It is the way the banks control the western political and financial system, and through that the way they control the world. Put simply the banks need to be fixed, or they will end up bankrupting us all.
This is not idle speculation. It is not a 'moral hazard' that might happen. It is what the system is designed to do. That is why something that sounds extremely dull, 'banking regulatory reform', is actually the most important political and economic event of the day, possibly of our age. There are so many fascinating things happening around the world, but we have to ignore many of them and keep coming back to this elephant, who is stamping his feet ever more impatiently in our little living room.
The financial weapons of mass destruction that Warren Buffet talked about when derivatives were just starting to grow exponentially in 2003 have only just started to explode. The Financial Crisis was not the end; it was the beginning. There are hundreds of trillions dollars of derivatives in circulation. Derivatives are worth many times the total value of world GDP, which stood at $60 by the end of 2000. The derivatives market is unregulated, and derivative trades happen secretly between two financial institutions or 'counter-parties'.
That is why we now have Too Big to Fail. We now have institutions who are party to derivatives contracts that are worth more than the entire productive capacity of the world. The bailouts and guarantees have only made them bigger.
Regulation currently being discussed in the House and Senate will NOT regulate the majority of derivatives (which might actually be worse than not regulating them at all). It will NOT challenge the Too Big to Fail philosophy - it will in fact entrench it.
Why is that so?
We need a bit of historical perspective here.
We need to understand how the governing system has been manipulated and skewed by financiers to serve their own interests for decades.
It is critical to understand that the Federal Reserve is a private bank.
Yes that's right, the Federal Reserve is a private bank. It is owned by the private banks, to whom it provides it monetary services as 'lender of last resort'. A bank must buy shares in the Fed to be a bank. How many shares does the government own in the Fed? None. What controls does the government have over the Fed? None, except that the Congress can alter its responsibilities by statute.
The word 'Federal' in Federal Reserve has been put in to make it seem that it is a government institution. There are subtle reasons why both the media and academia have been coerced into not talking about it. It is such a success that even most Senators don't understand this point.
The Fed proudly states that it does not take a penny in funding from the US Government, and that in fact it generates profits. But the way they do that is by having a monopoly on the printing of money, normally used to buy US Treasury bonds, on which they are then paid interest by the government. The Fed Charter guarantees that it pays a 6% return to its shareholders - the banks - and covers its own costs. It then gives the rest of its profit to the Treasury.
US citizens are therefore being held captive by private banks who have a guaranteed interest stream generated by their monopoly on the creation of money.
This is a crucial point, and one that requires deeper study. Read our article examining specifically on how the Fed is a private company, what this means to citizens and democracy, and how they need to be reformed.
You would have thought that the ability to create money out of thin air, get paid interest on it, and leverage that ten, twenty or thirty times to create multiple streams of interest income, would be enough.
But no, of course not, greed doesn't work like that. Greed always wants more.
So the bankers also control both the Republican and Democractic parties through campaign contributions. They are the biggest donors to both parties. Of course they are, since they can create money out of thin air.
They have used that influence first to push for deregulation, most importantly the repeal of the Glass-Steagall Act, enacted after the Great Depression to stop excessive risk taking at banks that could drag the whole economy into economic freefall. Sounds strangely familiar?
Then then used it to bail themselves out - all bar the hapless Dick Fuld of Lehman Brothers, that is, who managed to insult then Secretary of the Treasury Hank Paulson and was left out to dry. The disaster that led to put the thumbscrews on the government and sealed the bailout deal.
And now they are using it to entrench their interests, which are best defined as a giant rigged casino in which heads-I-win (i.e heads-I-get-millions-in-annual-bonuses) and tails-you-lose (as in tails-the-taxpayer-pays-the-tab).
The problem is that as the size of the stakes increase, even the seemingly bottomless reserves of the US government could be wiped out. Or more precisely, even the Chinese might stop buying US Treasuries.
Before contemplating that final meltdown, we should all be supporting efforts to change the system.
Sometimes it seems that everyone is complaining and no-one offering solutions, or that the solutions are so complex that only the giant brains of the Fed can solve them, but that is really not the case.
We will talk more about the needed reforms at the Fed in our in-depth article on that topic.
Dylan suggests that the reform of the financial system needs to achieve four aims:
1. Transparency. All derivatives - ALL derivatives - need to be moved onto exchanges, where they can be traded in the open - and regulated. No ifs or buts, no loopholes.
2. Increase capital requirements. If the banks had gone into the housing crash with twice the amount of capital (real hard cash) in their bank accounts, then the Financial Crisis would not have happened. Rather than the 10% that Basel II talks about, we should take inspiration from India's RBI. Their requirement? 25%.
3. Modify the Tax Code to Tax Short-Term Profits. Scams like High-Frequency Trading, which scalp unwitting investors in milliseconds, are helping Goldmans and their investment banking colleagues to cream record profits while adding no economic value whatsoever. They have found the only item in society that can be sold with no tax, a financial trade, and are leveraging it up, just like they leverage everything. Nobel Laureate James Tobin put forward the idea of a Tobin Tax, which will tax every financial transaction. It has been proposed by Lord Adair of the Financial Services Authority. The Economist magazine dismissed this idea as 'wacky', 'Utopian' and 'misguided'. That tells you who's side the Economist is on.