In his latest letter to investors JP Morgan CEO Jamie Dimon discussed US public policy in depth – areas he’s avoided commenting on in the past. He ends with a strong statement calling for more collaboration between business and government. Could it be that having his name bandied about for Treasury Secretary for the Trump Administration got him thinking about politics? And, what will that mean for banking and finance in the US?
It is said there is a revolving door between the Treasury, the Federal Reserve, the SEC and the big banks, so it certainly wouldn’t be unusual for someone in his position to scoot on over to the next horse on the US financial system merry-go-round. Is it retention of valuable expertise and leadership, or is it the most damaging conflict of interest imaginable? You decide.
In fact, the continued instability and vulnerability of our monetary system is one of the top threats to your retirement accounts and savings, and it could very well be because of these kinds of conflicts of interest in banking and the agencies that regulate them. Look at the evidence.
Complex systems collapse because they are unsustainable beyond certain size or scale. Either the energy inputs are too great to sustain the system or the interactions are too numerous to remain stable, or both.James Rickards,
New York Times Bestselling Author
In the aftermath of the 2008 financial crisis, few have noticed that fundamental views on monetary policy and the economy have not meaningfully shifted. More specifically, banks have consolidated and their balance sheets contain a greater concentration of assets than before. Derivative and Collateralized Debt Obligation (CDO) positions have expanded to levels even greater than they were in 2008. A definite sign of trouble ahead.
These very complicated financial instruments were largely responsible for exacerbating the housing bust. While Dodd-Frank regulation (Wall Street reform) requires banks to hold higher levels of capital reserves, there is little transparency on how these obligations are priced and risk levels assessed. In addition, bank stress testing doesn’t truly reflect the risk and financial damage these securities can inflict because they aren’t counted as assets on bank balance sheets.
Measures Taken to Solve the Crisis Created a New Set of Problems
As our national debt breaches the $20 trillion level, it is a fact that our debt is now twice what it was when the last crisis struck. Alan Greenspan stated that the Fed cannot exit its era of quantitative easing (QE) without serious repercussions. According to insider reports, Greenspan warns there will be a “significant market event”. He referred to the threat as “a tinder box of explosive inflation looking for a spark”. Then he identified the spark. Sitting on Fed Balance sheets right now are $4 trillion of excess reserves. A product of multiple QE Programs engaged in to bail out banks and the economy.
The Shocking Truth About Our Fractional Banking System
Risk escalates even more when you understand the structure of our banking system which is based on fractional reserves. Banks only keep a fraction of their depositors’ money in house in reserves. When you deposit $100 in an account, the bank is able to lend $90 to businesses and consumers. Interest charged on these loans generate profits for the bank.
The problem with the system is it’s built on the fact that new credit in the form of loans has to continually grow to cover all the interest that needs to be paid back on past loans. Like a house of cards, if new credit isn’t infused into the banking system, then past debts aren’t serviced and defaults start occurring.
We can now see the dominoes lining up. If rates rise, bank lending slows down and the source of new credit begins to dry up. Stocks weaken, bond values plummet and derivative investments begin to lose value as the value of the underlying assets that support the derivative market begin to shrink. Remember the Mortgage Backed Security? It’s deja vu all over again; however, your financial exits for getting money out of the system are constrained due to post crisis developments and the way our banking system works.
Are the regulations perhaps ineffective on purpose? Follow the money. Maybe so.
But our highly levered financial system is like a truckload of nitro glycerin on a bumpy road. One mistake can set off a credit implosion where holders of stocks, high yield bonds, and yes, subprime mortgages all rush to the bank to claim its one and only dollar in the vault.Bill Gross
Of course, Jamie Dimon thinks “Too Big to Fail” has been solved. But he also thinks current banking capital requirements are too high and that new mortgage underwriting standards are too stringent. And Washington is listening to him. Will we see the banking regulatory system quietly take two steps back in the near future? Will your portfolio be safe when history repeats itself?