The Banking Mess
Atlanta, GA
March 29, 2023
”When was the last time this was cleaned?”, my wife asked as she pointed to the dryer duct.
Like a good attorney, she knew the answer before the witness could give it. So the man on the stand responded with a question.
“Uh…I don’t know”, I stammered. “How long have we had the dryer?”
That years had passed without a cleaning not only reduced the efficiency of the dryer; it was also a fire hazard for the house.
Recognizing the urgency of the situation, a few weeks later (after being called to the stand a second time to answer the same charge) I got right on it.
I pulled the dryer from the wall and disconnected the duct. We’d purchased pieces of flexible cable to plumb the pipe. After connecting and extending them as far as possible, attaching a brush to one end and a power drill to the other, I began to clean.
Or tried to.
The probe met immediate resistance, and the brush broke off. What should’ve been a routine colonoscopy became an arduous enema of a constipated conduit.
The duct wasn’t “dirty”; it was full. Years of lint had compiled, moistened, and compacted into an immovable mass from one end to the other.
Cleaning up wouldn’t do. What we needed was a complete clearing out. Which brings us to the latest banking mess. Or, rather, the ongoing one.
The Federal Reserve has for more than a century pumped hot air into monetary channels, making investors and savers think financial lint was legitimate fabric. Especially the last decade, the central bank weaved reams of counterfeit cloth from its double-dealing looms.
In 2020, under the tailored hysteria over a respiratory germ, our fiscal embroiderers threaded innumerable needles. The Fed balance sheet expanded as much in 18 months as it had in its prior history. Within months, millions of locked-down idlers were wearing ersatz suits of fresh funny money.
Before long, these synthetic threads began to fray. And those robed in flashy new attire began to realize they’d been taken to the cleaners.
Last year, the Fed flipped the switch from “blow” to “vacuum”. Rising prices compelled it to extract excess dollars from fiat ducts.
After more than a decade expanding its waistline while urging everyone to eat, the Fed decided to tighten its belt. Holes were removed at record rate. As constriction continued, the tenuous support began to give way.
The last few weeks, several banks were caught with their pants down. As top tailors tried to cover them up, these same seamstresses assured us the remaining lenders are impeccably dressed.
We don’t know if this is true. But I have my doubts. Particularly when such duplicitous people provide us their promises. But most people pretend to believe it, because it’s appalling to envision the emperor without clothes.
But why should we tolerate such monetary immodesty when we wouldn’t do so with any other industry? When we check our coat at restaurant or shoes at a bowling alley, do we ever doubt we’ll get them back? At the end of the evening, there’s a “run” on the rack. Yet whatever was deposited is always there.
Rare exceptions result from accidental loss or blatant theft, which are punished, prosecuted, or compensated. It may be reluctant or inadequate. But at least there’s general acknowledgment that restitution is necessary to make things right.
Yet under fractional reserve banking, overt fraud and blatant larceny are accepted, incentivized, and rewarded. It is, as they say, a “feature”, not a “bug.”
But why is it a “feature” only of the banking system that customers should shiver when too many of them try to reclaim their coats? We’re assured by those handling the hangers that this flagrant racket is an indispensable factor for functioning finance.
It’s certainly a factor in fraudulent finance, facilitated by fractional reserves and incessant inflation under the cartelized façade of the Federal Reserve. And it’s particularly bad when even legal counterfeiters can’t create enough currency to cover-up the chicanery.
While offering unnerving assurances that everything is fine, the beneficiaries of the bamboozle assert that fractional reserves are a critical component of profitable banks. And from their perspective as pilferers and plunderers, they’re not wrong. Modern banking can be lucrative, much the way any crime can pay. At least for a while.
But lucrative larceny is still theft, in this case enabled and amplified by the dulled distinction between “demand“ deposits and “time” deposits.
Under sound banking, demand deposits (as the name implies) can be withdrawn at any time. Like allocated gold in a secure vault, these “checking accounts” should be 100% backed by reclaimable currency of reliable value.
Customers can withdraw this money whenever they like, even if all of them do so at once. For this service and assurance, they pay a “warehouse” fee to store their cash.
Time deposits, known colloquially as “savings accounts”, pay customers to relinquish their money for a specified duration. During that time, the bank can lend or invest it at interest, presuming to profit on the resulting spread.
But when time and demand deposits are commingled or confused, chaos results…even when banks invest “liabilities” from the latter in “safe” assets of longer duration. Last year, after spending a decade convincing markets it would hold its interest rate beach ball far below water, the Fed let go. When rates shot up, banks with maturity mismatches began to sink, and started to drown.
Rising rates reduced the value of longer-term investments banks make with clients’ short-term cash. They also encouraged depositors to move their money from low-yielding banks to higher income instruments, which they now can do instantly by simply pressing a screen or clicking a mouse.
But it’s worse than that. Because fiat banking doesn’t use customer deposits to create loans; it uses new loans to create deposits.
Debt is the coin of the fiat realm. Banks use it to create new “money” from thin air, by pyramiding fresh loans on limited (or, these days, no) reserves. Conversely, when debt is called in, paid off, or written down, the fake cash disappears into the ether from which it came.
In a system on the up-and-up, where the deck is full and no cards face down, customers would pay full-reserve banks to store their funds. But with our three-card monte money, fractional reserve banks entice demand deposits by paying “interest” to clients. They have to do so because the system is rickety. And they’re able to do so because the State supplies the false security of “insurance” scaffolding.
But at some point, as with the collapses in recent weeks, the cards come down. Then, when the scam is revealed and the fan gets filthy, the Fed and FDIC pull up their hip boots, grab their shovels…and deepen the pile.
Despite predictable platitudes, the taxpayers get buried under the technocratic BS. The Fed infuses inflation that dilutes existing dollars. And, to protect the flimsy banks, it prohibits sturdy ones. Any new bank must be approved by the Fed, and full-reserve applicants are regularly denied as obvious threats to the fractional reserve racket.
Meanwhile, FDIC coffers are woefully inadequate. The agency responsible for “covering” trillions of “insured” deposits has little to offer but moral hazard. Not to minimize how much American loot has gone to kleptocratic regimes, but the FDIC has less financial firepower than US taxpayers have sent to the Ukraine.
And now…right on cue, without constitutional authority or even a vote in Congress…the Executive branch unilaterally removed FDIC limits to “protect” depositors of preferred banks. By doing so, the US government implicitly nationalized banks’ liabilities (i.e., the uninsured deposits of well-connected clients), while keeping profits private.
Meanwhile, like George Steinbrenner giving a vote of confidence to a Yankee manager, the Federal Reserve promised that the US banking system is “sound and resilient.” This, as Dan Denning noted, came during a $300 billion burst in bank borrowing from the Fed, and a $350 billion total increase in the use of the Fed’s liquidity and credit facilities.
A third of last year’s “quantitative tightening” was undone in a week (see far right in chart below).
Be that as it may, as Tom Dyson put it, losses on bond portfolios will likely reduce lending activity as the “banks seek to keep capital buffers high and new loan risk low.” When banks need emergency liquidity to replace evaporating deposits, they don’t make new loans or create credit, offsetting (or perhaps overwhelming) the recent reversal in the Fed’s balance sheet.
But with new alphabet “rescue” facilities popping up like fungus in a cesspool, we’re urged to calm down and assume everything is fine. And if not, a more precipitous collapse may be an ideal opportunity to impose the “convenience” and “security” of a Central Bank Digital Currency.
For our own good.
That electronic cattle chute is under construction, and almost complete. All that’s needed is a good crisis to corral the herd. Once they go in, like wet lint packed into a confined pipe, movement will be limited. And escape may be possible only by destroying the duct.
JD
