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Beware the Banksters

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“Beware the Banksters”
by Nomi Prins
“I wonder how many times you have to get hit 
over the head before you find out who’s hitting you?”
- Harry S. Truman
“The economy continues to expand, and if it can keep growing through July, it’ll be the longest expansion on record. But if you take a closer look at the numbers, the average American isn’t doing nearly as well as those who own assets like stocks. Nearly eight out of 10 Americans live paycheck to paycheck. According to one recent survey reported by Forbes, “28% of workers making $50,000–99,999 usually or always live paycheck to paycheck, and 70% are in debt.”
The banks certainly are not helping average Americans keep their heads above water. Since the financial crisis, when the Federal Reserve cut rates and went into its quantitative easing (QE) mode, banks have received money cheaply. But they haven’t offered consumers the same in return. 
For instance, credit card interest rates are higher than before the crisis, even though banks are paying less for their money. They are also offering less interest to savings account customers. Indeed, the average credit card interest payment rate in 2017 was 15.5%. It closed at 17.6% for 2018. It was at 12.5% five years ago. The total revolving credit card debt (debt people don’t pay off right away) now stands at a record $1.04 trillion. That’s higher than its 2008 peak.
Here’s an even worse record. Last year, credit card borrowers paid $113 billion to banks in credit card interest and fees, up 12% from 2017. A household with the average revolving credit card debt of $6,929 would pay $1,220 in interest payments. According to a recent NerdWallet survey, about one in 11 Americans with credit card debt says they don’t believe they will ever be free of that debt.
In many cases, credit card balances represent only a fraction of a household’s debt. U.S. households have an average of $135,768 in outstanding total debt. According to the New York Federal Reserve Bank’s latest data, total consumer debt is higher now than it was during the financial crisis. Total household debt from the fourth quarter of 2018 was higher than its pre-crisis peak.
Meanwhile, student loan debt has tripled since the financial crisis. It’s the second-highest form of consumer debt in America. Finally, auto loan delinquency rates are at a 19-year high. What all of this means is that people have piled on debt since the financial crisis, but it’s more expensive for citizens to handle. Meanwhile, certain expenses have increased more quickly than incomes. Medical costs, for example, have risen by 33%. Then there’s the cost of eating out, which has risen by 27% since 2008.
So all of this consumer debt can result in national consumption fatigue. We are nearing that very tipping point. More citizens will have to consider what they need to buy versus what they want to buy.
But now the Fed says it’s trying to address the very wealth gap that its dark money policies have created. At a recent conference in Washington, the Fed decided to highlight “rising inequality in America and the corrosive effects it can have on the economy,” according to Bloomberg. Fed Gov. Lael Brainard told her audience that the U.S. economy could be at risk, as “middle-class households are squeezed by slow growth in income and wealth and rising costs for housing, health care and education.”
Over in the Bronx, New York Fed President John Williams warned a group of bankers that the increase in inequality “is undermining.” He added that he thinks “our economy… is not reaching its full potential because of these issues.”
Maybe the Fed is finally recognizing that rising inequality is a problem. But more likely, it’s really just an excuse to keep the cheap money game going. We have plenty of evidence that cheap credit doesn’t lower inequality. In fact, we have lots of evidence to the contrary. But that won’t stop the Fed from using it as a reason to maintain their cheap-money policies and potentially lower rates in the second half of the year. It’s all about keeping the game going.
Below, I show you why you need to beware the “banksters,” including a mysterious “shadow” system of banksters. Read on.”
“Beware the Banksters”
By Nomi Prins
“The more things change, the more they, well, don’t. With everything else going on in the world, the real culprits of the financial crisis that spawned more than a decade of dark money policy haven’t missed a beat. Of course, I’m talking about the “banksters.” 
A major European investigation into currency rate manipulation that took five years is finally over. Last week, five major global banks were slapped with a total of $1.2 billion in fines for rigging the currency markets. Four of them weren’t first-time offenders either. They are RBS, Barclays, Citigroup and JPMorgan. They reached a settlement of $2.5 billion in fines with the U.S. Department of Justice in 2015 for a “similar offense.” Indeed, over a dozen financial institutions have been forced to pay almost $12 billion in fines globally during that time. 
Citigroup faces the heaviest fines of them all. RBS, JPMorgan and Barclays were nearly tied, and MUFG came in last. UBS avoided fines because they were the bank that told the EU about the rigging cartels. What did these banks do to incur the fines?
They shared customer orders along with price and trading information in order to manipulate the currency markets. They targeted 11 currencies, including the dollar, pound and euro from 2007–2013. By knowing and sharing what customers were doing, they could front-run their customers’ trades and profit as a result. That means they had knowledge of buying and selling that could swing the price of an asset. They could position themselves accordingly. 
What this means is that big banks keep colluding against their customers if they can. With the sheer amount of money they make, mere fines aren’t a deterrent. And the banksters are always scrambling to stay one step ahead of the regulators. It’s a never-ending battle.
But that’s not the only way banks and major financial institutions are taking advantage of their customers. Just look at credit cards. You would think that after more than a decade of dark money policy and rates still relatively low that your credit cards wouldn’t demand such high interest rates. But while banks still enjoy access to cheap dark money from the central banks, they have raised your credit card costs to all-time highs. 
According to recent data from the Federal Reserve, Americans are now paying their banks an average 16.9% interest on their credit cards. That’s a record amount. But here’s the problem: if consumers are paying more money in interest on their credit cards, they have less money to spend in general. This can impact the overall economy. 
That’s one reason April’s U.S. retail sales were down 0.2%. As retail sales make up almost one-third of consumer spending, that could really be a drag on the economy. Credit card delinquencies (late payments) rose in the first quarter this year to their highest level in seven years, according to a New York Fed report last week. 
Millennials were behind the surge in overdue payments. So even though the Fed is now on pause, banks are still charging you way more than they should be. Even if the Fed cuts rates, it won’t mean banks will cut your credit card rates. 
These are some of the abuses of the banking system. But at least the traditional banking system faces a good amount of oversight and regulation. There’s another type of banking activity that’s largely unregulated. And it presents a threat to the entire system: I’m talking talk about “shadow banking.”
Shadow banks are basically financial firms like hedge funds and private equity funds. They include investment banks, hedge funds, mutual funds and ETFs that don’t hold FDIC-insured deposits.  With rates so low, shadow lending has increased substantially since the financial crisis. In particular, shadow banks, or non-bank lenders have lent over $52 trillion. That represents a 75% increase since the end of the financial crisis. 
They are also less regulated than the major banks. That’s the key: they are generally not as regulated as traditional banks, which themselves amassed a laundry list of frauds and fines.They are not required to maintain reserves or emergency capital, for example. 
They have engaged in risky lending activities, like the type of derivatives trading that led to the financial crisis of 2008. Into the last financial crisis, many shadow banks offered subprime loans to borrowers that had poor credit profiles. They also lent money to investment banks and other firms that bought billions of dollars of “toxic assets” the big banks created from those loans.
Daily Reckoning managing editor Brian Maher recently explored the shadow banking system in depth. Go here, here and here to learn more.
Economist Paul McCulley originated the term “shadow bank” in 2007. These institutions bring another level of complexity to the financial system. The commercial banking system has historically created liquidity in capital markets. The Fed was there to back them up in case of a credit crunch. But the shadow banking system generated liquidity in the system without being backstopped by the Fed or any other central bank. So if they faced a crisis, there was no one there to bail them out. They’re basically on their own. 
The fact that these shadow banks aren’t regulated presents a serious threat to financial stability. And the shadow banking network operates throughout the world, so it presents a systemic threat to the entire financial ecosystem. That is to say, the shadow banking industry’s’ rapid expansion could cause problems if credit conditions worsen and those loans need to be repaid. And there are even more shadow bank entities today than there were in 2008. That’s why the New York Fed has claimed that shadow banks have “increased the fragility of the entire financial system.” 
Just as the U.S. banks led the world in the creation of toxic assets going into the financial crisis, U.S. shadow banks now make up the largest segment of the sector with 29% or $15 trillion in total assets. The hottest growth area in shadow banking is called “collective investment vehicles.” 
These include bond funds, hedge funds, money markets and mixed funds. Total CIV assets have ballooned 130% to $36.7 trillion vs. traditional bank assets which have grown 35% to $148 trillion since 2010. Non-bank financials, such as insurance companies and pension funds, grew by 61% to $185 trillion. 
What this means is that the risks shadow banks impose on the market are three-fold. These firms are not well diversified, have less liquidity, and are particularly exposed to credit deterioration.  That’s why they could easily be at the heart of the next financial crisis. It’s time to rein in the banksters before they blow up the system again – maybe for good next time.”


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