Four big Wall Street banks struggled to pass the annual set of “stress tests” initiated by the Federal Reserve. This year’s test was intended to gauge whether banks would be able to continue lending during a period of severe economic stress.

Federal Reserve officials do not want the tests to be predictable, so the tests vary year to year. This is because the Fed believes banks should be planning for unforeseen risks. The Fed allows banks to make adjustments to plans prior to determining if a bank has passed or failed the round of stress tests.

The six largest firms had to weather a global market-shock situation that included corporate bankruptcies and an extreme drop in the price of certain “risky” securities. The market instability introduced during the testing was greater than in prior years, which produced higher losses for banks that are deeply involved in capital-market activities.

The Wall Street Journal reported on the struggles encountered by four of the biggest banks during the testing process:

Goldman Sachs Group Inc., J.P. Morgan Chase & Co. and Morgan Stanley received the green light to return income to investors only after adjusting their initial requests to ensure capital buffers stayed above the minimums required by the Fed. Bank of America Corp. got conditional approval to return capital to shareholders after the Fed found “certain weaknesses” in its ability to measure losses and revenue and in other internal controls. The bank can temporarily reward investors by boosting dividends or share buybacks, but it must submit a revised plan addressing its shortcomings by Sept. 30. If the Fed isn’t satisfied with the bank’s progress, it can freeze the capital distributions. The Charlotte, N.C., bank said it would increase stock buybacks but hold dividends steady. It was the only lender among the six biggest U.S. banks to not raise that payout. Bank of America Chief Executive Brian Moynihan said the lender was “committed” to submitting a revised plan “in the time frame the Fed has established.”

There’s a lot to digest in this excerpt and I’m not going to pretend to be some kind of Wall Street or “stress test” expert. But there are a couple of red flags in these paragraphs that even a casual observer should notice.

If it isn’t clear to you by now that big banks do not answer to shareholders or customers, then you need to pull your head out of the sand. Wall Street answers to the Federal Reserve. The same private entity that bankrolls their operations dictates how they spend the money. Does anyone see a conflict of interest here?

The Federal Reserve is largely responsible for boom-bust cycles in the U.S. economy and therefore they are not qualified to perform a risk assessment on these firms. The Fed’s manipulation of interest rates encourages malinvestment, which leads to wasted capital and ultimately halts progress in society. The Fed is directly responsible for much of the risky behavior woven into the culture at our nation’s largest investment banks.

Lastly, if banks are having trouble with the Federal Reserve’s orchestrated stress test, then they are absolutely screwed when an actual catastrophic event occurs in the global economy. Who decided that it was a good idea to put the Fed in control of monitoring risk at investment banks? This is worse than the definition of insanity. Instead of repeating the same process and expecting different results, the entity responsible for creating poor results has been given more power. This makes insanity look desirable!

Check out these great episodes of the Lions of Liberty Podcast related to the Federal Reserve:

Lions of Liberty Podcast Ep. 21: G. Edward Griffin

Lions of Liberty Podcast Ep. 44 – Chris Rossini – Set Money Free

Lions of Liberty Podcast Ep. 70 – Seth Mason of Solidus.Center.

Liberty Links!

– The Washington Examiner reports on a bill in the Senate that would require online merchants to collect and remit sales taxes to the local authorities where the purchaser lives.

– RT reports France to keep 10,000 troops on streets as terror threat remains high.

– Ron Noyes at Ben Swann’s website reports Sen. Graham vows U.S. Military force against non-compliant congress.

– Real Clear Science reports that research shows no link between gun ownership and higher crime.

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