Economic Crisis Gathering Steam
In
her budget speech on March 28, Deputy Prime Minister and Finance
Minister Chrystia Freeland said, "Last year, Canada delivered
the
strongest economic growth in the G7." She blamed "Putin and the
pandemic" which "drove up inflation around the world. Central
banks
have responded with one of the fastest and most synchronized
monetary
tightening cycles since the 1980s."
Her praise of
Canada's
strong economy verged on manic despite the fact that a serious
economic
crisis has been gathering steam and what even business interests
in
Canada say about the economy. Contrast Freeland's remarks to
those of
the Business Council of British Columbia, among many who
say
the same thing: "Canada's economy entered 2023 shouldering
serious structural weaknesses: the world's 4th most indebted
advanced
economy; the highest private sector debt-servicing burden among
G7
countries; the worst prospects in the OECD for growth in GDP per
capita
and labour productivity over the next 40 years; business
investment
that is barely keeping up with depreciation, resulting in a flat
or
declining capital stock per worker; and a two-decade retreat
from
international trade with exports shrinking as a share of GDP.
Young
Canadians entering the workforce today face the unhappy prospect
of the
lowest projected growth in average real incomes among the 38
OECD
countries over 2020-2060."
No mention in Freeland's
speech of the economic crisis which is gathering steam. The
immediate situation may
result in large-scale layoffs in the tech, health care and wine
sectors
and the collapse of thousands of smaller companies in those
sectors or
their seizure at little cost by the big cartels (hedge funds,
tech,
health care and
food giants).
The crisis is similar in some respects to 2008 in that the same financial instruments play a role. There is massive lending (in this case not to home and car buyers but to start-ups that have little or no income for years and use constant borrowing to cover costs) and the parking of large amounts of deposits by the lenders (Silicon Valley Bank (SVB) and others) in bonds, in this case mostly government bonds, not the sub-prime mortgage-backed (junk) securities of 2008. However, the government bonds are sensitive to interest rates. Their value goes down below the original purchase price with every increase in the interest rate.
One article said that SVB, as a condition of lending, forced borrowers to hold all or most of their cash in the Silicon Valley Bank. Much of this cash would be the borrowed money that would then be used to pay employees etc at the borrowing start-ups to augment amounts (revenue) from operations (if any).
Almost all SVB deposits are above the $250,000 guaranteed limit of the Federal Deposit Insurance Corp. making that deposited cash unavailable unless the cash is withdrawn before the collapse. The Biden government has subsequently announced a public bailout of all SVB and the bankrupt Signature Bank depositors regardless of the size of the deposit.
Reports are circulating that suggest corruption occurred at SVB as certain insiders, including government officials, removed deposited cash and sold shares in SVB just prior to the collapse. Certain individuals (who have been named in social media) sold shares in SVB for millions of dollars just prior to the collapse. Anyone who bought those shares without inside knowledge of the bank's status or was holding other SVB shares when the bank collapsed will lose millions.
The immediate problem for SVB arose because the bank along with other financial institutions put much of their cash (deposits) into long-term government bonds at low interest rates. With price inflation and rising interest rates (determined by the Federal Reserve) those bonds have lost a lot of their value. This means that if the banks want to sell the bonds to raise cash they will lose a lot of their initial purchase amount. (The value of bonds goes in inverse relation to interest rates unless you hold them to maturity.)
SVB was forced to sell billions of dollars of its bonds at a loss because it no longer had enough money coming into its coffers to cover the withdrawals of their business customers for payrolls etc. This was compounded by new loans becoming fewer because of the higher interest rates and a downturn in the tech industry.
SVB and comparable banks rely on constant new demand for borrowing and then deposits of that borrowed money to cover drawings on its existing accounts but most importantly they require their accounts to appear positive and their share price to increase, and to guard against any run to withdraw deposits by worried depositors, which all sounds similar to a Ponzi scheme. (A Ponzi scheme requires a constant flow of new money coming in to service any money going out without any or little actual production of new value.)
A similar bank in New York (Signature) has also collapsed with the state governor saying all depositors, regardless of the size of the deposits, would be guaranteed. Reports say several other banks of much the same size are also on the verge of collapse.
Some reports suggest the problem may go beyond the smaller start-ups to involve the bigger tech companies such as Uber, Shopify, Doordash and AirBNB as most of them rely on constantly receiving new loans to cover their expanding businesses, which for the most part do not have positive cash flows.
"Shopify CEO made a comment on his own Twitter account saying there would be a 'minor impact' for the company. Tobi Lutke said a small portion of its U.S. operational fund flows were tied up in SVB, 'but we are working around it and it should be business as usual' -- with nothing directly addressing the impact on sellers."
However, Shopify clients are already sounding alarm bells saying their accounts, where customers' payments go through Shopify, have been disrupted.
"On Sunday evening, Lutke tweeted a copy of an email Shopify sent merchants, including offering assistance to those with SVB accounts who might have trouble meeting payroll."
Most commentators are eager to say that this crisis is different from 2008 because the bonds are government backed and not junk and that the only reason the bonds have lost value is because of higher interest rates. (Similar end result, however.) The only problem arises according to them from the fact that many of the start-ups (borrowers) are risky and have no positive income but most are not "junk." In a similar vein, it could be said that the subprime mortgage and car loan borrowers in 2008 were risky but that did not stop the banks from bundling the loans into huge bonds and selling them to companies.
The fact remains that deregulation allows a bank such as SVB and Signature to lend virtually an unlimited amount without any regard to how much it has in deposits or whether it can even service its existing depositors with cash when they need it. New loans were not coming in at the speed required so SVB was forced to sell-off many of its bonds at a huge loss. Depositors learned of the difficulties and began to withdraw their deposits en masse forcing SVB to close its doors.
SVB was the banking partner of almost half of the technology and health care companies listed in the U.S. in 2022.
Rising interest rates have left banks (and others) saddled with low-yielding bonds that cannot be sold quickly without a loss. (Those are government and mortgage-backed bonds bought when interest rates were near zero.) If too many customers withdraw their deposits simultaneously, a risk develops of a cycle being sparked because word soon spreads. This is compounded today by the fact that most depositors can move their money quickly using their smartphones.
SVB sold $21 billion of its bond portfolio before its collapse at a loss to gain some liquidity to service depositors who needed to withdraw money. SVB also announced plans to sell additional stock market shares compounding the suspicion that something was not right. Yet in the face of this, only two weeks before the collapse, U.S. banking regulators gave SVB a clean bill of health and ratings agencies continued to keep it at a very solid AA rating. People have now learned that the CEO of SVB began selling his stock weeks before the collapse.
SVB borrowers were also its main depositors. The borrowers, mostly tech and health care start-ups, now face higher interest rates plus a slowdown in the tech sector. (Meta/Facebook just announced layoffs of another 10,000 employees.) Start-ups require constant new borrowing to sustain their projects as income is slow to begin with and for many never reaches a level to sustain operations. With interest rates near zero this was sustainable for a time but as soon as interest rates rise many start-ups can no longer service their outstanding loans and do not qualify for new loans.
In this scenario, many borrowers began to withdraw their deposits at SVB just to keep their operations going. SVB did not have the cash on hand to give them their money thus forcing it to tap into its bond portfolio at a loss. (New bonds on the market now have higher interest rates, which drives down the value of the old outstanding bonds that have lower interest rates unless held to maturity.)
SVB, as is the case with all financial enterprises holding depositors' money, does not have anywhere near enough in available liquidity (cash and other holdings such as cashable bonds) to return all its deposits to depositors or even a fraction of deposits. As well, most of the depositors in SVB were tech companies with close connections to social media. Worry quickly spread and within days (by March 9) depositors withdrew $42 billion draining all of SVB's available reserves including its cashed-out bonds.
Banks overall in the U.S. are reported to have about $3 trillion in cash versus $17.6 trillion in deposits. But most of that cash is just a web page with an amount written on it. In fact, only about $100 billion (0.1 trillion) is held by banks in the form of physical notes in vaults and ATMs. Thus, the $17.6 trillion in deposits is supported by only $3 trillion in cash, of which perhaps $0.1 trillion is physical cash. The rest is backed by less liquid securities and loans as was the case with SVB.
Biden has moved to secure the current deposits in SVB via the Federal Deposit Insurance Corporation (FDIC) beyond the $250,000 upper limit. This means depositors will be able eventually to withdraw their money. Investors in SVB stock market shares stand to lose a lot. These include pension funds.
According to a March 13 news report, Swedish pension group Alecta faces losing as much as 12 billion Swedish kronor ($1.13 billion) following the collapse of Silicon Valley Bank. Alecta, which holds around SEK1.12 trillion in assets under management, was the fourth-largest shareholder in SVB Financial Group at the end of 2022 with a 4.45 per cent stake. The South Korea Pension Service, California Public Employees Retirement Fund and pension funds based in Rhode Island, Arizona, Colorado, Ohio, Sweden, the Netherlands and others will also lose money.
Trading of Derivatives
The trading of derivatives has become immense worldwide. Derivatives are paper holdings designating a payment for something at a rate derived from some feature of the thing, such as commodities (e.g., oil, gold), stocks, bonds, the weather, interest rates, currencies etc. -- in fact anything that a buyer and seller can agree on can be traded.
Derivatives also play a role in hedging against fluctuations in prices of things. A buyer needs to buy oil in six months so it buys an oil derivative at an agreed price and receives the oil in six months at that price regardless of any changes in the price of oil on the market.
Derivative trading is similar in many respects to the now common betting platforms on the Internet where you can place a bet on almost anything.
Derivative trading is the imperialist global market on steroids dominated by the big financial cartels (banks, hedge funds etc). The value of the derivatives held is immense as shown in the amounts held by U.S. banks in the chart below. As derivatives involve everything and anything, they are bigger in volume than any of the parts such as the stock markets. Derivatives can be traded through an exchange (e.g., Chicago Mercantile) or over-the-counter market between a party and counterparty.
(Statistica)
"The derivatives market is, in a word, gigantic -- often estimated at over $1 quadrillion on the high end. How can that be? Largely because there are numerous derivatives in existence, available on virtually every possible type of investment asset, including equities, commodities, bonds, and currency. Some market analysts even place the size of the market at more than 10 times that of the total world gross domestic product (GDP)," reports Investopedia.
Before Credit Suisse was taken over by UBS on March 19, it held trillions in derivatives and is known to have experienced losses in trades in recent years. Its possible collapse had been suspected for some time.
A trading website reported on March 15: "The cost of credit derivatives linked to Credit Suisse Group AG are blowing out to levels reminiscent of the financial panic of 2008 after the lender's biggest shareholder [Saudi National Bank] said it doesn't want to boost its stake. The moves are being exacerbated by banks rushing to buy protection against a possible default by the Zurich-based firm to reduce their counterparty risk on trades, according to people with knowledge of the matter. In a chaotic day of trading, quotes for one-year credit default swaps were considerably more expensive than the offers for longer durations as lenders tried to give themselves a near-term shield from their exposure to the lender, the people said."
A bankruptcy such as with SVB upsets the derivatives market because all its derivative contracts will collapse. Credit Suisse was a far larger cartel with a more global reach, one of 30 global financial institutions considered "systemically important financial institutions (SIFIs) too big to fail." Credit Suisse handled the trading accounts of several hedge fund cartels. Its ownership and control was global with the largest group holdings in the U.S., France and Saudi Arabia. The Saudi owners made it known they would not put any more money into Credit Suisse. (Some fallout also occurred because of the seizure and freezing in Switzerland of Russian-owned property resulting in recent declines of investment volumes in financial institutions headquartered in Switzerland.)
SVB held $27.7 billion in derivatives, no small sum, but it is only 0.05 per cent of the $55,387 billion ($55.387 trillion) held by JPMorgan, the largest U.S. derivatives bank or the amount held by Credit Suisse.
The derivatives market in Europe has an estimated amount of 660 trillion euros.
Government Bailouts
A few examples of the thousands of business depositors in Silicon Valley Bank the government has bailed out following the bank's collapse are noted below. As stated, the government is also bailing out depositors in the failed Signature bank. Six other banks are said to be "teetering" on the verge of collapse.
Deposits
are insured up to $250,000 through insurance jointly paid by all
banks
and administered by the FDIC. Deposits above that amount are not
insured unless the depositor buys private insurance, which most
do not
do. The FDIC is acting as a receiver, which typically means it
will
liquidate the
bank's assets to recoup some of the insured amounts it must pay
out up
to $250,000. The FDIC does not have near enough funds in reserve
to pay
any more than that amount.
A typical large depositor (and borrower) in SVB is Roku Inc. Roku, the maker of a streaming media player, said in a U.S. Securities and Exchange Commission filing that roughly $487 million or 26 per cent of its $1.9 billion in cash is deposited in SVB. Roku added that it believed it had enough cash for normal operations for the next twelve months as it has a remaining balance of $1.4 billion distributed across other large financial institutions.
The past year has been difficult for Roku, similar to many in the tech sector. Even though viewers (customers) have increased, revenue is stagnant as advertisers have decreased their spending. Roku also experienced declining device sales. The flat revenue compares with soaring expenses caused by price inflation and higher interest rates. According to Yahoo Finance, "[Roku] fourth-quarter operating expenses soared 71 per cent year over year, while revenues remained flat. Instead of the modest profit reported in 2021, operations lost a frightening $250 million in the fourth quarter. Over the past year, as revenues stagnated, the company reported a $498 million net loss. In November 2022, the company laid off around five per cent of its staff, but that might not be enough. The company forecast another net loss of $205 million in the first quarter of 2023."
A small sample of other companies with large deposits in SVB include Gaming platform Roblox; Circle, a blockchain-based payments company with $3.3 billion of its U.S. Dollar Coin cryptocurrency still held by SVB; and, iRhythm Technologies, which sells a wearable device that monitors cardiac patterns.
Reports say the U.S. Federal Reserve has established an emergency lending fund to backstop the bank bailouts. In the initial stage the fund will be large enough to bail out $175 billion in deposits. This backstop is similar to (but much smaller at this point) the bailouts in 2008/09. Many commentators believe the bank and other company bailouts by the government are a big factor in driving up the state debt and flooding the world with U.S. dollars contributing to the current price inflation.
The FDIC said it will auction off any assets of SVB and Signature Bank and possibly impose special assessments or tax on banks to recoup its losses if possible.
Parasitism and Decay on Full Display
During the pandemic economic slowdown U.S. banks have been piling excess cash into bonds resulting in a 44 per cent surge in their bond holdings to $5.5 trillion. Most of those bonds carry a low interest rate until maturity many years away. In 2022 the Fed began raising interest rates. New bonds now carry the higher interest rates. Most bonds are liquid in the sense they can be sold but the already bought bonds at lower interest rates will command a price much lower than the original price (to be paid at maturity) as the new buyer takes into account the loss in value because of price inflation, which is not covered by the bond's lower interest rate.
At the end of 2022, the U.S. FDIC reported unrealized losses on securities totalled $689.9 billion in the third quarter, up from $469.7 billion in the second quarter. These are paper losses that have not as yet turned into actual losses.
Unrealized losses on held-to-maturity securities (HTM bonds) totalled $368.5 billion in the third quarter, up from $241.8 billion in the second quarter. Unrealized losses on available-for-sale (AFS) securities totalled $321.5 billion in the third quarter, up from $227.9 billion in the second quarter. (Unrealized losses reflect the paper losses on securities the financial institutions are holding, which become realized when sold.)
The unrealized losses are important for lending institutions because they play a role in determining the amount they can lend according to how much money value they are holding (capital requirements).
To soften the blow of losses on their balance sheets banks can classify their security holdings as HTM or AFS. Those that are labelled HTM cannot be sold. But that means any changes in market value will not count in the formulas regulators use for calculating capital requirements. By contrast, any losses in the AFS basket have to be marked to market and deducted from the bank's capital (money value) base.
A huge paper loss is sitting on the balance sheets of U.S. banks. If they need money and sell their securities at a loss, this erodes their capital (money value) base restricting their capacity to lend.
The Financial Times (FT) warned only three months ago on December 27, 2022, "For now, U.S. banks remain awash in liquidity and are suffering no obvious financial stress. But rising deposit outflows and the increase in unrealized losses could become problematic if they need to sell investments to meet unexpected liquidity needs. Bond holdings could emerge as a serious pressure point for banks in volatile markets. Investors should watch out for this in 2023."
Two months later in 2023 the chair of the FDIC said: "The combination of a high level of longer-term asset maturities and a moderate decline in total deposits underscores the risk that these unrealized losses could become actual losses should banks need to sell securities to meet liquidity needs."
The stress and outflows started in earnest in early 2023 in the tech sector but had been building steam for some time. Investment activity in the tech sector fell significantly in the last quarter of 2021 and kept declining through 2022 and into this year.
The stress and outflow became evident in SVB's balance sheet. Panic began when SVB tried to raise money to cover its losses and this became common knowledge. The concern among deposit holders was made worse in early March when SVB announced it had lost $1.8 billion on asset sales during the attempt to raise money from selling securities.
FT asks rhetorically, "How could SVB have ended up in this exposed position? Why was it not stress-tested? Because in 2018 the regulations were changed and SVB was leading the charge pushing for the onerous regulations to be lifted.
"The bank executive lobbying in this instance is the same Greg Becker who sold $3.6 million of company stock under a trading plan less than two weeks before the firm disclosed extensive losses that led to its failure. The sale of 12,451 shares on February 27 was the first time in more than a year that Becker had sold shares in parent company SVB Financial Group, according to regulatory filings. He filed the plan that allowed him to sell the shares on January 26."
FT criticizes the Fed saying, "Look, you don't raise [interest] rates in record fashion on an economy toting record leverage at maximum speculation and expect no consequences. This [the collapse of SVB, Signature and quite possibly First Republic] was clearly going to happen, and now we're seeing the weak links in the chain break. The areas where speculation was most rampant and most egregious are clearly coming down. Years of excessive risk-taking are coming back to bite them hard. The situation will devolve very rapidly."
Economic Crisis Looms Large
Economic crises occur regularly under the imperialist system. The individual owners in control of the socialized economy and state politics are driven with the aim to expropriate as much social wealth as possible for themselves from what working people produce. This aim drives them to scour the earth in search of exploitable social wealth in ways that become riskier and more dangerous for the people and Mother Earth herself. Parasitism, war and decay pervade their system of control and narrow selfish aim. Given the global interrelatedness of the oligopolies which operate as cartels and coalitions, and extreme often violent competition among them, the crises have become increasingly dangerous and destructive.
The
people must take matters into their own hands and empower
themselves
now to become those in control of the economic and political
system and
all those affairs that affect their lives and Mother Earth. They
must
create new forms of governance with a new direction and aim for
the
economy to
humanize the social and natural environment within relations of
peace
and cooperation for the benefit for all.
The narrow private interests which have created oligopolies which act as cartels and coalitions are leading society and Mother Earth to ruin. The peoples of the world are waging courageous battles to stop them, as in the case of the working class in France which is carrying out militant strikes against the police powers of the French presidency. It must be done! It can be done!
Toulouse,
France, March 23, 2023
Ellen Brown: "The Looming Quadrillion Dollar Derivatives Tsunami"
The following contains extensive excerpts from Ellen Brown's item, published March 12 following the collapse of the Silicon Valley Bank on March 10. TML comments are in double parentheses. The entire article is available here.
The FDIC fund is sufficient to cover only about two per cent of the $9.6 trillion in U.S. insured deposits. ((The FDIC fund insures bank deposits up to $250,000.)) A nationwide crisis triggering bank runs across the country, as happened in the early 1930s, would wipe out the fund. Today, some financial pundits are predicting a crisis of that magnitude in the quadrillion dollar-plus derivatives market, due to rapidly rising interest rates.
[...]
In 2002, mega-investor Warren Buffett wrote that derivatives were "financial weapons of mass destruction." At that time, their total "notional" value (the value of the underlying assets from which the "derivatives" were "derived") was estimated at $56 trillion. Investopedia reported in May 2022 that the derivatives bubble had reached an estimated $600 trillion according to the Bank for International Settlements (BIS), and that the total is often estimated at over $1 quadrillion. No one knows for sure, because most of the trades are done privately.
As of the third quarter of 2022, according to the "Quarterly Report on Bank Trading and Derivatives Activities" of the Office of the Comptroller of the Currency (the federal bank regulator), a total of 1,211 insured U.S. national and state commercial banks and savings associations held derivatives, but 88.6 per cent of these were concentrated in only four large banks: J.P. Morgan Chase ($54.3 trillion), Goldman Sachs ($51 trillion), Citibank ($46 trillion), Bank of America ($21.6 trillion), followed by Wells Fargo ($12.2 trillion). A full list is here [[https://www.usbanklocations.com/bank-rank/derivatives.html]]. Unlike in 2008-09, when the big derivative concerns were mortgage-backed securities and credit default swaps, today the largest and riskiest category is interest rate products.
[...]
In recent times [derivatives] have exploded into powerful vehicles for leveraged speculation (borrowing to gamble). In their basic form, derivatives are just bets — a giant casino in which players hedge against a variety of changes in market conditions (interest rates, exchange rates, defaults, etc.). They are sold as insurance against risk, which is passed off to the counterparty to the bet. But the risk is still there, and if the counterparty can't pay, both parties lose. In "systemically important" situations, the government winds up footing the bill.
Like at a race track, players can bet although they have no interest in the underlying asset (the horse). This has allowed derivative bets to grow to many times global GDP and has added another element of risk: if you don't own the barn on which you are betting, the temptation is there to burn down the barn to get the insurance. The financial entities taking these bets typically hedge by betting both ways, and they are highly interconnected. If counterparties don't get paid, they can't pay their own counterparties, and the whole system can go down very quickly, a systemic risk called "the domino effect."
That is why insolvent SIFIs had to be bailed out in the Global Financial Crisis (GFC) of 2007-09, first with $700 billion of taxpayer money and then by the Federal Reserve with "quantitative easing." ((Quantitative easing is a form of monetary policy used by central banks to increase the domestic money supply. A central bank, like the U.S. Federal Reserve, purchases securities from the open market to reduce interest rates and increase the money supply. Quantitative easing creates new bank reserves, providing banks with more liquidity and encouraging lending and investment. – Investopedia.))
Derivatives were at the heart of that crisis [2008]. Lehman Brothers was one of the derivative entities with bets across the system. So was insurance company AIG, which managed to survive due to a whopping $182 billion bailout from the U.S. Treasury; but Lehman was considered too weakly collateralized to salvage. It went down, and the Great Recession followed.
Derivatives are largely a creation of the "shadow banking" system, a group of financial intermediaries that facilitates the creation of credit globally but whose members are not subject to regulatory oversight. The shadow banking system also includes unregulated activities by regulated institutions. It includes the repo market, which evolved as a sort of pawn shop for large institutional investors with more than $250,000 to deposit. The repo market is a safe place for these lenders, including pension funds and the U.S. Treasury, to park their money and earn a bit of interest. But its safety is insured not by the FDIC but by sound collateral posted by the borrowers, preferably in the form of federal securities.
As explained by Prof. Gary Gorton:
This banking system (the "shadow" or "parallel" banking system) – repo based on securitization – is a genuine banking system, as large as the traditional, regulated banking system. It is of critical importance to the economy because it is the funding basis for the traditional banking system. Without it, traditional banks will not lend and credit, which is essential for job creation, will not be created.
While it is true that banks create the money they lend simply by writing loans into the accounts of their borrowers, they still need liquidity to clear withdrawals; and for that they largely rely on the repo market, which has a daily turnover just in the U.S. of over $1 trillion. British financial commentator Alasdair MacLeod observes that the derivatives market was built on cheap repo credit. But interest rates have shot up and credit is no longer cheap, even for financial institutions.
According to a December 2022 report by the BIS, $80 trillion in foreign exchange derivatives that are off-balance-sheet (documented only in the footnotes of bank reports) are about to reset (roll over at higher interest rates). Another time bomb in the news is Credit Suisse, a giant Swiss derivatives bank that was hit with an $88 billion run on its deposits by large institutional investors late in 2022. The bank was bailed out by the Swiss National Bank through swap lines with the U.S. Federal Reserve at 3.33 per cent interest.
[...]
The 2005 safe harbour amendment to the bankruptcy law says that the collateral posted by insolvent borrowers for both repo loans and derivatives has "safe harbour" status exempting it from recovery by the bankruptcy court. When Lehman appeared to be in trouble (2008), the repo and derivatives traders all rushed to claim the collateral before it ran out, and the court had no power to stop them.
[...]
The safe harbour exemption is a critical feature of the shadow banking system, one it needs to function. Like traditional banks, shadow banks create credit in the form of loans backed by "demandable debt" – short-term loans or deposits that can be recalled on demand. In the traditional banking system, the promise that the depositor can get his money back on demand is made credible by government-backed deposit insurance and access to central bank funding. The shadow banks needed their own variant of "demandable debt," and they got it through the privilege of "super-priority" in bankruptcy.
Safe harbour status grants the privilege of being excluded from mandatory stay, and basically all other restrictions. Safe harbour lenders, which at present include repos and derivative margins, can immediately repossess and resell pledged collateral. This gives repos and derivatives extraordinary super-priority over all other claims, including tax and wage claims, deposits, real secured credit and insurance claims.
The dilemma of our current banking system is that lenders won't advance the short-term liquidity needed to fund repo loans without an ironclad guarantee; but the guarantee that makes the lender's money safe makes the system itself very risky. When a debtor appears to be on shaky ground, there will be a predictable stampede by favoured creditors to grab the collateral, in a rush for the exits that can propel an otherwise-viable debtor into bankruptcy; and that is what happened to Lehman Brothers [2008 crisis].
Derivatives were granted "safe harbour" because allowing them to fail was also considered a systemic risk. It could trigger the "domino effect," taking the whole system down.
[...]
Interest rate derivatives are particularly vulnerable in today's high interest rate environment. From March 2022 to February 2023, the prime rate (the rate banks charge their best customers) shot up from 3.5 per cent to 7.75 per cent, a radical jump. Market analyst Stephanie Pomboy calls it an "interest rate shock." It won't really hit the market until variable-rate contracts reset, but $1 trillion in U.S. corporate contracts are due to reset this year, another trillion next year, and another trillion the year after that.
An interest rate shock to the massive derivatives market could take down the whole economy. Michael Snyder, in a 2013 article titled "A Chilling Warning About Interest Rate Derivatives," wrote, "Will rapidly rising interest rates rip through the U.S. financial system like a giant lawnmower blade? Yes, the U.S. economy survived much higher interest rates in the past, but at that time there were not hundreds of trillions of dollars worth of interest rate derivatives hanging over our financial system like a Sword of Damocles.
"Rising interest rates could burst the derivatives bubble and cause 'massive bankruptcies around the globe' [quoting Mexican billionaire Hugo Salinas Price]. If [the 'too big to fail' banks go bankrupt] ... our entire economy will go down with them. Our entire economic system is based on credit, and just like we saw back in 2008, if the big banks start failing, credit freezes up and suddenly nobody can get any money for anything. [...]"
((The remaining half of the Ellen Brown article contains her proposals to reform the banking system in a manner she says would benefit the people. In doing so she presents actions the people could take in the present to defend what belongs to them by right but then curiously uses those policy objectives to negate the necessity to create new forms which would resolve the crisis in their favour. The crisis arises out of a dysfunctional imperialist system and is not a matter of bad policies and behaviour as such. No matter how corrupt and morally reprehensible, they are par for the course and "good polices" are not favoured when the economy is reduced to a global casino in which things spiral from bad to worse.
The socialized economy has spread throughout the world with productive forces led by a modern working class but captured within relations of production under the control of supranational narrow private interests, a social class no longer relevant but hanging on through oppression, destruction and war. To establish their own vantage point, the workers must settle scores with the old conscience of society and fight for what belongs to them by right from that perspective.))
This article was published in
Volume 53
Number 3 - March 2023
Article Link:
https://cpcml.ca/Tmlm2023/Articles/M530034.HTM
Website: www.cpcml.ca Email: editor@cpcml.ca