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Why the Financial and Political System Failed and Stability Matters

The recent spike in global political-financial volatility that was temporarily soothed by European Central Bank (ECB) covered bond buying and Bank of Japan (BOJ) stimulus reveals another crack in the six-year-old throw-money-at-the-banks strategies of politicians and central bankers. The premise of using banks as credit portals to transport public funds from the government to citizens is as inefficient as it is not happening. The power elite may exude belabored moans about slow growth and rising inequality in speeches and press releases, but they continue to find ways to provide liquidity, sustenance and comfort to financial institutions, not to populations.

The very fact - that without excessive artificial stimulation or the promise of it - more hell breaks loose - is one that government heads neither admit, nor appear to discuss. But the truth is that the global financial system has already failed. Big banks have been propped up, and their capital bases rejuvenated, by various means of external intervention, not their own business models.

In late October, the Federal Reserve released its latest 2015 stress test scenarios. They don’t even exceed the parameters of what actually took place during the 2008-2009-crisis period. This makes them, though statistically viable, completely irrelevant in an inevitable full-scale meltdown of greater magnitude. This Sunday, the ECB announced that 25 banks failed their tests, none of which were the biggest banks (that received the most help). These tests are the equivalent of SAT exams for which students provide the questions and answers, and a few get thrown under the bus for cheating to make it all look legit. 

Regardless of the outcome of the next set of tests, it’s the very need for them that should be examined. If we had a more controllable, stable, accountable and transparent system (let alone one not in constant litigation and crime-committing mode) neither the pretense of well-thought-out stress tests making a difference in crisis preparation, nor the administering of them, would be necessary as a soothing tool. But we don’t. We have an unreformed (legally and morally) international banking system still laden with risk and losses, whose major players control more assets than ever before, with our help.  

The biggest banks, and the US and European markets, are now floating on more than $7 trillion of Fed and ECB intervention with little to show for it on the ground and more to come. To put that into perspective – consider that the top 100 global hedge funds manage about $1.5 trillion in assets. The Fed’s book has ballooned to $4.5 trillion and the ECB’s book stands at $2.7 trillion – a figure ECB President, Mario Draghi considers too low. Thus, to sustain the illusion of international systemic health, the Fed and the ECB are each, as well as collectively, larger than the top 100 global hedge funds combined. The BOJ has joined the fray wit its own path to QE. 

Providing ‘liquidity crack’ to the global financial system has required heightened international government and central bank coordination to maintain an illusion of stability, but not true stability. The definition of instability is this epic support network. It is more dangerous than in past financial crises precisely because of its size and level of political backing.

During the Panic of 1907, President Teddy Roosevelt’s Treasury Secretary, Cortelyou announced the first US bank bailout in the country’s history. Though not a member of the government, financier J.P. Morgan was chosen by Roosevelt to deploy $25 million from the Treasury. He and a team of associates decided which banks would live or die with this federal money and some private (or customers’) capital thrown in.

The Federal Reserve was established in 1913 to back the private banking system in advance from requiring future such government injections of capital. After World War I, a Laissez Faire policy toward finance and speculation, but not alcohol, marked the 1920s. before the financial system crumbled under the weight of its own recklessness again. So on October 24, 1929, the Big Six bankers convened at the Morgan Bank at noon (for 20 minutes) to form a plan to 'save' the ailing markets by injecting their own (well, their customer’s) capital.  It didn’t work. What transpired instead was the Great Depression.

After the Crash of 1929, markets rallied, and then lost 90% of their value. Liquidity froze. Credit for the masses was as unavailable, as was real money. The combined will of President FDR and the key bankers of the day worked to bolster people’s confidence in the system that had crushed them - by reforming it, by making the biggest banks smaller, by separating bet-taking arms from those in which people could store, and borrow money from, safely. Political and financial leaderships collaboratively ushered in the reform measures of the Glass-Steagall Act.  As I note in my most recent book, All the Presidents' Bankers, this Act was not merely a piece of legislation passed in spirited bi-partisan fashion, but it was also a means to stabilize a system for participants at the top, middle and bottom of it. Stability itself was the political and financial goal.

Through World War II, the Cold War, and Vietnam, and until the dissolution of the gold standard, the financial system remained fairly stable, with banks handling their own risks, which were separate from the funds of citizens. No capital injections or bailouts were required until the mid-1970s Penn Central debacle. But with the bailout floodgates reopened, big banks launched a frenzied drive for Middle East petro-dollar profits to use as capital for a hot new area of speculation, Third World loans.

By the 1980s, the Latin American Debt crisis resulted, and with it, the magnitude of federally backed bank bailouts based on Washington alliances, ballooned. When the 1994 Mexican Peso Crisis hit, bank losses were ‘handled’ by President Clinton’s Treasury Secretary (and former Goldman Sachs co-CEO) Robert Rubin and his Asst. Treasury Secretary, Larry Summers via congressionally approved aid.

Afterwards, the repeal of the Glass Steagall Act, the mega-merging of financial players, the explosion of the derivatives market, and the rise of global ‘competition’ amongst government supported gambling firms, lead to increase speculative complexity and instability, and the recent and ongoing 2008 financial crisis.  

By its actions, the US government (under both political parties) has chosen to embrace volatility rather than stability from a policy perspective, and has convinced governments in Europe to follow suit. Too big to fail has been replaced by bigger than ever.

Today, the Big Six US banks are mostly incarnations of the Big Six banks in 1929 with a few add-ons due to political relationships (notably that of Goldman Sachs, whose past partner, Sidney Weinberg struck up lasting relationships with FDR and other presidents.) 

We no longer have a private financial system responsible for its own risk, regardless of how it’s computed or supervised. We have a system whose risk is shouldered by the federal government and its central bank entities, and therefore, the people whose deposits seed that risk and whose taxes and futures sustain it.

We have a private financial system that routinely commits financial crimes against humanity with miniscule punishments, as approved by the government. We don’t even have a free market system based on the impossible notion of full transparency and opportunity, we have a publicly funded betting arena, where the largest players are the most politically connected and the most powerful politicians are enablers, contributors and supporters. We talk about wealth inequality but not this substantial power inequality that generates it. 

Today, neither the leadership in Washington, nor throughout Europe, has the foresight to consider what kind of real stress would happen when zero and negative interest rate and bond-buying policies truly run their course and wreak further havoc on their respective economies, because the very banks supported by them, will crush people, now in a weaker economic condition, more horrifically than before.

The political system that stumbles to sustain the illusion that economies can be built on rampant financial instability, has also failed us. Past presidents talked of a square deal, a new deal and a fair deal. It’s high time for a stability deal that prioritizes the real financial health of individuals over the false one of financial institutions.



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Reader Comments (19)

Another great article by Nomi. Will widely share. Thank you.

October 28, 2014 | Unregistered CommenterDina Strange

Thanks Dina! I very much appreciate that.

October 28, 2014 | Registered CommenterNomi Prins

Thank you for this insightful commentary. I have featured your videos in the past, especially recently on the introduction of your excellent book.

I have featured it here, in addition to linking to it.

October 28, 2014 | Unregistered CommenterJesse

Thank you! I am a big fan of your site and topic selection and am flattered to be included …

October 28, 2014 | Registered CommenterNomi Prins

thank you for work and insight on this problem,which i fear is beyond correction.there is too much money and corrupted power involved.countries when defeated in war,have their economies leveled to the ground and then rebuild anew on the ruins of the old.this distorted system will not give up control until it crashes and least for the history books,your voice will be remembered as one of the clear beacons shining into these financial black holes.

October 28, 2014 | Unregistered Commenterrobert turpin

Thanks Nomi ,

As usual you are first class all the way. You wrote " We have a private system that routinely commits financial crimes against humanity with miniscule punishments, as approved by the government.
This is an important sentence and it is sad that it is quite true and repeats itself over and over like a broken record.
The ones who bear the brunt are the hard working women and men who built and keep building their countries and raise their families with the added burden of these psychopathic financial criminals and politicians ripping them off with their ponzi schemes and murdering them with their endless wars.
Sooner better than later we need to rout these criminals out , strip them of their assets and throw them in jail for the rest of their lives.

Thank you again for all the truth you share with the historical reference which helps a lot. Dean

October 28, 2014 | Unregistered CommenterDean

Your eloquent and lonesome cry from the heart still begs the question: why are there absoluetly no figures of decency and courage in all our corridors of power willing to battle this degenerate political culture. As one who lived through the Vietnam War era, when plenty of brave opposition battled an obdurate establishment, I am astonished at the total absence of any heroic resistance to the turpitudes of the day. For instance, after the Citzens United decision, there was not even public chatter about proposing legislation, or a consitutional amendment, to redefine the alleged personhood of corporations, which, after all, have no duties or responsibilities to the public interest, but only to shareholders. This is a shameful and disgusting moment in our history.

October 29, 2014 | Unregistered CommenterJames Howard Kunstler

Proof the pen is mightier than the sword.

Truth is both freedom's greatest asset and core responsibility, as without transparency there can be no justice or freedom.

Thank you.

October 29, 2014 | Unregistered CommenterCole

Very informative article. The money system is totally controlled by the money printers. A real life game of monopoly is at "work." see link below:

October 29, 2014 | Unregistered Commenterstephen

If the American people will just wake up to the fact that our financial system since the enactment of the Federal Reserve system has been planned and designed to only transfer the wealth of our nation and it's people to the elitist who run the world. This is a long standing agenda and if the many issues of our day to include the constant need to be at war, the depopulation agenda and taking of our sovereign rights through the contrived and prep landed Patriot Act, numerous false flags of aggression on our country,the lack of justice and the build up of a police and survalence state; if these agenda' s don't wake up the American and other western populations then there will be nothing left but decay and ruin facing all of us.
Save yourselves and continue to buy hard assets and a lot of toliet paper because you are going to need it before the good guys that I like to say, take back our Republic from the Fascist thugs who are currently running things. Your political beliefs of the current two party system is a joke since it has been believed that most have been paid off and nothing will change until they are arrested which I hear is coming.

October 29, 2014 | Unregistered CommenterBuddy

Nomi, everything you have written is absolutely spot on. There is only one element I don't believe you addressed which changes how one looks at your entire article. Bottom line, there is no free lunch. That means that every American enjoying a fixed rate mortgage for 30 yrs, as well as dozens of other facilities of low interest credit are all part of the disease. It is easy to act like the financial system is foreign to humanity, but unfortunately that is just not the case. Our never ending lust for pointless consumerism and one upmanship fuels the very machine that everyone is railing against. Everyone wants reform as long as it doesn't mess with their set of systemic benefits. Banks aren't alien entities. They are staffed and run by men and women who grew up in the same society we all did and are only living its values. The only way to change the system is to ask society to put the needs of society over the individual, not typically western societies strong suit. The battle for the future continues.

October 29, 2014 | Unregistered CommenterMatt T

Bang on! Just look at Cyprus. The ECB promised a bail out and instead it was a bail -in! The ECB stole the money deposits of Cypriots!

October 29, 2014 | Unregistered CommenterSteve Stojanovic

I've been reading what I consider to be the most informative and concise compilation of essays on the subject of the economic system that will emerge from the ashes of this current economic system. Nomi Prims, if you read the comments here may I suggest you check out this most informative site: and read the essays compiled by J.C. Collins. I would be very interested in reading your opinion of his research and essays on how this new economic system will function.

October 29, 2014 | Unregistered CommenterMark Joseph

What an honor to be able to post alongside Jesse (best blogroll in the world) and James Kunstler. James asks the real question: why do we not have even one man or woman of principle left? For all his faults, at least Ron Paul had his priorities straight: 1. End foreign adventure wars for profit; 2. Stop warrantless wiretap spying by the Surveillance-Industrial Complex; and 3. Immediately prosecute banker fraud. But we live in an age without great men, or even without any good men. That's the real failing, and it's an indictment of our entire civilization. I read today's headline "Number of Billionaires Has Doubled Since Crisis Began" and lament that there is not one single solitary conscience left among those who wield power today.
I'm retreating into tech-money land, where one by one we are building the peer-to-peer financial system that will suck the power out from under the feet of these despicable anti-patriot tyrants. It will be standing proud after this latest crop of money Fascists has tumbled.

October 29, 2014 | Unregistered CommenterOpenThePodBayDoorsHAL

Democracy is dead...the corporations have won. Those that have wanted democracy to fail have succeeded. Those that have succeeded...continue to run the global financial system. Yes... the global financial system understands it is seen as a failure...and they also understand there will be extremely difficult time ahead, there always will be when a great transition of power occurs. Current political/financial problems are seen today by those who rule (the corporate state) more as a transition than a failure. The ruling class must take advantage of those failures and thats as obvious to them as breathing.

October 30, 2014 | Unregistered CommenterWill

Naomi, I just stumbled on your site and love your clear and powerful writing style on what is a very complex subject. People with your rare gift are needed to translate an almost indecipherable global financial system to the rest of us.
BTW, I gathered some shocking US income statistics. Virtually no one makes over $75 million per year (I included sports figures, movie stars, and CEO's) except for one class of people: those in hedge funds. When you look at the phenomenal jump in incomes of the top .001% from either 2000 or since the financial crisis, it all goes to hedge fund managers and hedge fund traders. The Fed's QE injections go "excess reserves" which then are leveraged by big bank prop desks or filter out to hedge funds! It is quite easy to follow the money.
I hope you can write about the specifics of this. If you want me to send you my slides I will. I'm a layman and I am only looking at incomes and not wealth but my graphical portrayals of the income split are stunning. Charts are needed because almost all of our eyes glaze when someone talks billions or trillions.
I for one think the Tea Party and the Occupy Wall Street folks had a lot in common in their natural distrust of bigness and big banks, You are the person who can educate both extremes - and that is what is needed to pull us together, Thank you for doing what you are doing.

November 1, 2014 | Unregistered CommenterMike Mears

I have picked up a copy of ATPB and I find it very informative and well-written.

November 2, 2014 | Unregistered CommenterAdelina T

7 trillion injected into the banking system to stave off a banking crises have not reach the stakeholder that matters the most-the consumer? Money recycled into the system with the banks lending to central banks at a profit.Rest used for more speculative activity creating a fresh round of bubbles?

November 3, 2014 | Unregistered CommenterHanief Haider

La deuda y los déficit fiscales de la mayoría de los países del mundo, van a ser corregidos nuevamente con alza de tasas de interés, inflación y guerras como escusas. Es una de las mejores formas de licuar los pasivos, con el costo pagado por los residentes de cada uno de esos países!!

April 20, 2015 | Unregistered Commenterdavidmza
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