The Banking Monster

                Many folks wonder why the economy is so bad despite Wall Street’s record profits and low unemployment.  Why aren’t people getting raises and why do there seem to be no new businesses?  The usual explanations on the right have to do with heavy regulation and taxes as well as slight-of-hand in government statistics.  True enough. But there is something much more insidious and disastrous which takes some explaining. 

            Small businesses with under 50 employees create 70% of new jobs.  Their partners, the small banks hold only 10% of bank assets but do 40% of the loans.  Prior to 2009, on average 164 new banks appeared per year.  But since 2010 there have only been only two new banks started.  Meanwhile over 400 have failed—all small banks.  So the loan generators are dying and small businesses report it is extremely hard to get much of a loan.  What’s going on?

            What’s happening is that Obama’s socialist revolution is putting money in the hands of big bankers and killing the small community banks.  61% of all bank assets are now under the control of 6 large mega-banks.  In 2008 it was just 35%.  In 2007, the last year of the former expansion, 18% of corporate profits on Wall Street went to the financial sector.  In 2013, the last year statistically available, it was 23%.  Somebody is making a killing in finances but it isn’t the small, hometown banks who lend to mainstreet businesses. 

            Two culprits.  First is Dodd-Frank financial reform passed in 2010, the second is Fed policy.  Frankendodd banned banks from two activities: proprietary trading and ties to hedge and private firms.  Supposedly this was to keep banks from speculating  and getting into conflicts of interest.  But the reality is that anytime a bank trades equities, it is doing proprietary trading.  In other words, the ability of a bank to deal in bonds, contracts, and other equities-- the ability to do their normal business-- was prohibited, except by approval of the government.  Now what?  Compliance is almost impossible for banks to know.  Interpretive questions and being in cahoots with federal bank examiners is the only possibility.  Large banks closed many departments feeling they couldn’t defend their practices.  Small banks, out of compliance, often shut their doors. But when you are Too Big To Fail, you can browbeat the bureaucrats and fight with lawyers.  As a result, most foreign bankers have left our shores and many small banks have closed.  The big guys have inherited the market. 

            After the Shearson-Lehman Brothers bailout, the voters rebelled and many congressmen who voted for the bailout, then voted for the Stimulus, found themselves on the losing end of elections.  As a result, the government has come to lean heavily on the Fed to implement policy.  The QEs were instituted to provide further stimulus after interest rates were lowered to virtually zero, yet further stimulus was deemed necessary.  Result is that government bonds are bought, usually from large banks and institutional investors, putting money in their pockets.  That money sometimes went to buy stocks and sometimes was just stockpiled in the Fed’s depository reserves.  As a result, Fed depository reserves have gone from $43B to $2.5T in 6 years. (Yes. !!!!)  Those reserves are like a bank making deposits in a bank.  Should the economy improve and the bank have reason to loan, they can simply draw upon their own reserves.  Thus, should the economy improve, we are headed to near-certain inflation.  Meanwhile, only the mega-banks can play the game and they are getting very rich. 

            Ironically, Obama, a Democrat, has made the mega-banks and Wall Street crowd quite wealthy while most people are making less in constant dollars than they did 5 years ago.  But this is really not so strange, when you think about democratic socialists and national socialists.  The government’s  idea is to control the economy by owning or being in cahoots with the major industries.  Goldman Sachs donates 97% of their donations to the Democrats and Obama.  Krupp Munitions donated 97% of their political donations to Hitler and the National Socialists.

The tragedy is multifaceted.  Small businesses and jobs and the economy die a slow death.  Big boys with government connections  team with powerful tyrants to control the markets.  The rest of us are all invited to join the peronistas and rail against big business and the rich.

Obama created a banking monster.

For further information, consult the Economist, July 25 edition pages 57-61.