Tag: banks

The dark side of income inequality

Republicans, Libertarians, and Any Rand aficionados like to talk about income inequality as if it is an intrinsically socialist concept. And there is some truth to that. Socialists and other distributionists often appeal to income inequality in order to violate private property rights and rob from Peter in order to pay Paula, DaPaul and Pedro. Income equality can be, and has often been used to justify socialism.

However, superior talent, hard work, and luck combined with a capitalist system are not the only source of income inequality. Income inequality also comes from theft, fraud, government corruption and other evils. And that is the very sort of income inequality that is not only indefensible, but is ever bit as problematic economically as it is morally.  Zerohedge explains the dark side of income inequality:

This brings us to the second undesirable and unjustified source of income inequalities, i.e., the creation of money out of thin air, or legal counterfeiting, by central banks. It should be no surprise the growing gap in income inequalities has coincided with the adoption of fiat currencies worldwide. Every dollar the central bank creates benefits the early recipients of the money—the government and the banking sector — at the expense of the late recipients of the money, the wage earners, and the poor. Since the creation of a fiat currency system in 1971, the dollar has lost 82 percent of its value while the banking sector has gone from 4 percent of GDP to well over 10 percent today.

The central bank does not create anything real; neither resources nor goods and services. When it creates money it causes the price of transactions to increase. The original quantity theory of money clearly related money to the price of anything money can buy, including assets. When the central bank creates money, traders, hedge funds and banks — being first in line — benefit from the increased variability and upward trend in asset prices. Also, future contracts and other derivative products on exchange rates or interest rates were unnecessary prior to 1971, since hedging activity was mostly unnecessary. The central bank is responsible for this added risk, variability, and surge in asset prices unjustified by fundamentals.

The banking sector has been able to significantly increase its profits or claims on goods and services. However, more claims held by one sector, which essentially does not create anything of real value, means less claims on real goods and services for everyone else. This is why counterfeiting is illegal. Hence, the central bank has been playing a central role as a “reverse Robin Hood” by increasing the economic pie going to the rich and by slowly sinking the middle class toward poverty.

One need not be a socialist, or oppose capitalism, to oppose the income equality that is the result of theft. With the assistance of the Federal Reserve and Congress, the banks have financially raped the American economy and the American people through fraud and political corruption. A reckoning is overdue. Everything that has been done in the last five years has been done in order to postpone it. And yet, a reckoning is coming nevertheless, because that which cannot continue will not continue. The rich simply cannot consume enough to substitute for more equitable consumption; how many cars can a man drive? In how many homes can a man dwell?

Wall Street loses Krugman

Wow, I have to admit that I didn’t expect to see this out of the former Enron advisor:

Normal people take it in stride; even if they’re angry and bitter over political setbacks, they don’t cry persecution, compare their critics to Nazis and insist that the world revolves around their hurt feelings. But the rich are different from you and me.

And yes, that’s partly because they have more money, and the power that goes with it. They can and all too often do surround themselves with courtiers who tell them what they want to hear and never, ever, tell them they’re being foolish. They’re accustomed to being treated with deference, not just by the people they hire but by politicians who want their campaign contributions. And so they are shocked to discover that money can’t buy everything, can’t insulate them from all adversity.

I also suspect that today’s Masters of the Universe are insecure about the nature of their success. We’re not talking captains of industry here, men who make stuff. We are, instead, talking about wheeler-dealers, men who push money around and get rich by skimming some off the top as it sloshes by. They may boast that they are job creators, the people who make the economy work, but are they really adding value? Many of us doubt it — and so, I suspect, do some of the wealthy themselves, a form of self-doubt that causes them to lash out even more furiously at their critics.

Nice call-out to F. Scott Fitzgerald there on the part of the quasi-Nobel winner too. But Krugman fails to notice that there is an amount of truth to Perkins’s complaint about the coming Kristallnacht of the so-called One Percent, especially given that a disproportionate amount of the parasitical One Percent are Jewish.

It’s not paranoia when someone really is out to get you. And self-doubt is more than justified when you know damn well that you eminently deserve to have people out to get you. The financial skimmers of Wall Street not only don’t make the economy work, they have destroyed the wealthiest economy history has ever known through the massive malinvestments their massive credit bubble has created. And they have made matters worse by coopting the federal government into making good their losses at the expense of the American people.

When the final crash comes, I expect a considerable portion of the One Percent to be wiped out by an angry and well-armed populace. And no one should shed a tear for them, because they eminently deserve their such bitter desserts. The wolves of Wall Street who preyed upon the helpless for decades will become the hunted.

China: two stories

First, this Forbes report is NOT true: “The People’s Bank of China , the central bank, has just ordered commercial banks to halt cash transfers.” The false report was particularly worrisome in light of the way it appeared to coincide with HSBC’s recent attempt to crack down on all withdrawals of more than 3,000 pounds in the UK. (HSBC appears to have backed down on that following widespread outrage.) However, that does not mean that all is well with the Chinese economy, which you will recall has been engaged in much bigger credit inflation and government spending stimulus programs since 2009 than the USA or the European governments. From Zerohedge two weeks ago:

the big problem in big China remains that of an out-of-control credit creation process that is blowing up. As we previously noted, instead of crushing credit creation, the PBOC’s liquidity rationing has forced distressed companies into high-interest-cost products in the shadow-banking world. Investors on the other side of “troubled shadow banking products” had assumed that ‘someone’ would bail them out but this evening Reuters reports that ICBC has confirmed that it will not rescue holders of the “Credit Equals Gold #1 Collective Trust Product”, due to mature Jan 31st with $492 million outstanding.

A single $492 million default sounds very small compared to the overall size of the shadow banking market, but the problem is that what expands by the multiplication effect will contract even faster. There are many multiples of credit dollars stacked upon each actual dollar, so a default has a domino effect that is one or two orders of magnitude greater than the size of the default itself.

It’s probably not a coincidence that the banks appear to be a little nervous leading up to this default, because it’s not possible to know exactly what the effects of the Friday default will be. I expect next weekend will be a very busy one throughout the financial industry as the markets position for the fallout on Monday; I imagine the central banks’ printing presses will be smoking.

It’s not your money

In case you were wondering why a bank can refuse to give you “your money” when you ask for it, it is because the terms of the loan you provided them permit it.

Stephen Cotton went to his local HSBC branch this month to withdraw £7,000 from his instant access savings account to pay back a loan from his mother. A year before, he had withdrawn a larger sum in cash from HSBC without a problem.

But this time it was different, as he told Money Box: “When we presented them with the withdrawal slip, they declined to give us the money because we could not provide them with a satisfactory explanation for what the money was for. They wanted a letter from the person involved.”

Mr Cotton says the staff refused to tell him how much he could have: “So I wrote out a few slips. I said, ‘Can I have £5,000?’ They said no. I said, ‘Can I have £4,000?’ They said no. And then I wrote one out for £3,000 and they said, ‘OK, we’ll give you that.’ “

He asked if he could return later that day to withdraw another £3,000, but he was told he could not do the same thing twice in one day.He wrote to complain to HSBC about the new rules and also that he had not been informed of any change.

The bank said it did not have to tell him. “As this was not a change to the Terms and Conditions of your bank account, we had no need to pre-notify customers of the change,” HSBC wrote.

The only way you can be certain to get your money back is by calling the
loan, or to put it in more common terms, closing your account.

Is Germany’s gold gone?

Zerohedge features an exchange of letters with the Deutsche Bundesbank:

Here is a recent correspondence from our friend Lars Schall, an independent financial journalist, and the German Central Bank, the Deutsche Bundesbank, regarding the exact whereabouts and specifications of Germany’s national gold reserve. From the correspondence below, it appears that the US Central Bank had already leased out Germany’s gold reserves in prior years and no longer has it, as the gold bars the US Central Bankers returned to Germany last year were clearly not the same ones that Germany originally deposited with them. The questions Mr. Schall’s revelations now beg is (1) if the Banque de France and the Bank of England have Germany’s original gold as well; and (2) if the various Central Bankers are deliberately returning Germany’s gold on a painfully slow timeline because they have already leased out Germany’s gold into the open market in prior years, no longer hold it, and must therefore scrape together Germany’s gold from the open market now.

The fact that it is taking eight years for Germany to obtain a portion of its gold upon request, and that those bars are not the same ones that were originally on deposit in New York tends to suggest that the USA’s gold is probably long gone from the Federal Reserve as well.

Fed failure within 10 years

Jim Rogers predicts the failure of the USA’s third central bank:

With Bernanke’s term due to expire in January, Rogers says he will be remembered as “the guy who set the stage for the demise of the Central Bank in America. We’ve had three central banks in America. The first two disappeared. This one’s going to disappear too in the next decade.”

“It’s not a possibility,” he adds, “it’s a probability. People will realise that these guys have led us down a terrible path. The Fed balance sheet has increased by 500 per cent in the last 5 years and a lot of it’s garbage.”

Unlike the wider market, Rogers does not set great store by the Fed’s decision shortly before Christmas to taper its bond buying measures from $85bn per month to $75bn. The announcement put pressure on gold and drove US equities to a new all-time high, in what Rogers views as a relief rally.

“The US went up because people said, ‘Now it’s done, we don’t have to worry anymore.’ But somewhere along the line, markets are going to start suffering. They’ll taper until the markets start hurting and then they’ll panic and loosen up again. They’ve got themselves in a terrible box.”

“It’ll turn into a bubble or a very inflated situation, but eventually the markets will say, we’re not going to take your garbage anymore, whether it’s treasury bonds or currency.”

As you know, I disagree with the inflation call, but I don’t disagree that the Federal Reserve will collapse in bankruptcy sooner or later. As I have repeatedly noted, I expect a political and financial collapse of the US empire by 2033. The pace of problematic events appears to be picking up speed; not even the reported 4 percent economic growth and new Dow highs appears to have dented the average American’s pessimism.

The stage is being set. But when the curtain will fall, I do not know. Every government and every financial regime comes to an end sooner or later, but it usually much easier to see the end date in hindsight than in real time.

This time it isn’t different

The astonishing story of a thrice-failed Spanish bank:

Consider the story of Bankia.

Bankia was formed by merging seven bankrupt regional Spanish banks in 2010. The new bank was funded by Spain’s Government rescue fund… which received “preference shares” in return for over €4 billion (from taxpayers). These preference shares were shares that a) yielded 7.75% and b) would get paid before ordinary investors if Bankia failed again.

So right away, the Spanish Government was taking taxpayer money to give itself preferential treatment over ordinary investors. Indeed, those investors who owned shares in the seven banks that merged to form Bankia lost their shirts. They were wiped out and lost everything.

Bankia was then taken public in 2011. Spanish investment bankers convinced the Spanish public that the bank was a fantastic investment. Over 98% of the shares were sold to Spanish investors.

One year later, Bankia was bankrupt again, and required the single largest bailout in Spain’s history: €19 billion. Spain took over the bank and Bankia shares were frozen on the market (meaning you couldn’t sell them if you wanted to). When the bailout took place, Bankia shareholders were all but wiped out, forced to take huge losses as part of the deal. The vast majority of them were individual investors (the bank currently faces a lawsuit for over 140,000 claims of mis-selling shares).

So that’s two wipeouts in as many years.

The bank was taken public a year a second time later in May 2013. Once again Bankia shares promptly collapsed, losing 80% of their value in a matter of days. And once again, it was ordinary investors who got destroyed. Indeed, things were so awful that a police officer stabbed a Bankia banker who sold him over €300,000 worth of shares (the banker had convinced him it was a great investment).

Which brings us to today.

Bankia remains completely bankrupt. But its executives and the Spanish Government continue to claim that things are improving and that the bank is on the up and up. Indeed, just a few weeks ago, the Wall Street Journal wrote an article titled “Investors Show Interest in Bankia.” The story featured a quote from Spain’s Finance Minister that, “… it is logical. The perception of Spain has improved and Banki has improved a lot.”

Bear in mind, this is a bank that has wiped out investors THREE times in the last THREE YEARS. So that’s three different rounds of individual investors being told that Bankia was a great investment and losing everything. Every single one of these wipeouts was preceded by both bankers and Spanish Government officials claiming that “everything had been fixed” and that Bankia was a success story.

And now the Spanish Government is trying to convince them to line up for a fourth round.

Keep this in mind when you read the reassurances that this time, the green shoots really have been spotted, that the economy is growing at more than 4 percent per quarter, and stocks are cheap at their all-time highs if you only look at them in just the right way.

Mailvox: you talking to ME?

Serge Tomiko is a rather strange anklebiter who enjoys informing me that I know absolutely nothing about economics, which statement is inevitably followed by an economics-related assertion that indicates he has read the appropriate material, but he hasn’t understood it. He’s very much like Kevin Cline in A Fish Called Wanda; the last time he showed up, he failed to understand that the graph he was citing to dispute my contention was charting the data from the very same Federal Reserve report I had cited in the first place.

This time he felt the need to “correct” my factual statement that deposits are unsecured loans from the depositor to the bank:

Once again, Vox shows he is absolutely clueless about how banking functions. Deposits are NOT loans to the bank. Banks do not in any way require deposits. It is a service they provide.

Banks create money by the authority of the government, which is given to entities in exchange for interest payments. They do not lend money. In this case, the banks are being perfectly honest. It doesn’t matter in the slightest whether or not they have deposits. In fact, this kind of policy is intended to discourage deposits. 

Because beating up on Serge feels rather like kicking a toddler in the head, I thought I should give him the opportunity to retract his foolish “correction”.  I wrote: “Serge_Tomiko, I humiliated you the last time you tried to correct me.
Fair warning: I’m going to prison-rape you on this one, brutally, if you
don’t retract this. You have until tomorrow to think this over.”

Not being the brightest bulb on the planet, Serge proceeded to double-down.

What more can one say? It should be blatantly obvious. How could banks charge negative interest rates if their lending was at all dependent upon deposits?

This is a complicated issue, but Vox has it completely wrong.

This would a good, recent work that not only demolishes Vox’s common, yet ill informed idea of banking, it explains the origin of his error. Will he read it? I doubt it. 

As it happens, I did read it. I could have written it. And not only do I completely agree with it, but I note that it has precisely NOTHING to do with my original contention. The article deals with what bankers do with the money they are loaned by their depositors and says absolutely nothing about the nature of that money or the nature of the legal relationship between the depositor and the bank. Regardless of what Serge thinks, the central message of Buddhism is not every man for himself.

On the other hand, the 1848 Foley-Hill case in the English House of Lords said everything that one needs to know about both.

Edward Thomas Foley,–Appellant; Thomas Hill and Others,-Respondents

(1848) 2 HLC 28
English Reports Citation: 9 E.R. 1002
July 31, August 1, 1848.

Mews’ Dig. i. 42, 1007; ix. 76; xi. 988. S.C. In 8 Jur., 347; 1 Ph. 399; 13 L.J. Ch. 182. On point as to relation between banker and customer, considered in St. Aubyn v. Smart, 1867, L.R. 5 Eq. 189; A.-G. v. Edmunds, 1868, L.R. 6 Eq. 390; Moxon v. Bright, 1869, L.R. 4 Ch. 294; Summers v. City Bank, 1874, L.R. 9 C.P. 587; Marten v. Rocke, 1885, 53 L.T., 1948. Distinguished on point as to limitation (1 Ph. 399; cf. 2 H.L.C. pp. 41, 42) in In re Tidd (1893), 3 Ch. 156, and in Atkinson v. Bradford Third Equitable, etc., Society, 1890, 25 Q.B.D. 381.

EDWARD THOMAS & FOLEY, – Appellant; THOMAS HILL and Others,–, Respondents [July 31, August 1, 1848].

Banker and Customer–Accounts not complicated, subject for action, and not for bill.

The relation between a Banker and Customer, who pays money into the Bank, is the ordinary relation of debtor and creditor, with a superadded obligation arising out of the custom of bankers to honour the customer’s drafts; and that relation is not altered by an agreement by the banker to allow the interest on the balances in the Bank.

The relation of Banker and Customer does not partake of a fiduciary character, nor bear analogy to the relation between Principal and Factor or Agent, who is quasi trustee for the principal in respect of the particular matter for which. he is appointed factor or agent.

Is that sufficiently clear? The relationship between the depositor and the bank is the normal one between a creditor and a debtor. Because it is a loan from the former to the latter. In case the Old English legalese is too complicated for you, we can go from 1848 to 2013 and make it even simpler. Last week, the investor Jim Sinclair explained the same thing on Market Sanity:

I think that our listeners need to understand that when they make a deposit in a bank, they don’t have an asset. They become an unsecured lender to the banking institution, that goes back to British law in the 1850s and present law in North America and elsewhere. In fact, it’s universally accepted that once you make a deposit in a bank you’re lending the money to the bank. When you hear that the bondholders and lenders will have to undertake the rescue of any banking institution that faces difficulty to the listener, you are the lender. You are a lender without collateral. You are in a very junior financial position.

And if you’re still in doubt, it is right there in US law, specifically 12 USC § 1813 – Definitions

The term “deposit” means—
(1) the unpaid balance of money or its equivalent received or held by a bank or savings association in the usual course of business and for which it has given or is obligated to give credit, either conditionally or unconditionally, to a commercial, checking, savings, time, or thrift account, or which is evidenced by its certificate of deposit, thrift certificate, investment certificate, certificate of indebtedness, or other similar name, or a check or draft drawn against a deposit account and certified by the bank or savings association, or a letter of credit or a traveler’s check on which the bank or savings association is primarily liable:

What is an “unpaid balance of money received?” It is a loan. As it happens, it is an unsecured loan, albeit one that is nominally guaranteed by the FDIC, at the FDIC’s sole discretion. Which is exactly what I stated in the first place. Banks are nothing but middlemen, which is why they require loans from their “depositors” in order to make new loans and profit from the difference between the interest they pay and the interest paid to them. The real service they provide is collecting all of the many smaller deposit-loans into a single large credit pool that can then be borrowed from more efficiently in larger loan packages. This is a legitimate function, perhaps even a necessary one, but hardly one that rationally justifies nearly 30 percent of all the operating profit in the country being devoted to it.

As it happens, the ability of the banks to create money is not completely dependent upon receiving loans from the general public. They can also receive loans directly from the Federal Reserve. And, as per the previous post, that $2.5 trillion injection of credit from the Fed is what has produced the $2.1 trillion nominal increase in bank assets since 2008.

The amusing thing about this particular failure to grasp the obvious is that Serge is a self-avowed fascist who flatters himself with the idea that he understands the English Common Law. It appears he is still stuck on the Magna Carta and hasn’t reached the 19th century yet.

Yikes

Everyone has been wondering where the anticipated inflation is.  The answer, it appears, is in Chinese bank assets.

Go to Zerohedge to read the whole thing.  But the key bit is this: “In the past five years the total assets on US bank books have risen by a paltry $2.1 trillion while over the same period, Chinese bank assets have exploded by an unprecedented $15.4 trillion hitting a gargantuan CNY147 trillion or an epic $24 trillion – some two and a half times the GDP of China!

 Putting the rate of change in perspective, while the Fed was actively pumping $85 billion per month into US banks for a total of $1 trillion each year, in just the trailing 12 months ended September 30, Chinese bank assets grew by a mind-blowing $3.6 trillion!“

This is going to end well. Real well. And here I thought things were bad just looking at the USA, Europe, and Japan.

Paying to give them money

This is a fascinating example of the potential consequences of American bank depositors failing to understand what their bank deposits are:

Leading US banks have warned that they could start charging companies and consumers for deposits if the US Federal Reserve cuts the interest it pays on bank reserves. Depositors already have to cope with near-zero interest rates, but paying just to leave money in the bank would be highly unusual and unwelcome for companies and households.

This is akin to the credit card company paying you for the privilege of borrowing their money. It should also eliminate any last vestige of belief in the idea that the Federal Reserve, the Congress, or the banks have any capacity for putting either the economy or the American people before their own short-term pecuniary interests.

Just to make it clear, your bank deposit is a loan you make to the bank. It is an unsecured loan that the bank can utilize in any way it pleases, and since it is unsecured, if the bank happens to lose the money by making bad investments or spending it on cocaine and expensive hookers, you have no legal recourse. This is why John Corzine is not only not in jail, but hasn’t even been charged with a crime; he didn’t commit one.

It’s not stealing if you’re dumb enough to give them the money in return for an unsecured promise to pay it back so long as you ask for it before they don’t have it on hand.

And note that this is bank industry opposition to a rate cut, not the much-feared rate increase.