Operation Disclosure | By David Lifschultz, Contributing Writer
Submitted on July 11, 2022
THE US BANKING CRISIS 2023
Compliments of the Lifschultz Organization, Founded in 1899
This banking crisis came about by the banks having invested in bonds at low interest rates several years ago who are now facing rising interest rates as the Federal Reserve moves to stop inflation by raising interest rates. The bank purchased bonds paying low interest rates crashed in price wiping a significant part of their financial backing in the purchased bonds as their prices fell significantly. If you marked the bonds to market the banks were technically insolvent. It does not mean there will be a crash if the banks are technically insolvent if the depositors do not ask for their money which was invested in the low interest bonds. If they could wait out the interest rate fluctuations they would return to solvency once the interest rates fell. However, markets do not work this way as these fundamentals create a fears of losses by depositors that create bank runs.
When they do wake up asking for their money this mismatch creates a crisis as the banks must sell the bonds below what they paid for them to give the cash to their depositors. This means they must show great losses on their bond sales which scared the wits out of the depositors which created a bank run last week. Many banks in the US banking system are technically insolvent but this crisis could drag down the great and might banks on Wall Street as there are runs on their deposits. The Federal Reserve said that they would protect the depositors who had Federal Deposit Insurance but most of the money in the banks was over that $250,000.00 limit which meant that many of the banks in the US banking system would go bankrupt anyway. These bankruptcies would then threaten the well managed banks as their daily transactions might not settle favorably. The US Federal Reserve miscalculated the effect of their deflationary program not realizing the significance of the low interest rate holdings of the banks they supervise.
Let’s give an example of what followed. I am sitting in the office of Walter Wriston the CEO of Citibank when the Herstatt Bank crisis broke out. David Rockefeller from the Chase Bank called Walter in my presence as to what he should do and Walter asked me what he should do. I said tell him to return the CHIPS. And so he did. What that meant was that CHIPS was the code name for the Central Bank Clearing System.
https://www.theclearinghouse.org/payment-systems/chips
What I was advising was that Chase should not accept the draw on the Chase Bank by the Herstatt Bank simply for the reason that Chase receivables from Herstadt would not be honored so Chase could not honor their payments to Herstatt or Chase could face a huge loss even though it was technically solvent. In other words, the weak banks could theoretically drag down the solvent banks defaulting against them.
Once we understand this principle we can look at the Russian situation. Here on July 2, 2019 I gave a speech at the Peace Conference at the Russian Duma where I was introduced as the first speaker by Vladimir V. Zhirinovsky who was a Member of State Council, The Head of the fraction LDPR in the State Duma of the Russian Federation. I had been personally invited by his aide to speak. Here I predicted the Ukraine War unless Russia accepted my 700 billion dollar proposal to redirect all Russian natural resources to China. I had made this offer to Vladimir Putin through his energy expert Shmal Gannadi which was turned down by Lord Jacob Rothschild who created the oligarch control of the Russian economy under his jurisdiction and Putin was merely his lackey. Shmal had “privatized” the Russian oil and gas industry which means it was looted for pennies on a dollar. This was the greatest theft in modern world history paralleling the (theft) transfer by Trotsky of the Tsar’s gold to Baron Eduard de Rothschild which represented hundreds of years of Russian state savings. This was the payoff for the Baron financing the Bolshevik Revolution through Parvus his agent.
Fall of Eagles – Sealed Train Decision (9m)
The history is traced in the next link.
If my credentials are questioned, I wrote the Volcker plan in 1979 and was the architect of the blocking of the 1987 crash which was effectuated with almost no loss. In 2008 29 trillion dollars had to be created as they hesitated to apply this technique outlined below as they hesitated to adopt my plan.
He who hesitates is lost:
(In spite of all the virtue we can boast)
The woman that deliberates is lost.
My proposal would have avoided the Ukrainian War that the US was bent on creating to stop the alliance between Germany (EU), Russia and China. The alliance of Germany (EU), Russia and China representing a 52 trillion dollar GDP based on purchasing power parity against 23 trillion for the US would have relegated the US to becoming a secondary power. The US went to war over this. Here is the proposal:
I bring this up as in that speech I predicted that the Russians would be cut off from the international trading system by being cut out of CHIPS and that there would be a war in the Ukraine unless Russia ended Nord Stream One and Two. The US intended to create a war to stop this agglomeration of Russia, China and Germany (EU). Here is a copy of that speech:
The clear purpose of cutting Russia out of CHIPS would mean that the payments for oil to Russia could not be made in dollars if Russia was cut out of CHIPS and in a relatively micro-sense the United States Federal Reserve governing the internal US economy fears that the internal US payment system will break down if all the banks go bankrupt. This would apply to the internal CHIPS transactions in the US. You might say that the US considered this the Armageddon Financial Weapon.
It was not acceptable to much of the world to see this happen and what we see occurring for the first time since Bretton Woods is alternative payment systems are being created so that the US can no longer control the world as it did in 1945 holding half the world’s industrial capacity and GDP. The key Russian planner of the new world money to replace the dollar Sergei Glaziev is planning using gold as part of the basis of the new currency in order to drive the fiat dollar out of business.
The US banking crisis will be solved by the creation of whatever credit is necessary to keep the system afloat. In footnote two Paul Craig Roberts discussed the grave error the US committed in overturning the Glass-Steagal bill which would have prevented this crisis. Here I quote in part:
“We owe the financial crisis earlier this century, and we will owe the next financial crisis, to the mindless repeal of the Glass-Steagall Act. This legislation was passed in 1933 to deal with the crisis at that time. The law did so by separating commercial from investment banking. This prevented commercial banks from using deposits for speculative purposes. The law prevented financial crisis for 66 years until it was repealed in 1999 during the Clinton administration.”
I anticipated this then and invited Senator Jake Garvy out to dinner where I discussed my opposition to this bill to overturn Glass-Steagall. He agreed with me but could find only seven senators to oppose this saying all the rest of the senators were bought and paid for. He said to me deliver the votes and I will stop it.
Gresham’s Law and Legal Tender
In the absence of effectively enforced legal tender laws, Gresham’s law operates in reverse as good money drives bad money out of circulation where people can decline to accept less valuable money.
Footnote One:
Footnote Two:
Banking Troubles on the Horizon?
Paul Craig Roberts • Monday, March 13, 2023 • 1,100 Words
The failure of Silicon Valley Bank (16th largest bank in US) last Friday resulted from depositors withdrawing their funds in response to a drop in value of the bank’s bond portfolios caused by the Federal Reserve’s ill-considered hikes in interest rates. The mindless policy implemented by the Federal Reserve cures inflation by producing bank runs, failed banks, and unemployment. The Federal Reserve and neoliberal economists are still stuck in the worn out thinking of 20th century Keynesianism.
Yesterday federal regulators seized New York’s Signature Bank which was overwhelmed by deposit withdrawals. The banks’ failures, with troubles reported afflicting Republic Bank (14th largest in the US) and reports that many Wells Fargo depositors experienced zero balances due to a glitch of the digital revolution has left those fortunate enough to have bank balances an entire weekend to work themselves into a panic about the safety of their own bank deposits. The question is whether panicked depositors rush to withdraw their money today (Monday, March 13, 2023). Hoping to avoid this, the Federal Reserve announced yesterday on Sunday that it would provide banks with cash to meet withdrawals. The Federal reserve announced that all depositors in Silicon Valley and Signature banks, including those with deposits above the insured amount, would be protected.
https://www.federalreserve.gov/newsevents/pressreleases/monetary20230312a.htm
With the Federal Reserve backstopping the banking system as it is supposed to do (and failed to do during the Great Depression), bank problems and the panic they produce will hopefully be contained. In the last 14 months, bank reserves have declined by $1.3 trillion.
This means that banks are short the cash to meet withdrawals and would have to sell financial assets to meet withdrawals. These sales would depress the prices of the financial assets, and impair the banks’ balance sheets.
Of course, as during the previous financial crisis, government and financial executives will make reassuring statements, such as the one made by Treasury Secretary Yellen last Friday when she reassured the public that the American banking system is resilient and well capitalized.
But is it? The five banks labeled “too big to fail” have $188 trillion in derivatives.
https://www.usbanklocations.com/bank-rank/derivatives.html
The brutal fact is that 5 US banks have risk exposure that is twice the size of the GDP of the entire world.
https://fred.stlouisfed.org/series/NYGDPMKTPCDWLD
It is incomprehensible that 5 US banks have sufficient capital to back derivative bets that are twice the size of world GDP.
We owe the financial crisis earlier this century, and we will owe the next financial crisis, to the mindless repeal of the Glass-Steagall Act. This legislation was passed in 1933 to deal with the crisis at that time. The law did so by separating commercial from investment banking. This prevented commercial banks from using deposits for speculative purposes. The law prevented financial crisis for 66 years until it was repealed in 1999 during the Clinton administration. Alan Greenspan, the Federal Reserve Chairman at that time, argued that markets were self-regulating and did not need Washington’s help. This suited the big banks fine. You can learn about the consequences from Michael Lewis’ books. In short, a couple of Wall Street firms failed along with banks and insurance companies. The five largest banks were protected by Quantitative Easing, thus leading to explosive growth in the Federal Reserve’s balance sheet, inflated values of financial instruments, and the current possibility of another financial crisis.
Congress and economists would not admit their mistake in repealing the highly successful Glass-Steagall Act, but public resentment of big bank bailouts caused Congress to pretend to fix the situation. Congress “fixed” the problem it had created by legislating the ability of your bank to seize your deposits to prevent its failure. The law was deceptively called the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010. It claimed to “protect the American taxpayer by ending bailouts,” but did so by bailing out banks with the depositors’ money instead of federal tax revenues. It was said to be a “bail in” instead of a “bail out.” Ellen Brown explains it here:
There was no valid reason for overturning Glass-Steagall. It happened because public policy has ceased to be in the public interest, instead serving private agendas. The commercial banks wanted to participate in the speculative ventures like investment banks and enjoy the same high earnings. Instead of using their own money, they wanted access to the money of their depositors. Free market ideologues serving their free market ideology provided the justification. But as we relearned a few short years afterward, markets are not self-regulating. Thus the consequent distortion of the economy by a decade of Quantitative Easing, the consequences of which are not over.
What can be done? Repeal Dodd-Frank Monday morning. It is the most foolish legislation since Prohibition. It protects the banks and the general taxpayer at the expense of depositors, thus encouraging runs on banks. It took a completely mindless Congress to pass such destructive legislation.
Also drive home the message that all deposits are protected. It is important to realize that among deposits too large to be insured are monies for payrolls of large businesses.
Then set to work with legislation requiring banks to restructure their investment bank operations and separate them in a different entity from deposit based banking with deposits insulated from investment banking. The effect would be to re-establish Glass-Steagall.
It is possible that darker forces are at work. The five big banks, knowing that they are protected by the Fed, regard bank failures as opportunities to buy up assets for pennies on the dollar. The three New York banks, who control the New York Fed, the operating arm of the Federal Reserve, might even have their greedy eyes on Bank of America and Wells Fargo.
A Looming Derivative Tsunami?
The existing trillions of dollars of derivative bets were made when interest rates were lower. When these contracts are reset, it will be at higher interest rates, so the value of the bets would be adversely affected. Ellen Brown explains what might be a Derivative Tsunami.
Ellen Brown: The Looming Quadrillion Dollar Derivatives Tsunami
One still reads in the financial media that banks finance businesses and new investment, but they don’t. Banks finance purchases of existing assets and speculative derivative bets that produce profits for investment banks but nothing real for the economy. Indeed, derivatives have become extreme risks with no productive purpose.
If the Federal Reserve has any intelligence, this signals the end of the rising interest rates. Inflation will have to be brought under control with supply-side, not demand-side policy.
David Lifschultz
THE LIFSCHULTZ ORGANIZATION
DAVID@LIFSCHULTZORGANIZATION.COM
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