On November 4, 2011, The Financial Stability Board, a policy research and development entity released a list of 29 banks worldwide that they consider to be systemically important Financial Institutions, financial organizations whose size and role meant that any failure could cause serious systemic problems. As per the Financial Stability Board, 17 of these banks are located in Europe, 8 are based in United States and 4 in Asia. The “too big to fail” theory asserts that certain financial institutions are so large and so interconnected that their failure would be disastrous to the economy, and they therefore must be supported by government when they face difficulty. I ask you all a simple question if the Big banks are to be supported by Government financially, who pays the money? The People, The taxpayers pay the money to the government who keep altering the rules and regulations at their own whims and fancies and provide the money to ‘Big’ Institutions, in this case today we have taken banks. The Governments have bailed out Housing and Mortgage Entities, Real Estate Institutions directly and indirectly during the continuing crisis from the sub prime crash, when this was insufficient we kept on hearing about Debt ceilings and more recently the Money Printing more sophisticated called as Quantitative Easing.

On April 10, 2013, International Monetary Fund Managing Director Ms. Christine Lagarde quoted that “too big to fail” banks had become more dangerous than ever and needed to be controlled with comprehensive and clear regulation including more intensive and intrusive supervision. Federal Reserve Chairman Ben Bernanke defined the term in 2010: “A too-big-to-fail firm is one whose size, complexity, interconnectedness, and critical functions are such that, should the firm go unexpectedly into liquidation, the rest of the financial system and the economy would face severe adverse consequences.” I ask you all one simple question is that these 29 firms the only critical firms whose unexpected liquidation will impact the Global Economy adversely? Well if the definition is to be taken as true then the Global Economy is not only adversely affected today but what we see is that we are facing a strange situation where the banks are functioning despite a virtual failure or should we say virtually working despite a Real Global Economic crisis? How can the heads of the banking system be allowed to work in such circumstances. More rather it is dangerous to allow these Banks to work in today’s circumstances. The banks have become addicted to receive bail outs after bail outs from the Governments so that they keep functioning for the sake of functioning. We can put the same capital in other new firms and help them grow than keep feeding the ‘Big’ and elderly banks on the money of the father. It is like father taking care of a child, till child is of age 70, how does this scenario look like? Give the Child toys, games, girl, milk, dinner, lunch and every thing he/she wants. Satisfy the child’s needs till he keeps asking for them. This is what is happening in the Global Financial System. The so called too big to fail institutions are now dominating the global wealth. A large percentage of Global Wealth is at the hands of Big Banks. It is not sensible to allow large banks to combine high street retail banking with risky investment banking or funding strategies, and then provide an implicit state guarantee against failure.

Some simple questions raised by common person who is well concerned about his/her own future: when the government prints up new money, where does it go? how long can the government keep spending money it doesn’t have — before it has to shut down? Is all new money just replacing old money? How can money be introduced without somebody ‘Big Banks’ getting a lot of cash for nothing?

The Federal Reserve has a bottomless pit of money at its disposal. It is arguably the most powerful institution in the world- it controls the money of the Reserve Currency of the World – The US Dollar. It could destroy the world economy by simply changing the main interest rate (Federal Funds Rate) just like in 2007/2008.

How money printing happens: The newly printed money is just a number on the computer; printing real money is expensive. The Federal Reserve must have a system to spread the newly printed money. It spreads the money by ‘taking over’ existing loans; in essence buying the loans (from banks, hedge funds or other financial institutions). This system reimburses the banks the money banks loaned out before it’s repaid by client, by so injecting new money into the economy. Where will the client get money from if the person has no job and no resources to generate money?

The loans are considered “assets” because they earn interest. There are various loans (assets) the Federal Reserve buys through its programs, including Government loans (treasury bills, securities, bonds), MBS (Mortgage Backed Securities- home loans), Student Loans, Credit cards and Auto loans and many more.

Little known fact: As discussed in previous blog, all money is debt. All money is loaned into existence. Banks create (90%+ of all) money by making a “Reserve Requirement” deposit with the Federal Reserve. If a bank deposits $1 million with Federal Reserve, with a 10% Reserve Requirement it can loan out $10 million by simply typing it into the computer into an account. This is called Fractional Reserve Banking. Federal Reserve also works as a lender of last resort when the banks that loaned out 10x more than they have deposited, get a run on the bank and can’t come up with the money– when more people are pulling it out than they have available. Federal Reserve protects the system that allows lending out what one does not actually have. Federal Reserve is also a private bank, privately owned and not responsible to the Government, or anyone, except possibly its 300 private share holders. This might sound confusing, but money-creation is not taught in schools, therefore many completely lack the concept of how the system works. The economy text-books of today are written by big corporations, such as McGraw Hill– which are owned by the banks. Banks benefit from this system, and from you not understanding it.

In September 2012, the Federal Reserve started its 3rd QE Economic Stimulus Program. Under this program Federal Reserve has for the rest of 2012 bought $40 Billion a month, each month, in Mortgage Backed Security(Home Backed Loans) from the market, by so infusing new money into the economy. Can you imagine that $40 billion a month would amount to 9,600,000 jobs paying $50,000 / year. Unfortunately, more money does not equal jobs. The newly printed money is not getting loaned out to consumers (as intended by the stimulus package) but stays with the banks and the banks invest the newly printed money in stocks for fast profits, by so pushing the stock market higher. The money does not go to SBA Bonds that are aimed at pumping cash into small business sectors.Quantitative Easing QE3 continues in 2013 with $ 85 Billion / month for 2013. Federal Reserve intends to print $1020 Billions ($1.02 Trillion) in 2013. In 2013 Federal Reserve has increased printing from $40 to $85 Billion by purchasing $40 Billion a month in Mortgage Backed Securities(Home backed Loans) AND additional $45 billion in 10-30 year US Government Treasury’s(Loans) from financial institutions. The Fed will therefore monetize roughly half of the US budget deficit in 2013.

Can you Imagine, this is equivalent to 20.4 million jobs per year paying $50,000 / year

Federal reserve’s balance Sheet at the end of 2013 $ 4,000,000,000,000 $ 4 trillion which is in addition to the $21 Trillion in debts earlier. The sequestration cuts made no sense as the spending continues rampant on Bail Outs and Government requirements. The money never reaches the people for whom the stimulus program was meant. Eventually the Federal Reserve must reverse the flow of assets and start selling them or inflation and price instability kicks in. This reverse flow would deduct at least 24% of GDP, when it happens. Federal Reserve is left with a catch 22 situation, because it contradicts their mandate by-law of price stability and maximum employment.





The Federal Reserve Economic Models are now broken as The Fed is as of September 2012 shocked its models predict “Explosive Inflation”, but reality does not show it. One of the reasons there has not been an explosive inflation is that there is a little known, but massive by size, Shadow Banking System, a place where credit money is created by the banks, for the banks and never enters the real economy by so being protected from causing inflation. The Shadow Banking System has been de leveraging since 2008 and needs to sell assets to come up with the money to pay back others. This new money comes from the Fed, but now enters banks’ real Balance Sheets, and is pushed into stocks for quick profits, pushing the stock markets higher, by-passing the consumer. The Federal reserve must now print at least $ 3.9 Trillion more before the Shadow banking System is stabilized.

Would not we all be wealthier if we print more money or Government send each person in the country an envelope containing money? What does happen to the economy when the money is printed and sent in to the system? When money supply rises, automatically the currency depreciates in any economy. That is either you get same item for more money to the extent the money has been printed or you get less of the item intended to buy for the existing amount of money you have with you. The less is relevant to the amount of the money printed and pushed in the system. What we see in the current economic scenario is exactly opposite. Read carefully, the Global Currencies have actually depreciated against the US Dollar and why is that so? Is it only a currency speculation or what is called as a ‘Virtual Economy’ coming in place of ‘Real Economy’. What happened to the Asian Currencies, Australian Currencies and European Currencies against the US Dollar, is it a temporary effect or is the effect here to stay with us permanently? Why not opt for new breed of Banks, new breed of Banking Systems and adopt a total new Global Economic System which is transparent and clear to the Law makers and the people?

Rampant currency speculation, Continuous lending losses, Mortgage and Bond losses, Transactional failures with the Traditional Big banks are now a new ‘Normal’ and we say Big Banks – To big to fail? Time to think again!

Regards,

Shrikant G. Shete

Gold Coast, QLD – 4215

Australia