the financial collapse is not about to hit us.

Hopefully the entire global financial system is not on the verge of a major implosion.

But you might want to get prepared just in case.

Too Big To Fail?: 10 Banks Own 77 Percent Of All U.S. Banking Assets

Back during the financial crisis of 2008, the American people were told that the largest banks in the United States were “too big to fail” and that was why it was necessary for the federal government to step in and bail them out.  The idea was that if several of our biggest banks collapsed at the same time the financial system would not be strong enough to keep things going and economic activity all across America would simply come to a standstill.  Congress was told that if the “too big to fail” banks did not receive bailouts that there would be chaos in the streets and this country would plunge into another Great Depression.  Since that time, however, essentially no efforts have been made to decentralize the U.S. banking system.  Instead, the “too big to fail” banks just keep getting larger and larger and larger.  Back in 2002, the top 10 banks controlled 55 percent of all U.S. banking assets.  Today, the top 10 banks control 77 percent of all U.S. banking assets.  Unfortunately, these giant banks are also colossal mountains of risk, debt and leverage.  They are incredibly unstable and they could start coming apart again at any time.  None of the major problems that caused the crash of 2008 have been fixed.  In fact, the U.S. banking system is more centralized and more vulnerable today than it ever has been before.

It really is difficult for ordinary Americans to get a handle on just how large these financial institutions are.  For example, the “big six” U.S. banks (Goldman Sachs, Morgan Stanley, JPMorgan Chase, Citigroup, Bank of America, and Wells Fargo) now possess assets equivalent to approximately 60 percent of America’s gross national product.

These huge banks are giant financial vacuum cleaners.  Over the past couple of decades we have witnessed a financial consolidation in this country that is absolutely unprecedented.

This trend accelerated during the recent financial crisis.  While the big boys were receiving massive bailouts, the hundreds of small banks that were failing were either allowed to collapse or they were told that they should find a big bank that was willing to buy them.

As a group, Citigroup, JPMorgan Chase, Bank of America and Wells Fargo held approximately 22 percent of all banking deposits in FDIC-insured institutions back in 2000.

By the middle of 2009 that figure was up to 39 percent.

That is not just a trend – that is a landslide.

Sadly, smaller banks continue to fail in large numbers and the big banks just keep growing and getting more power.

Today, there are more than 1,000 U.S. banks that are on the “unofficial list” of problem banking institutions.

In the absence of fundamental changes, the consolidation of the banking industry is going to continue.

Meanwhile, the “too big to fail” banks are flush with cash and they are getting serious about expanding.  The Federal Reserve has been extremely good to the big boys and they are eager to grow.

For example, Citigroup is becoming extremely aggressive about expanding….

Citigroup has been hiring dozens of investment bankers, dialing up advertising and drawing up plans to add several hundred branches worldwide, including more than 200 in major cities across the United States.

Hopefully the big banks will start lending again.  The whole idea behind the bailouts and all of the “quantitative easing” that the Federal Reserve did was to get money into the hands of the big banks so that they would lend it out to ordinary Americans and get the economy rolling again.

Well, a funny thing happened.  The big banks just sat on a lot of that money.

In particular, what they did was they deposited much of it at the Fed and drew interest on it.

Since 2008, excess reserves parked at the Fed have grown by nearly 1.7 trillion dollars.  Just check out the chart posted below….

The American people were promised that TARP and all of the other bailouts would enable the big banks to lend out lots of money which would help get the economy going for ordinary Americans again.

Well, it turns out that in 2009 (the first full year after Congress passed the bailout legislation) U.S. banks posted their sharpest decline in lending since 1942.

Lending has never fully recovered since the crash of 2008.  The big financial institutions like Goldman Sachs, Morgan Stanley and JPMorgan Chase have been able to get all the cash that they need, but they have not passed that generosity along to ordinary Americans.

In fact, the biggest U.S. banks have actually reduced small business lending by about 50 percent since the crash of 2008.

That doesn’t sound like what we were promised.

These “too big to fail” banks have been able to borrow gigantic amounts of money from the Fed for next to nothing and yet they still refuse to let credit flow to local communities.  Instead, the big banks have found other purposes for all of the super cheap money that they have been getting from the Fed as Ellen Brown recently explained….

It can be very profitable indeed for the big Wall Street banks, but the purpose of the near-zero interest rates was supposed to be to get banks to lend again. Instead, they are, indeed, paying “outrageous bonuses to their top executives;” using the money to engage in the same sort of unregulated speculation that nearly brought down the economy in 2008; buying up smaller banks; or investing this virtually interest-free money in risk-free government bonds, on which taxpayers are paying 2.5 percent interest (more for longer-term securities).

What makes things even worse is that these big banks often pay next to nothing in taxes.

For example, between 2008 and 2010, Wells Fargo made a total profit of 49.37 billion dollars.

Over that same time period, their tax bill was negative 681 million dollars.

Do you understand what that means?  Over that 3 year time period, Wells Fargo actually got 681 million dollars back from the U.S. government.

Isn’t that just peachy?

Meanwhile, the big financial giants have not learned their lessons and they continue to do business pretty much as they did it prior to 2008.

The big banks continue to roll up massive amounts of risk, debt and leverage.

Today, Wall Street has become one giant financial casino.  More money is made on Wall Street by making side bets (commonly referred to as “derivatives“) than on the investments themselves.

If the bets pay off for the big financial institutions, mind blowing profits can be made.  But if the bets go against the big financial institutions (as we saw in 2008), firms can collapse almost overnight.

In fact, it was derivatives that almost brought down AIG.  The biggest insurance company in the world almost folded in 2008 because of a whole bunch of really bad bets.

The danger from derivatives is so great that Warren Buffet once called them “financial weapons of mass destruction”.  It has been estimated that the notional value of the worldwide derivatives market is somewhere in the neighborhood of a quadrillion dollars.

The largest banks have tens of trillions of dollars of exposure to derivatives.  When the next great financial collapse happens, derivatives will almost certainly be at the center of it once again.  These side bets do not create anything real for the economy – they just make and lose huge amounts of money.  We never know when the next great derivatives crisis will strike.  Derivatives are essentially like a “sword of Damocles” that perpetually hangs over the U.S. financial system.

When I start talking about derivatives I get a lot of people in the financial community mad at me.  On Wall Street today you can bet on just about anything you can imagine.  Almost everyone in the financial world has gotten so used to making wild bets that they couldn’t even imagine a world without them.  If anyone even tried to put significant limits on futures, options and swaps it would cause Wall Street to throw a hissy fit.

But someday the dominoes are going to start to fall and the house of cards is going to come crashing down.  It is an open secret that our financial system is fundamentally unsound.  Even a lot of people working on Wall Street will admit that.  It is just that people are so busy making such big piles of money that nobody wants the party to stop.

It is only a matter of time until some of these big banks get into a huge amount of trouble again.  When that happens, we might really find out whether they are “too big to fail” or whether we could get along just fine without them.

Shell Game

The entire U.S. financial system has become a gigantic shell game.  While it is still in motion, a shell game can be mesmerizing to watch.  But when it ends the consequences can be painful.  So exactly what is a shell game?  According to Wikipedia, a shell game “is portrayed as a gambling game, but in reality, when a wager for money is made, it is a confidence trick used to perpetrate fraud.”  Sadly, that is exactly what is happening on the global stage today.  The Federal Reserve is like a con artist that is desperately trying to stay one step ahead of everyone else.  The folks at the Fed know that the debt that the U.S. government has accumulated is not sustainable and will eventually collapse.  They also know that the U.S. dollar is eventually going to become essentially worthless.  But for now the Federal Reserve is putting on a grand show and is trying to keep everyone believing that the game is fair and legitimate.

The Federal Reserve’s much ballyhooed “QE2” program has come to an end, and most Americans still don’t even understand what “quantitative easing” is.

Basically, what the Federal Reserve did was zap hundreds of billions of dollars into existence out of thin air and used them to buy U.S. government debt.

It is kind of like if you are playing poker with someone and they reach under the table and pull out a gigantic pile of chips which they add to their own stack.

In the process, the big banks made a ton of money because they are the ones that the Federal Reserve was buying U.S. Treasuries from and the U.S. government was happy because all of the new government debt being issued was getting soaked up by the system.

Of course all of this is one giant Ponzi scheme, but up to this point the Federal Reserve has gotten away with it.

Meanwhile, average Americans were getting the short end of the stick because all of this new money has been causing the price of food and the price of gas to go up.

But now QE2 has come to an end.

So does that mean that  “quantitative easing” is going to be completely over?

No, not really.  The shell game continues.

The Federal Reserve has announced that it is going to continue to purchase U.S. government debt using the proceeds from maturing debt that it already owns.  It is being projected that the Federal Reserve will purchase 300 billion dollars in U.S. government debt over the next 12 months using this method.

This isn’t being called “quantitative easing”, but that is essentially what it is.  In fact, one CNN article is calling it “QE2.5”….

QE2 is just about done. But the Federal Reserve will still be buying massive amounts of long-term Treasuries.

In fact, the Fed’s purchases over the next year will likely be at least $300 billion. That’s half the size of QE2 — even if QE3 never takes place.

But “quantitative easing” is just one example of a shell game run by the Fed.  There have been lots more.

For example, during the financial crisis the Federal Reserve started loaning gigantic amounts of cash to the big banks for next to nothing.

The big banks took a lot of this cash and invested it in U.S. Treasuries.  U.S. Treasuries typically only pay a couple of percentage points, but when you can borrow massive amounts of nearly free money suddenly they become extremely profitable.

Instead of loaning out large amounts of money to all of us to get the economy rolling again, the big banks just parked huge amounts of cash in U.S. Treasuries and watched the risk-free profits come rolling in.

In this way, the Federal Reserve helped big banks make a ton of money and they supported the exploding federal government debt load at the same time.

The chart below shows that the amount of U.S. government securities owned by the banks has increased exponentially since the beginning of the financial crisis.  This is not an accident….

The Federal Reserve does lots of stuff like this.  They know that they will probably never get audited and they know that the American people don’t understand all of this financial stuff, so they get away with it.

But what if something came along and suddenly interrupted the shell games that the Fed is playing?

Well, that is exactly what this debt ceiling debate threatens to do.

If the U.S. defaults, even for a short time, all of the financial shell games and Ponzi schemes are going to be greatly jeopardized.

If Congress does not raise the debt ceiling by August 2nd, the U.S. government will start defaulting, and that would unleash a tremendous amount of chaos.

A recent USA Today article described some of the things that might happen if the government was not able to borrow any more money later this summer….

If Social Security, Medicare, Medicaid, unemployment benefits, payments to defense contractors and interest payments on Treasury bonds were exempt, that would be all the government could afford for the month. No money for troops or veterans. No tax refunds. No food stamps or welfare. No federal salaries or benefits.

In addition, financial markets all over the world would be severely rattled.  If the default only lasted a couple of days it would not be bad, but if the U.S. ended up defaulting on debts for weeks or months it really would be cataclysmic.

The International Monetary Fund warned this week that a failure to raise the debt ceiling by August 2nd would be a “severe shock” to global financial markets.

In this case, the IMF is actually right.  In fact, a “severe shock” would be an understatement.

The managing director of Standard & Poor’s has told Reuters that if the U.S. starts defaulting, the credit rating on U.S. Treasury bonds that are supposed to mature on August 4th will go all the way down from AAA to D….

Chambers, who is also the chairman of S&P’s sovereign ratings committee, told Reuters on Tuesday that U.S. Treasury bills maturing on August 4 would be rated ‘D’ if the government fails to honor them. Unaffected Treasuries would be downgraded as well, but not as sharply, he said.

“If the U.S. government misses a payment, it goes to D,” Chambers said. “That would happen right after August 4, when the bills mature, because they don’t have a grace period.”

A lot of Americans believe that Congress should just refuse to raise the debt ceiling and let the whole system crash.  But the reality is that most Americans simply have no idea how much of a financial disaster that would be for the entire globe.

Yes, the U.S. national debt is completely and totally out of control.  Yes, something must be done about it urgently.

But defaulting on our debts and wrecking global financial markets is not going to solve much of anything.

Sadly, even if we do not default on our debts this year, the reality is that the U.S. government debt bubble is going to collapse one way or another eventually.

The path that we are currently on is not even close to sustainable.

Even as our debt expands exponentially, the U.S. economy is being systematically dismantled and we are becoming poorer as a nation.

As I have written about previously, jobs and businesses are leaving the United States at a staggering rate because of cheap labor overseas and because of ridiculous regulations.  The business environment in this country has become incredibly toxic.

Stanford University’s David Cheriton was instrumental in helping Sergey Brin and Larry Brin develop Google.  Now he is warning that the anti-business policies of Barack Obama and the U.S. Congress are wrecking the economy….

“When you look at, say, Larry and Sergey of Google, they made billions of dollars, but they contributed many more billions of dollars to the US economy. And so we should be empowering these people; we should be cultivating more of the next generation of those types. And yet, I think there’s almost a hostile attitude towards people who have been successful in this country.”

As I wrote about the other day, the rate of new business creation in the United States has been declining steadily since the 1980s.  We won’t have a chance at a real economic recovery until the creation of small businesses is encouraged once again.

But today businesses of all sizes are trying to avoid U.S. taxation.  Right now, the United States has the highest corporate tax rate in the entire world.  Sadly, all businesses have a great deal of incentive to avoid incorporating in the United States.

A recent article in The Wall Street Journal talked about this phenomenon….

As savvy investors and entrepreneurs search for ways to minimize the impact of the U.S. tax system, with its relatively high rates and global reach, they are increasingly incorporating overseas, tax experts say. Some private-equity firms have relocated U.S. companies or divisions to tax-haven countries. U.S. multinational companies have spun off foreign subsidiaries in tax havens. U.S. start-ups are even beginning life offshore.

Large numbers of really good companies are fleeing the United States.

What we are doing is not working.

So what is the answer?

Well, as I have said before, we need to entirely scrap the current tax system and come up with something that works in the 21st century.

But we all know that is not going to happen.

Meanwhile, our economy continues to unravel.  According to the Department of Labor, the unemployment rate rose in 210 metro areas during the month of May, and it only declined in 131 metro areas.

Consumer confidence in this country has hit a seven-month low, and average Americans are becoming increasingly anxious about the state of the economy.

Unfortunately, most of our politicians don’t seem to have any answers and the Federal Reserve is just trying to keep their shell games going.

Every single day the U.S. economy is getting weaker.  Every single day we are going into more debt.  Every single day we get closer to the collapse of the entire system.

Time is running out.

I hope you are making good use of the time you still have left.

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