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Banks Failed But So Did Government; Saved Each Other at Your Expense ^ | March 30, 2014 | Mike Shedlock

Posted on 03/30/2014 5:57:20 PM PDT by Kaslin

In response to Will Prices Rise Significantly When Velocity of Money Picks Up? reader Dave, a friend, noted that as the Fed jacked up its balance sheet, velocity has mirrored the curve to the downside.

Dave asks "Can't an argument be made that since much of the banking system is really insolvent, that the Fed increasing its balance sheet is necessary?"


This depends on what you mean by "necessary" and more importantly, who gets to decide.

I am one of those who staunchly believes that banks should fail. More precisely: Banks did fail, but taxpayers bailed them out.

Was the last bailout "necessary"?

No - not to me. The world will not end if banks fail. Bondholders would have and should have paid the price. Who are the bondholders? In general, the wealthy own most of the assets, including bonds.

However, if "necessary" means in the eyes of central bankers, then yes – it was deemed "necessary".

It's all part of the moral hazard tactics of central banks that tells the "too big to fail banks" that no matter what they do, they will be bailed out, again and again and again.

Privatize the Gains, Socialize the Losses

Last time, Tim Geithner preached to Congress that financial Armageddon was right around the corner if Congress failed to pass a resuce package. Congress did pass a packages on the second attempt. Then Geithner promptly changed the terms of it to do what he wanted with the money.

Speaking before Congress, Bernanke said the collapse of Lehman was his biggest mistake. I suggest it was his only success. Over-leveraged financial institutions should pay the price for their folly, not overburdened taxpayers in general.

The poor bailed out the wealthy. The poor continue to pay the price in two ways.

  1. Excessively low interest rates on deposits
  2. Fed actions to drive up inflation when real wages do not keep up

Not only is that unnecessary, it's middle-class destructive. It's also conveniently disguised theft.

TOPICS: Business/Economy; Culture/Society; Editorial; Government

1 posted on 03/30/2014 5:57:20 PM PDT by Kaslin
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To: Kaslin

Well, AIG, BoA, JPMorgan Chase, and a number of others should’a been allowed to go down the drain.

2 posted on 03/30/2014 6:01:15 PM PDT by Paladin2
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To: Kaslin

The banks also fund the poor to own temporarily; a home they could not afford. Sanctioned by the government.

There was no clamor 2001-2007 from voters like: stop qualifying so many of us for loans!

That’s why no one went to jail. The occupy Wall Street guys fail to grasp.

3 posted on 03/30/2014 6:34:19 PM PDT by cicero2k
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To: Kaslin

This is a very naive position. What about the hundreds of billions of dollars at these banks belonging to depositors? Ooops, there goes GE’s payroll account, so nobody at GE gets paid this week.

4 posted on 03/30/2014 6:37:07 PM PDT by proxy_user
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To: proxy_user

a) deposits are insured to a certain amount.
b) there’s a stronger case for the depositors to recover their money than the investors.

We, the American public, have now paid more than the GE payroll in lost yields, subsidies and back-door bailouts through the NY Fed.

The prospect of failure is necessary in capitalism. For banks to understand the real hazards of risk, they have to have failures to remind them that there’s a price.

5 posted on 03/30/2014 6:55:35 PM PDT by NVDave
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To: NVDave

a) Yeah, $250K. That won’t do a corporation with $100 million on deposit much good.
b) Yeah, eventually. But if large corporations can’t meet their obligations when they are due, then they are forced out of business. It would have been a catastrophic collapse of the economic system, with the entire Fortune 500 having to shut down.

The guys at the Fed understood what they were doing. They didn’t like to have to do it, but they did what was necessary to keep the financial system afloat.

Their mistake was not punishing egregious wrongdoers as individuals after it was over.

6 posted on 03/30/2014 7:01:58 PM PDT by proxy_user
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To: Paladin2
The trouble with this analysis is that it leaves out the main culprit in the meltdown; the government. When the Democrats took control of congress in 2007 they Mau-Mau’d the banks into making loans without reference to ability to pay(sub-prime loans) to advance social justice. They sugar coated the edict by requiring Fannnie/Freddie to buy these mortgages from the issuing banks. The banks, unable to resist the power of the federal government that regulated them, ran with it and cooked up schemes to make money with derivatives based on mortgage backed debt. Now, if the fate of banks could be separated from that of our currency, I would have said,let then pay the price for their cupidity. But the risk for fiat currency is always a run on the banks and hyper inflation, savings rendered valueless, commerce reduced to barter. (see Wiemar Republic) I hold no brief for BoA, etc. but they only fanned the flames, the government stared the conflagration.
7 posted on 03/30/2014 7:03:36 PM PDT by Old North State
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To: proxy_user

The Fed didn’t know their ass from a warm rock. That’s why they got blind-sided by the ARS scandal, the AIG blow-up, the Reserve Fund, you name it.

They were (and still are) flailing around in the dark.

The fact that GE would/could have had their deposits wiped out would have served GE as a warning notice to quit playing at being an industrial company in banker drag.

8 posted on 03/30/2014 7:21:44 PM PDT by NVDave
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To: Old North State

A few more object lessons for buying into crony krapitalism would have been good.

9 posted on 03/30/2014 7:22:22 PM PDT by Paladin2
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