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America’s Big Five Are Plunging the World Into Another Banking Crisis

America’s Big Five Are Plunging the World Into Another Banking Crisis
A comeback of the pre-crisis lending practices by the world’s biggest banks could end in another banking crisis. So, what exactly are the banking policies? Radio Sputnik is discussing it with former World Bank economist Peter Koenig.

In his story titled ‘Memories of Financial Crisis Fading as Risks Rise’ an AP economics writer Paul Wiseman points to several factors which banking analysts describe as ‘worrying’:

— a surge in subprime auto loans for financially stretched buyers,

— a US Congress recent vote to ease regulations aimed at reduction of risks to taxpayers  and of course,

— the unprecedented rise of America's five biggest banks which now account for 44 percent of bank assets, compared to 38 percent in 2007…

Says financial consultant Peter Koenig, former World Bank economist, based in Zurich:

I think there is what we would call an impending banking crisis. A new banking crisis is looming on the horizon, I believe. And then, of course, there are many layers to this banking crisis and many elements to it. And if I may, I would like to, perhaps, address three of them, which give clear signals that something is not correct and will not be sustainable over time.

The points that I would like to make are not necessarily listed in order of priority, because they are related, and make no mistake – the coming crisis, like the one in 2008, which is still lingering, is planned. And it is planned by the international banking and financial elite, which is led by Wall Street with the support of the Fed and of the European Central Bank.

And, of course, the purpose of that is to make the rich financial elite richer and actually rob the common people of their savings and of their social system. That has been the case before and it is certainly happening again. And that’s what is looming.

The first one of these elements I want to talk about is the derivative market. It is frightening. There currently is an estimated way over $700 trillion globally outstanding in derivatives. And some people say it is over a quadrillion. But I'm conservative, I think this is probably a good enough figure, because it doesn’t really matter at this point. Even the $700 trillion is about ten times the global GDP of 72.6 trillion – an estimate of 2014.

And you look at the five largest US banks, they alone, each of them has more than $40 trillion in derivatives exposure. If they decide tomorrow to call in the debt at once, or even in part, it would create the worldwide tsunami with, possibly, a result in the collapse of the Western monetary system.

Today about 6 US banks control two thirds of all banking assets. And that is considerably more than it was in 2008, when the figure for the same banks was just over 40%. So, this is a big risk – the derivatives. And, of course, there is no regulation which stops the bank from calling in their debt. So, it can happen any time. If they don’t do it, perhaps, for now it is the means of self-protection.

The second point is somehow related and is very similar, it is the current gold frenzy. For some strange reason, when the economy is sick, it is like a thermometer; people run to gold. You can tell when it is sick, then they run to gold, as if you could eat gold when the system collapses. That of course doesn’t happen. So, it is really not of much use other than symbolic.

This happens before every crisis and it happened before 2008, and it is now happening again. But now the banking deregulation is allowing every form of speculation in the interest of profit making. It happens to an extent that is really insane.

Which means that the whole system, so to say, the blood of the financial system all over the world is not supported by any material substance.

Peter Koenig: Absolutely! That’s correct! You know, since Nixon in 1971 abandoned the gold standard which all the Western moneys were tired to, meaning that every currency had a convertibility ratio, the currency could be converted into gold. And that standard was abandoned in 1971.

Then, automatically and de facto every Western currency became fiat money, which means it is free to be printed by the central banks according to their needs, and doesn't need to be backed by anything, not even by the national economy, as you see very clearly in the US where money printing goes on to cover every debt. Every war that is financed requires new money.

And in the US it is relatively easy, because so far most of the rest of the world has been buying the US debt, especially China. Altogether, probably about 50% of the US debt is abroad. So, money printing is relatively easy, as long as people don’t react to it. And they haven't reacted to it, simply because the US has a very-very strong military power and countries are just simply afraid not to accept the dollar anymore as the reserve currency.

But, as you probably know, that has already drastically changed in the last ten years or so. And nobody really talks about it. Ten years ago about 90% of the world reserves were held in any form of the US dollar-denominated papers. Today, that has diminished to only about 60%. And it is shrinking even further.

And so, therefore, gold is again highly in demand, especially in those countries that love their currencies and would like to keep their currencies stable. One of those countries is my country – Switzerland.

Switzerland launched a referendum, as you have probably heard, it somehow made the headlines around the world, which requested the Swiss Central Bank to buy gold, to cover the reserves to about 20%. I think 20% of the reserves should be in gold. That was what the referendum asked for. Currently it is about 7%.

That could have meant massive gold buying for the Central Bank, which would have affected the whole monetary system and, of course, the value of gold. And again, money is so far not backed by anything else, and gold alone – what would it do? – you can’t really do anything with gold, other than feed an illusion, I think.

But anyway, the referendum was defeated by three quarters of the people. And this is also very controversial. This happened because at the very end nobody thought it might pass. It grew in acceptance until about a month before the vote. It had almost 50% of “yes”-sayers of the sovereign. And then, the Central Bank and the Government, and, of course, the financial and industrial lobbies were massively campaigning against it and, eventually, it was defeated by three quarters of the people who voted.

Anyway, gold is really a problem of the much larger scale. What I said is really insane. The banks are now issuing paper gold. They probably always had, but in certain measures. But now these certificates of gold far exceed the available physical gold. So, there are certificates which sell future gold.

What is the point in that?

Peter Koenig: The point of that is that they are speculating with the gains they can make, when they sell the gold in the future for less or for more as they feel fit. For the banks it creates an asset, if they have gold. You know, it is not physically available.

But that is absolutely crazy, I mean, the whole approach. The whole structure goes virtual.

Peter Koenig: That is absolutely right, it is crazy. And I think they get away with it, because most people don’t understand it. They don’t understand what deregulation has done to their financial system, to our Western financial system. It is absolutely crazy if a bank can issue paper gold in one day of 80 tons, which is ten times more than the average or estimated daily production of gold. The yearly gold production is estimated at about 2400-2700 tons.

Which is a scheme at a global scale. It is really a scheme, isn’t it?

Peter Koenig: Yes, absolutely! And people are just quiet about it. In total, there are probably more than 100 thousand tons of paper gold outstanding. And how much money would be available? It is the same as with derivatives. If the banks would decide to call in their paper gold in physical gold, it would have to be shipped to their location.

Right now the world has, that is an estimate and it is probably an underestimate, officially about 180 thousand tons of gold. Out of that, about 20% is available in the central banks, so it cannot be easily moved. And another 5% are private holdings in commercial banks and institutions. So, that’s what you are talking about, that may be moved. The shippable gold is perhaps about 900 tons.

Imagine if all outstanding gold would be called in to be physically delivered – what that would mean to the banking system. A very similar disaster as it would happen with the derivatives, if they were to be called in.

So, these two components alone already mean a serious trouble. And they are kind of related, because those people who are afraid of the derivatives’ collapse, they say – oh, well let’s better buy gold. So, they buy gold which they don’t have and which doesn’t exist and think – somehow we will manage, because once you have a contract, the contract is legal. So, if a bank has to deliver the gold they don’t have, but are committed to, then what does it do? It collapses or it will be rescued.


Peter Koenig: And now we are coming to the third element. And this is probably the worst of all, the biggest calamity of all – the so-called bail-ins versus the former bailouts, as you probably know what that means. In 2008 the too big to fail banks were bailed out by the public money, basically by your tax money.

This is no longer so. There is this so-called Dodd–Frank US Banking Act, which says that the future insolvent banks have to rescue themselves by bail-ins, which means literally to confiscate money from the depositors and shareholders. And that also goes pretty unnoticed. This is the law that was passed in the US and it has been recently also passed by the European Commission. So, there is almost no way out.

And it has been rubberstamped, and that is the interesting part. On the weekend of November 16th at the G20 Meeting in Brisbane they endorsed a proposal which has a fancy name, it is called Financial Stability Board's Adequacy of Loss-Absorbing Capacity of Global Systemically Important Banks in Resolution. I had to write it down to remember the title.

Nobody really understands what it means, but it basically means that there is a financial stability board (the European Commission has it) that can now decide which bank is insolvent and how it has to rescue itself. So, this completely changes the rules of banking as we know it.

And mind you, and this is another important fact, that the G20 has no international legal standing. They are self-nominated, self-designated group of countries or rather their leaders who have decided to rule the world. There is no UN resolution approving that G20 is a legal international entity, a decision making organization. Nothing at all!

The G20 can even decide to exclude a leader they don’t like, as the G8 did, as we remember. Let’s put that G8 is a concentrated form of the G20. When they recently decided that they didn’t like President Putin, they just excluded him. And it is now called the G7. Terrible!

So, that’s the freedom. They have absolutely no legal standing, yet they decide over the savings and the social systems that the people have worked for all their lives – how it should be managed and when it can be stolen. This illegal group of the so-called world leaders, all of them course follow the destructive neoliberal doctrine.

They have decided that the too big to fail banks (some people abbreviate them in the TBTF banks) should stay in business whatever comes, but no longer with the tax money, but with the savings of their clients which they simply can confiscate and convert from a debt into assets.

It has actually happened in Cyprus, if you remember in the 2012-2013 crisis. In March 2013, I believe, the infamous troika the IMF, the ECB and the European Commission decided to help Cyprus with the bailout, meaning that they would give them money which would bail them out. But eventually that money would have to be bailed in from their shareholders and depositors…

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