This is a siren call. A stark reminder to anyone who’s tied up all their savings into a major bank. In the next financial collapse, the banks can’t save you and neither can the government. They are stone cold broke.
Let’s face it, we barely do our due diligence when it comes to banks. Nobody thinks about where our money goes and the potential dangers never cross our minds. The average citizen conducts more research when buying a flatscreen television than depositing their life savings in a bank because we rely heavily on governments to save these institutions when they are on the brink of collapse. Growing dependence on government bailouts has left most people without an exit strategy and they are subsidizing our trust by becoming too overconfident in their ability to keep the system afloat.
A century ago, capitalism wasn’t so forgiving. If a bank engaged in criminal activity or risky lending practices that institution would always end up failing. Depositors would lose all their money, suffer the consequences and move on.
Nowadays, with the rise of big government this isn’t the case. The state only cares about one thing and one thing only: inflation. The truth is the banking industry is still allowed to engage in criminal activity and irresponsible lending even under the watchful eye of big brother. Wall Street giants engage in risky activity to achieve this, as we saw in the 2007/2008 financial crisis.
Once your money is deposited into the bank, it’s no longer yours anymore. Up to one hundred percent of your deposited capital is used to generate huge profits for the big banks. The balance you see in your account is now just a number on a screen.
Centuries ago, banks used to rely on consumers just paying back the debt they owed; it was a simple business model. They now depend on customers taking on even more debt to keep the profit machine running by creating some of the most absurd financial products on the market. This creates an artificial wealth effect. Global economies keep growing because central banks have turned savers into speculators.
The Federal Reserve (a fancy way of saying, “central bank”) in the U.S. can only keep the banks solvent for so long. When the price of money becomes too expensive the whole system will inevitably collapse.
Commercial banks make a profit by borrowing short-term money most commonly in the form of bonds and lending it out to customers long-term at a higher rate. If the difference in the interest rate of short and long money inverts then it is almost impossible for them to stay profitable. If the banks can’t lend to clients and other financial institutions in the interbank money markets, the availability of credit reduces rapidly. An inverted yield curve is not necessarily a panacea for a recession but it should make you aware of the potential problems that lie ahead in the future.
Forget bailouts this time it’s different, yes, really; governments are weaker than ever before. Monetary elites at the IMF (International Monetary Fund) have found a new tyrannical solution; bail-ins. The concept looks all rosy on the surface, but reality hides within the definition. Your money will be sacrificed to bail out the bankers. Instead of allowing them to fail in a pure capitalist system, they will seize your assets using them to provide liquidity, preventing the banking system from collapsing.
It’s happened before in recent history, only seven years ago in Cyprus. If a bail-in occurs, the largest depositors who own legitimate capital are ones that get hit first. Bank of Cyprus customers who deposited more than €100,000 had to give up almost half their funds to keep the bank solvent. The people of Cyprus learned a valuable lesson: your money isn’t safe in any financial institution, even banks backed by the government.
The lack of regulation allowed banks to get away with mortgage bond fraud in the subprime crisis era. MBSs were the atomic bomb that exploded in 2008, yet the bonds were rated triple AAA. Rating agencies like S&P and Moody’s aren’t government institutions; they are profitable businesses. Their models result in artificially high scores being awarded to banks because they risk losing business if they downgrade their clients. Banks could walk down Wall Street receiving a higher rating from a competing agency.
Rating firms and bank regulators are reactionary, not predictive, they don’t anticipate the future, rendering them useless. This proves that rating agencies are slaves to the big banks, they will only issue a correction when things go pear-shaped. It’s ironic that in a system of regulation, rating agencies have so little.
What’s the most likely cause of the next recession? It’s hard to predict but for me, it’s Europe. Brexit is the least of the EU’s worries. If I had to bet on the canary in the coal mine; German and Italian banks are top candidates. These institutions are three times bigger compared to a decade ago and using riskier strategies than ever before. The Lehman Brothers collapse of 2008 demonstrates that if one domino topples, multiple fall thereafter.
My bets are on Deutsche Bank & Unicredit. These companies show the frailty of the European markets. The ECB (European Central Bank) announced it’s stopping their bond-buying program, in other words, the stimulus that holds up asset bubbles in property and stocks will no longer be provided. This decision will likely be reversed as Europe’s economies start to collapse.
Anyone who has an in-depth knowledge of the European bond market knows there is a significant systemic risk; barely anyone in the mainstream media is talking about this as they are fixated on the trade war narrative between U.S. and China.
Taking all the above into account, we must do something to have a better chance of staying in the green! So what can we do about our situation? What’s the best course of action? Choose a boring bank. One that has limited services and doesn’t engage in fraudulent activities which is more likely to weather the next financial storm. Choose a bank that does what it’s supposed to do; grow your money with minimal risk. Capitalization is the key to finding a bank that can withstand a credit crunch. Don’t let size and brand fool you.