The Phaserl


Dysfunction at the Fed

from The Daily Bell:

The Fed is About to Make Life Harder For Big Banks … It’s considering changes to its annual stress test. The Federal Reserve administers stress tests to the largest U.S. banks each year to see how they would fare in a hypothetically turbulent economy. The regulator is expected to make those tests more difficult to pass. No changes have officially been proposed but, as the New York Times reports, a senior official says that the Fed is considering different modifications. – Fortune

Dominant Social Theme: The Fed is on the job, always trying to make the banking system better and safer.

Free-Market Analysis: Fortune magazine gives us a heads up on what the Federal Reserve may soon mandate for banks, as can be seen in the excerpt above. The test is actually fairly simple, though doubtless the details are complex. First the Fed figures out how much money a bank would lose in a volatile market. This number is removed from the bank’s capital and if the result brings the total below the minimum requirement, then the bank is not considered to be in compliance.

Now the Fed wants to raise the minimum requirement – that is, the amount of capital a bank has to hold. Supposedly, this would make big banks “more resilient” and less likely to fail.

The trouble with this, of course, is that the bank model is derived from a time when banks held gold and silver as capital. Today, they simply hold electronic digits and those digits can be multiplied at will by the Fed itself.

During the 2008 crisis, the Fed supposedly gave away trillions in short-term loans to ensure that banks didn’t “fail.” Of course, today, with derivatives markets totaling well over one thousand trillion, any catastrophic failure would require the Fed to print an astronomical amount of money.

Within this context, “stress tests” can be seen more as financial drama than financial reality. Like airport security, the stress tests provide consumers with reassurance but little else.

When one examines the larger operations of the Fed and central banks in general, one comes away convinced that most of what the Fed does is simply for show. The bottom line here is that a small group of people standing in the shadows invented and presumably control the money printing process. They’ve erected quite a large charade to justify it.

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