The gap between capitalism based on production and capitalism predicated on sheer gambling has never been wider.
Crony capitalism controls every crevice of our political-financial system. By this point speculation has been nationalized and institutionalized through the coordinated efforts of governments, multinational entities, central banks and private banks.
The result is that classical capitalism is over.
In its place, the Trends Research Institute’s “bankism” trend has become the dominant global economic system of the 21st century.
Capitalism is classically defined as “an economic and political system in which trade and industry are controlled by private owners for profit, rather than being controlled by the state.” In bankism, bankers control capital flow and markets. They dictate monetary policy with the support of state and central banks.
Bankism is a Ponzi scheme fueled by government debt and cheap money that buoys banks that otherwise would become insolvent without that help. By-products of bankism are artificially inflated debt and stock markets, bolstered by corporate buyouts and buybacks financed by the fee-collecting big banks.
Bankism relies on bipartisan political collusion. On December 11, 2014, for instance, using Citigroup’s wording and JPMorgan Chase CEO Jamie Dimon’s collaborative calls to Congress along with those by President Barack Obama, the already weak Dodd-Frank Act of 2010 was rendered even weaker. The language attached to a $1.1 trillion spending bill explicitly enabled credit-default swaps to be part of a bank’s balance sheet — and thus be able to rely on federal deposit insurance during calamities.
As bad as that sounds — and is — the resultant debate over the new language overshadowed the existing language that allowed these types of risky securities to be created by banks to begin with, as long as they are “separated” from the bank’s main books. But separating risk through creative bookkeeping doesn’t make it disappear; it just provides talking points for ambitious congressional representatives. If FDIC-insured deposits and credit-default swaps live in the same neighborhood (the bank holding company), even if they don’t live in the same house (say one lives in the garage), a liquidity earthquake can destroy both.
Bankism is global
Bankism is so prevalent, it has fostered its own nicknames. One of them, the “G-SIB” (global systemically important banks) classification, sprouted after the 2008 crisis began.
The 30 G-SIBs dominate market share and thus market behavior in their respective national financial systems. Representing 15 economies, their share of lending to their non-financial private systems ranges from 4 percent to 75 percent per bank. Their share of financial assets ranges from 9 to 77 percent. Weighted by GDP, they control, on average, 40 percent of lending and 52 percent of assets worldwide. Bankism reflects consolidated economic power, yet diffusing their size or influence remains off the table.
Supposedly to combat the risk these GSIBs pose, regulators require them to set aside an amount of Tier 1 capital based on five factors: size, interconnectedness, lack of available substitutes for their services, global (cross-jurisdictional) activities and complexity. They have been divided into four regulatory buckets according to levels of risk. Most have committed multibillion-dollar crimes, from rigging London Interbank Offered Rates, or LIBOR, and the Forex Market to money laundering and fraud. None of their leaders have been indicted or jailed.
Bucket 4: HSBC and JPM Chase
Bucket 3: Barclays, BNP, Citigroup and Deutsche Bank
Bucket 2: Bank of America, Credit Suisse, Goldman Sachs, Mitsubishi UFJ FG, Morgan Stanley, and the Royal Bank of Scotland
Bucket 1: Agricultural Bank of China, Bank of China, Bank of New York Mellon, BBVA, Group BPCE, Groupe Credit Agricole, Industrial and Commercial Bank of China Limited, ING Bank, Mizuho FG, Nordea, Santander, Societe Generale, Standard Chartered, State Street, Sumitomo Mitsui FG, UBS, Unicredit Group and Wells Fargo.
Big banks keep getting bigger
Since the financial crisis, the biggest banks have grown bigger. Their assets have increased 41.4 percent and their deposits by 82.4 percent. Their cash pile has nearly quadrupled in size. Though the official reason for providing a cheap money supply was to help the general economy by inspiring banks to lend, the figures show they weren’t lending more, but simply hoarding money.
Just 10 US banks hold about 97 percent of all bank-trading assets. Of those, JPM Chase holds 43.8 percent and Citigroup holds 24.5 percent. In addition, the top four US banks (JPM Chase, Citigroup, Goldman Sachs and Bank of America) hold $219 trillion out of $237 trillion, or 93 percent, of US derivatives.
In capitalism, businesses are financially accountable for their risks. They rise and fall on their own merits (as well as the fruits of certain powerful political connections). According to the principles of capitalism, no business is too big to fail. In bankism, private bank risk is abetted by federal policy and shouldered by the public. The biggest, most politically connected banks aren’t allowed to fail. Institutionalized speculation is fueled by government and central bank funds, while austerity programs and economic inequality crush the stability of entire populations.
BIS on bankism
In capitalism, money is raised through capital markets and private channels. In bankism, banks rely on $8 trillion in Federal Reserve, European Central Bank, Bank of Japan and People’s Bank of China intervention. In capitalism, criminals are supposed to be jailed. In bankism, bankers commit financial crimes against humanity with impunity, enabled by complicit politicians, lax regulation and unequal justice. Banks know this. Even Bank of America observed that 56 percent of global GDP and 83 percent of equities were being sustained by a zero interest rate and Quantitative Easing policies.
According to the Bank of International Settlements’ (BIS) December report, markets are exhibiting growing instability.
The October 2014 volatility spike was more pronounced than the one in August. Though it was alleviated by renewed global quantitative-easing measures, this pattern, the BIS says, “suggests more than a quantum of fragility underlies the current elevated mood in financial markets.”
The ECB had cut its rates to -.20 percent, and promised to buy more securities to increase its book size by 50 percent or $1 trillion Euros, a size equal to about 10 percent of the Euro-area GDP. On October 31, the Bank of Japan announced its Abenomics Quantitative and Qualitative Easing plan, raising its monetary target from 60-70 trillion yen to 80 trillion yen over 2015. That would increase its balance sheet by 30 percent, an amount equivalent to 16 percent of GDP.
The People’s Bank of China cut rates on November 21 for the first time since July 2012, and with the global turmoil predicated on bankism, more such moves are sure to come in 2015.
Each central bank provision of “liquidity crack” caused stock markets to leap and credit spreads to tighten in response. But the effects of such measures are increasingly short-lived. By December 2014, volatility spiked to levels last seen in 2011, compounded by substantive oil price drops.
The Fed remains the largest global hedge fund with a $4.5 trillion book of assets. It has grown by 60 percent since September 2012, reflecting an amount equivalent to 25 percent of US GDP. Through the magic of the bankism partnership, the Fed is also a paying client of JPM Chase. The bank gets fees for holding and executing transactions on behalf of the New York Fed’s $1.7 trillion QE mortgage portfolio.
As the Fed tapered in 2014, big US banks took up the slack, more than doubling their share of government debt purchases in 2014 vs. the prior year. Just seven banks accounted for most of that increase.
By the end of 2014, the Treasury Department issued about $1 trillion in new debt to make up for shortfalls in government revenues and to pay for maturing short-term debt underlying the Fed’s QE program.
The next bankism crisis
For big banks, zero-percent interest rates have fueled yet another bubble — this time in leveraged (high-risk) loans to corporations. While banks decreased their portfolios of residential mortgage loans, they used the cheap money to increase their lucrative leveraged-lending business into a $1 trillion market, surpassing pre-2008 crisis levels. They deployed similar “structured credit packaging” methods — in essence, baking the same toxic pies, just with a different filling.
The 2014 issuance of collateralized loan obligations, or CLOs, eclipsed 2006 records. Just as collateralized debt obligations drove subprime loan origination by providing them financial homes the banks can sell around the world, CLOs do the same thing now. Holding two-thirds of the market, CLOs are the biggest buyers of leveraged loans.
Not surprisingly, the top 10 global CLO arrangers are members of the old wrecking crew, such as Citigroup, JPM Chase, Bank of America, Goldman Sachs and Barclays. Bankism invites dangerous deja-vu.
In November 2014, regulators woke up to this looming problem, but did nothing other than talk about it. They found that one-third of the $767 billion in loans they examined in their annual bank loan review showed “lax reviews of potential borrowers and poor risk management.” In response, and as if it would help, they simply warned institutions to “cease their participation in this type of lending until their processes improve sufficiently.”
Meanwhile, banks kept stuffing these risky loans into the CLOs, which are AAA-rated securities, just as they did before the subprime crisis. Then they dumped them into pension and other asset-management funds desperate for more yield, regardless of the risk — again.