Despite Political Theater US Gov't is "Too Big to Fail"

Paul Craig Roberts
Lew Rockwell

Although the financial press speculates about a downgrade of the US government's credit rating and default if political impasse prevents the debt ceiling from being raised in time, I doubt anyone really believes that the debt ceiling will not be raised. It is just all a part of the political theater of the next couple of months.

Republicans will blame the budget deficit and accumulated national debt on Medicare and Social Security. Wall Street sees billions of profits in privatizing either, and debt rating agencies will oblige their Wall Street paymasters by opining from time to time that US Treasury bonds might be downgraded unless "entitlements can be addressed and the deficit brought under control."

Democrats will say that the budget deficit cannot be addressed without an increase in tax revenues, especially from the rich whose incomes have exploded upward while their tax rates have declined.

ForeclosureGate Could Force Bank Nationalization

Dees Illustration - Web of Debt

Ellen H. Brown
Web of Debt

For two years, politicians have danced around the nationalization issue, but ForeclosureGate may be the last straw.  The megabanks are too big to fail, but they aren’t too big to reorganize as federal institutions serving the public interest.

In January 2009, only a week into Obama’s presidency, David Sanger reported in The New York Times that nationalizing the banks was being discussed.  Privately, the Obama economic team was conceding that more taxpayer money was going to be needed to shore up the banks.  When asked whether nationalization was a good idea, House speaker Nancy Pelosi replied:

“Well, whatever you want to call it . . . . If we are strengthening them, then the American people should get some of the upside of that strengthening. Some people call that nationalization.

“I’m not talking about total ownership,” she quickly cautioned — stopping herself by posing a question: “Would we have ever thought we would see the day when we’d be using that terminology? ‘Nationalization of the banks?’ ”

Noted Matthew Rothschild in a March 2009 editorial:

[T]hat’s the problem today. The word “nationalization” shuts off the debate. Never mind that Britain, facing the same crisis we are, just nationalized the Bank of Scotland. Never mind that Ronald Reagan himself considered such an option during a global banking crisis in the early 1980s.

Although nationalization sounds like socialism, it is actually what is supposed to happen under our capitalist system when a major bank goes bankrupt.  The bank is put into receivership under the FDIC, which takes it over.

What fits the socialist label more, in fact, is the TARP bank bailout, sometimes called “welfare for the rich.”  The banks' losses and risks have been socialized but the profits have not.  The bankers have been feasting on our dime without sharing the spread. 

And that was before ForeclosureGate – the uncovering of massive fraud in the foreclosure process.  Investors are now suing to put defective loans back on bank balance sheets.  If they win, the banks will be hopelessly under water.

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Banks should be broken up, Bank of England Governor Mervyn King warns

Mervyn King, Governor of the Bank of England, has thrown his weight behind breaking up the banks as part of wider reforms to protect the taxpayer from another financial industry meltdown.

Mervyn King: Reuters image

Philip Aldrich
Telegraph

In a speech to the Buttonwood Gathering in New York, he set out his vision for a banking industry that does not imperil the next generation. He warned creditors that "they will bear losses in the event of failure" and stressed that banks in the future must be "financed much more heavily by equity rather than short-term debt".

Addressing the option of separating investment banking from retail banking, he said: "If there is a need for genuinely safe deposits the only way they can be provided, while ensuring costs and benefits are fully aligned, is to insist such deposits do not coexist with risky assets."

He said such a radical measure "explicitly recognises that the pretence that risk-free deposits can be supported by risky assets is alchemy" and argued that a simple break-up would make it harder for banks to work around the rules.

"The attraction of the more radical solutions is that they offer the hope of avoiding the seemingly inevitable drift to ever more complex and costly regulation," he said. "The advantage of these types of more fundamental proposals is that no tax or capital requirement needs to be calibrated."

Banks are already facing the toughest regulatory overhaul in years with the capital and liquidity buffers being introduced under Basel III. However, Mr King said Basel is only the start as "even the new levels of capital are insufficient to prevent another crisis". The Goverment's £2.5bn bank levy is also "not a silver bullet", he said: "In the area of financial stability, it makes sense to have both belt and braces."

Banks have attacked new regulations and taxes for lumbering the industry with such high costs economic growth will suffer, claiming that as many as 10m fewer jobs will be created over five years as a result. Mr King dismissed the argument, saying: "The benefits to society, most obviously through greater financial stability, but also through factors such as higher tax revenue, are likely to swamp any change in the private costs faced by banks."

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Foreclosuregate: Time to Break Up Too-Big-to-Fail Banks?

Ellen Brown
Web Of Debt

Looming losses from the mortgage scandal dubbed “foreclosuregate” may qualify as the sort of systemic risk that, under the new financial reform bill, warrants the breakup of the too-big-to-fail banks. The Kanjorski amendment allows federal regulators to pre-emptively break up large financial institutions that—for any reason—pose a threat to U.S. financial or economic stability.

Although downplayed by most media accounts and popular financial analysts, crippling bank losses from foreclosure flaws appear to be imminent and unavoidable. The defects prompting the “RoboSigning Scandal” are not mere technicalities but are inherent to the securitization process. They cannot be cured. This deep-seated fraud is already explicitly outlined in publicly available lawsuits.

There is, however, no need to panic, no need for TARP II, and no need for legislation to further conceal the fraud and push the inevitable failure of the too-big-to-fail banks into the future.

Federal regulators now have the tools to take control and set things right. The Wall Street giants escaped the Volcker Rule, which would have limited their size, and the Brown-Kaufman amendment, which would have broken up the largest six banks outright; but the financial reform bill has us covered. The Kanjorski amendment—which slipped past lobbyists largely unnoticed—allows federal regulators to preemptively break up large financial institutions that pose a threat to U.S. financial or economic stability.

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