Introduction

Note to readers: I will begin to post the chapters from the section on banking in the sequence they will appear in my book, The Path Forward: Stopping Predatory Capitalism. Many have been posted previously but randomly. They have been rewritten and re-organized not only in terms of the order of presentation but internally.

I assume that most of my readers will have some but often scattered knowledge of the fundamental concepts needed to understand and analyze the financial system. However, there does not appear to be any previous attempt to systematize the presentation of these fundamental concepts. Certainly there are no courses in our schools outside of some for those who want to become part of the system and profit from it. So this is an attempt to explain those concepts and fill-in any gaps in understanding.

I would appreciate your feedback and in particular identify any concepts that need to be clarified or additional concepts that should be included.

Introduction: Banking

“ Americans should lose faith in their government. They should deplore the captured politicians and regulators who distributed tax dollars to the banks without insisting that they be accountable… Only with this appropriate and justified rage can we hope for the type of reform that will one day break our system free from the corrupting grasp of the megabanks”.

-Neil M. Barofsky, the former special inspector general in charge of oversight of the Troubled Asset Relief Program (TARP)

While the mainstream economists and analysts were praising the stability of the financial system leading up to 2008, there were some who cried warnings but were ignored. They are again saying that the financial system remains as fragile and vulnerable to a severe meltdown today as it was in 2008.

They were right then, most likely they are right again.

* Warren Buffett warned about the danger of derivatives in his 2002 letter to shareholders.

* After the reforms of 2008, in his 2016 letter, Buffett again warned that the danger of derivatives continues.

Beginning in 2003, Janet Tavakoli, the founder of Tavakoli Structured Finance, a former banker who was involved in derivative creation at major banks is worth listening to. As Think Advisor notes: she predicted the thrift industry blow-up and the demise of Enron. Then she foresaw that excessive leverage and structured products’ (derivatives) misratings would lead to a global financial crisis in 2008.

She echoes Buffett’s warning about their continuing danger. She says the story of what actually happened leading to the 2008 financial crisis has been covered up:

• It’s a story that needs to be told because nothing has changed.
• “There’s been a lot of lying, and the lying has been so good that many people in the business aren’t fully aware of the big picture of what happened”.

Tavakoli says the reforms of 2008, including Dodd Frank, have made the system more vulnerable: “And now we’ve made it worse. It’s like handing a drunk driver who got into a crash the keys to a bigger, faster car together with a bottle of vodka”.

To understand the fragility of our present financial system:

• we will look first at what actually happened to cause the 2008 crisis and how that was covered up;
• show that the causes were left untouched by the reforms in 2010;
• examine what can be done to restore the resilience that the financial system had from the reforms of 1933 until they were undone in 1999.

In reading this section keep in mind that when media or authors use the word ‘bank’, they may be referring to very different types of businesses:

• Commercial banks, — our corner store banks and Savings & Loans (thrifts)
• Investment banks — the brokers who bring investors and businesses together,
• Bank Holding Companies that control operating banks that could be commercial banks or investment banks.
• Shadow banks, huge businesses that do banking activities such as making loans, but are beyond the sunlight of government regulatory oversight:

* Private mortgage lenders,

* Equity/Hedge funds that do banking functions such as lending

* New Fintech (Financial Technology) businesses that make loans.

The indiscriminate use of the word bank makes many media articles completely opaque. I will always specify exactly which type of bank I am referring to. That will clear up a lot of the mystification of the banking system.

Acknowledgement: Bank image by Brett Sayles on Pexels

Originally published at https://jandweir.substack.com.