Tuesday, April 27, 2010
Mega Banks' Power and Privilege a Threat to Our Nation and Economy
"History records that the money changers have used every form of abuse, intrigue, deceit and violent means possible, to maintain their control over governments, by controlling money and its issuance." – James Madison
Most people understand that commercial banks make money by taking deposits at low rates of interest (or often no interest at all) and then making loans at higher rates.
But investment banks rely on trading, issuing bonds, and borrowing money from other banks to raise capital. That's because they typically lack the deposits of commercial banks.
Investment banks also rely on arcane financial instruments such as derivatives, credit swaps, collateralized debt obligations, and the like, to increase profits. But those risky schemes are now facing scrutiny as Washington debates reform legislation.
Naturally, anything that upsets the banking industry's profits, or the way it customarily does business and makes money, is none too welcome. In fact, even the suggestion of reform is being met with stiff resistance.
The big banks love the status quo, which has allowed them to grown so wildly rich. However, under the spell of greed, they've forgotten how good they have it and take their incredible privilege for granted.
It can't be forgotten that the big banks are in the supreme and enviable position of getting virtually free money from the Federal Reserve, which they can then loan out at interest. This makes it easy to repay the Fed and still walk away with handsome profits.
What's particularly amazing is that the big banks are using this interest-free Fed money to buy billions worth of Treasury bonds, essentially returning this money right back to the federal government. Those bonds will eventually be paid back, at interest, with taxpayer money. And once again, the big banks will easily repay their Fed loans and enjoy massive returns.
Think about that; billions of dollars are being loaned to the biggest banks, essentially for free. And those banks are using that free money in exchange for Treasuries that pay 3%-4% interest, which results in huge gains for the big banks.
Who doesn't love zero percent loans?
The government loves this arrangement too since it provides them a buyer for hundreds of billions of dollars in government bonds. It's a pretty cozy relationship, don't you think? It's kind of like your dad loaning you money so that you can then spend it in his store and boost his sales.
It's also called insanity.
Our big banks have grown markedly larger in recent decades. Some would rightly argue dangerously larger.
In 1983, Citibank, America’s largest bank, had $114 billion in assets, or 3.2 percent of U.S. gross domestic product. By 2007, nine financial institutions were bigger relative to the U.S. economy than Citibank had been in 1983. By March 2009, Bank of America’s assets were 16.4 percent of GDP, followed by JPMorgan Chase at 14.7 percent and Citigroup at 12.9 percent.
The assets of the four biggest banks equal 50% of GDP. The top three equal 44% of GDP. That's way too much concentration of power and capital.
This concentration of capital has also lead to a concentration of power. Wall St. and Washington are incestuously interconnected. The banking industry is the most powerful, most politically connected industry in America. Its influence is unmatched. Money buys access.
A revolving door exists between Washington and Wall St., in which former politicians take lucrative positions as banking lobbyists, and where banking lobbyists take positions in government. The big banks aren't just connected, they're protected.
The Wall Street banks have become an oligarchy, gaining political power through their economic power, then using that political power for their own benefit.
Since last year, the Wall St. banking behemoths have spent more than $500 million to derail financial reform; that's $1.4 million per day.
More than 2,500 banking lobbyists are swarming the halls of Congress each week, fighting reform. This means that the big banks now have five lobbyists for every member of Congress.
According to the Center for Media and Democracy, the total cost to taxpayers of the Wall Street bailout was $4.6 trillion. Of that, $2 trillion is still outstanding. To out this in perspective, the entire federal budget is $3.6 trillion.
The biggest banks must be broken up and reduced a to a series of smaller banks. In the last century, the government used antitrust laws to trim the power and influence of banks and other industries. Banks so massive are rigidly anti-competitive because they control an outsized market share. They simply buy up their competitors, becoming continually larger.
And the big banks take on absurd and dangerous risks with the implicit understanding that the government will bail them out with taxpayer money when disaster strikes.
Far from being regulated by the government, it now seems that the big banks regulate the government. Politicians become bank lobbyists, and bank lobbyists assume lofty positions in our government. It's all to cozy and amounts to a dangerous conflict of interest.
In the face of the financial meltdown and subsequent economic crisis – when reform seemed vitally necessary and inevitable – the biggest banks only grew bigger, concentrating ever more power and wealth.
Too big to fail means too big to exist. Free from regulation, over-the-counter derivatives grew to over $680 trillion in face value and over $20 trillion in market value by 2008. The consequences to our economy and the taxpayers could be devastating.
The big banks endanger our economy and our democracy. Our government is representative of banks and other moneyed interests, not the ordinary citizens. This is not what our democratic republic was founded on. The Founding Fathers would be horrified. They warned of the abusive power and corrupting influence of big banks, and their warnings have not been heeded.
We ignore them at our own peril.
"I sincerely believe that banking institutions are more dangerous than standing armies; and that the principle of spending money to be paid by posterity is but swindling futurity on a large scale."
"The end of democracy, and the defeat of the American revolution will occur when government falls into the hands of the lending institutions and moneyed incorporations." – Thomas Jefferson