Debt Bubble: Why “Too Big To Fail” Banks Still Face Much Trouble Ahead (XLF, SKF, FAS, FAZ, JPM, BAC, C, GS)
Michael Snyder: Federal Reserve Chairman Ben Bernanke claims that the Federal Reserve averted a second Great Depression by bailing out the big Wall Street banks during the last financial crisis, and he says that if a similar financial crisis comes along that the correct “policy response” will be to do the exact same thing again. This was the theme of the lecture that Bernanke delivered to students at George Washington University on Tuesday. In previous lectures Bernanke has defended the existence of the Fed and detailed the history of Fed activities, but on Tuesday he addressed things that have happened since he has been at the helm of the Fed. And according to Bernanke, he has been doing a great job. Bernanke told the students that the “threat of a second Great Depression was very real” and that the Federal Reserve did exactly what needed to be done to fix the financial system. Unfortunately, the truth is that all Bernanke did was kick the can a bit farther down the road. You can’t fix a debt problem with more debt, and the debt bubble we are living in today is far larger than it was in 2008. Will Bernanke still be trying to portray himself as a hero when this house of cards finally falls apart?
During his lecture to the students on Tuesday, Bernanke stated the following….
“I think the view is increasingly gaining acceptance that without the forceful policy response that stabilized the financial system in 2008 and early 2009, we could have had a much worse outcome in the economy.”
So what did that “forceful policy response” entail?
Well, on slide 24 of his presentation to the students Bernanke tells us….
• On October 10, 2008, G‐7 countries agreed to work together to stabilize the global financial system. They agreed to:
– prevent the failure of systemically important financial institutions
– ensure financial institutions’ access to funding and capital
– restore depositor confidence
– work to normalize credit markets
Please note that not all financial institutions got bailed out.
In fact, hundreds of small and mid-size U.S. banks failed during the financial crisis.
It was only the “systemically important financial institutions” that got bailed out.
So who decided which financial institutions were important enough to be bailed out?
The Federal Reserve made those decisions. There were no Congressional votes and no input from the public. The Federal Reserve determined who the winners and the losers would be in secret and without any public debate.
Sure sounds “democratic”, eh?
But we are told to trust them because they are supposedly the experts.
So once the Federal Reserve bailed out the “too big to fail” banks, what was the outcome?
On page 25 of his presentation to the students Bernanke claimed that the bailouts successfully prevented the global financial system from collapsing….
• The international policy response averted the collapse of the global financial system.
But it wasn’t just big Wall Street banks that got bailed out. Bernanke says that AIG was also bailed out because the insurance company was deemed to be too “interconnected with many other parts of the global financial system” to be allowed to fail….
Because AIG was interconnected with many other parts of the global financial system, its failure would have had a massive effect on other financial firms and markets.
Once again, we see that it is the Federal Reserve who picks the winners and the losers.
AIG got bailed out and was then able to pay 100 cents on the dollar of what it owed to Goldman Sachs (NYSE:GS).
That sure worked out well for Goldman Sachs.
In all, the Federal Reserve issued a grand total of more than 16 trillion dollars in secret loans during the financial crisis.
The big Wall Street banks got showered with cash while hundreds of smaller banks were allowed to die like dogs.
The fact that the Fed greatly favors the big Wall Street banks has allowed them to grow massively in size and in power.
Back in 1970, the 5 biggest U.S. banks held 17 percent of all U.S. banking industry assets.
Today, the 5 biggest U.S. banks hold 52 percent of all U.S. banking industry assets.
The “too big to fail” banks just keep getting bigger and bigger and bigger.
Yet during his presentation to the students, Bernanke tried to talk out of both sides of his mouth by claiming that it is not a good thing for some banks to be “too big to fail”….
“But clearly, it is something fundamentally wrong with a system in which some companies are ‘too big to fail.’”
So who is to blame for them being so big?
Well, the Federal Reserve is probably the biggest culprit.
The big Wall Street banks are bigger than ever and they are also more unstable than ever.
JPMorgan Chase (NYSE:JPM) – $70.1 Trillion
Citibank (NYSE:C) – $52.1 Trillion
Bank of America (NYSE:BAC) – $50.1 Trillion
Goldman Sachs (NYSE:GS) – $44.2 Trillion
So what is going to happen when that bubble pops?
Is Bernanke going to zap tens of trillions of dollars into existence to bail out that gigantic mess?
Meanwhile, the debt bubble that we are all living in just keeps exploding in size.
The American people are not in better financial condition than they were during the last financial crisis. In fact, they are significantly worse off.
All over America, state and local governments are also drowning in debt. In fact, there have been several very notable municipal bankruptcies lately.
And the U.S. government is racking up debt at a pace that is almost unimaginable.
When the last financial crisis began, the U.S. national debt was about 10 trillion dollars.
Today, it has risen to 15.5 trillion dollars.
So Bernanke did not fix anything.
The best that can be said is that he kicked the can down the road a little bit and made our long-term financial problems a lot worse at the same time.
Bernanke can create money out of thin air and loan it to his friends all he wants, but he is not going to be able to prevent this house of cards from crashing down indefinitely.
So grab a bucket of popcorn and get ready. The next few years are going to be fascinating to watch.
Related: Direxion Daily Financial Bull 3X Shares (NYSEARCA:FAS), ProShares UltraShort Financials (NYSEARCA:SKF), Direxion Daily Financial Bear 3X Shares (NYSEARCA:FAZ), Financial Select Sector SPDR ETF (NYSEARCA:XLF).
Michael has an undergraduate degree in Commerce from the University of Virginia and a law degree from the University of Florida law school. He also has an LLM from the University of Florida law school. Michael has worked for some of the largest law firms in Washington D.C., but now is mostly focus on trying to make a difference in the world.