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This Is Your Banking System on Trump

Linked by Paul Ciano on May 23, 2018

Nomi Prins, Mother Jones:

As the central bank of the United States, the “Fed” sets the financial tone for the global economy by manipulating interest rate levels. This affects everyone, yet very few grasp the scope of its influence.

During times of relative economic calm, the Fed is regularly forgotten. But what history shows us is that having leaders who are primed to neglect Wall Street’s misdoings often sets the scene for economic dangers to come.

Williams served as president of the San Francisco Fed. Under his watch, the third largest US bank, Wells Fargo, created about 3.5 million fake accounts, gave its CEO a whopping raise, and copped to a $1 billion fine for bilking customers on auto and mortgage insurance contracts.

Not surprisingly, Wall Street has embraced Trump’s new Fed line-up because its members are so favorably disposed to loosening restrictions on financial institutions of every sort. Initially, the financial markets reflected concern that Powell might turn out to be a hawk on interest rates, meaning he’d raise them too quickly, but he’s proved to be anything but.

As Trump stacks the deck in his favor, count on an economic impact that will be felt for years to come and could leave the world devastated. But rest assured, if the Fed can help Trump keep the stock market buoyant for a while by letting money stay cheap for Wall Street speculation, and the dollar competitive for a trade war, it will.

…the Fed sets interest rates and therefore the cost of money. This, in turn, indirectly affects the value of the dollar, which means everything you buy.

Since the financial crisis of a decade ago, the Fed has kept the cost of borrowing for banks at near zero. This allowed banks to borrow money to buy their own stock (as did many corporations) to inflate their own value but not, of course, the value of their service to Main Street.

When money is cheap because interest rates are low or near zero, the beneficiaries are those with the most direct access to it. Which means that the biggest banks, members of the Fed since its inception, get the largest chunks of fabricated money and pay the least interest on it.

The era of trade wars, soaring stock markets, and Trump gaffes may feel like it’s gone on forever. But don’t forget that there was a moment not so long ago when the same banking policies still reigning caused turmoil, ripping through the country and devouring the finances of so many. It’s worth recalling what happened during the Great Meltdown of 2008, when unrestrained megabanks ravaged the economy before being bailed out. In the midst of the current market ecstasy, it’s an easy past to ignore. That’s why Trump’s takeover of the Fed and its impact on the financial system matters so much.

Let’s recall that, on September 15, 2008, Lehman Brothers crashed. Lehman, like my former employer Goldman Sachs, had been around more than 150 years. Its collapse was a key catalyst in a spiral of disaster that nearly decimated the world financial system. It wasn’t the bankruptcy that did it, however, but the massive amount of money the surviving banks had already lent Lehman so it could buy the toxic assets they created.

In the wake of Lehman’s bankruptcy, $16 trillion in bailouts and other subsidies from the Federal Reserve and Congress were offered mostly to Wall Street’s biggest banks. That flow of money allowed them to return from the edge of financial disaster. It also fueled the stock and bond markets, as untethered from economic realities as the hot air balloon in The Wizard of Oz.

True, the unemployment rate is significantly lower than it was at the height of the financial crisis, but for Main Street, growth hasn’t been quite so apparent. About one in five American jobs still pays a median income below the federal poverty line. Median household income is only up 5.3 percent since 2008 and remains well below where it was in 1998, if you adjust for inflation. Workforce participation remains nearly as low as it’s ever been. Meanwhile, the top 1 percent of American earners saw their median income rise by leaps and bounds since the Fed started manufacturing money–to more than 40 times that of the bottom 90 percent.

So, today, we stand near–how near we don’t yet know–the edge of a dangerous financial precipice. The risks posed by the largest of the private banks still exist, only now they’re even bigger than they were in 2007-2008 and operating in an arena of even more debt. In Donald Trump’s America, what this means is that the same dangerous policies are still being promoted today. The difference now is that the president is appointing members to the Fed who will only increase the danger of those risks for years to come.

When politicians and regulators are asleep at the wheel, it’s the rest of us who will suffer sooner or later.

Average people are going to be the ones that are gonna have to pay for all of this, because they always, always do.

Paul Ciano

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