The Banking Scam

If you're wondering what's going on with the Fed jacking rates beyond the usual "crapitalism crushing normal folks", it's that banking is a rigged game that works only by socializing risk. Banks raise funds by assuming demand liabilities (deposits, investor funds). They invest that money in relatively long term financial products (loans, mortgages). Banks are required by law to hold a certain amount as cash or cash equivalents (typically Treasuries). Typically a bank can fund demand withdrawals out of its cash reserve. If too many withdrawals are made, the bank needs to sell some Treasuries. No problem normally, but if interest rates have risen, the bank's old Treasuries aren't worth as much as new Treasuries with higher rates, and it has to sell its old Treasuries at a discount. Which means it’s much more likely to be facing a cash crunch, become illiquid, and need the FDIC to step in. So when the Fed jacks up rates, it not only makes future loans cost more, it makes existing loans (such as government securities) worth less.

So why would banks, which in one form or another are the main holders of loans and government securities, put up with the Fed doing this? Now you get to see how deep the rabbit hole goes. Think of the Too Big To Fails as sharks, except they don’t feed on smaller fish, they feed on smaller banks. Or more accurately, smaller banks’ balance sheets. Or more accurately still, smaller banks’ balance sheets after they’ve been purged of all “inconveniences” at public expense. Tons of assets flow onto the TBTF’s balance sheet to make it look like it actually, you know, balances, as opposed to being a Dumpster fire of catastrophic proportions. The 2008 Crash required the sacrificing of many balance sheets on the TBTF altar (Take a look at Jamie Dimon’s maneuvering to force Washington Mutual under so Chase could grab its balance sheet.) including what had been known as The Greatest Balance Sheet on Earth, AIG.

Hence the pump-and-dump cycle. The TBTFs and their allies pump the markets, soaking up obscene salaries, commissions, bonuses, and capital gains in the process. On their signal, the Fed jacks rates, and the dump begins, but the TBTFs and their allies don’t care because they have cash and new balance sheets, and they use those to snap up dumped assets on the cheap. Rinse, repeat.

So at the core of the financial industry is a system not only to privatize profit and socialize risk but to protect an oligopoly and enhance the wealth and power of its members. You knew it was bad. It’s actually worse. Much worse.