What Happens When the Rules Stop Changing?

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Are people warning about the upcoming economic collapse economic prophets? People’s warnings have been marginalized about the economy for a simple reason: it has not happened. If the predictions based on their projections had been accurate, our economy would have already collapsed. The truth is that the economy should have collapse but the rules have been changed so that “kicking the can down the road” has extended this economic cycle. What rules have been changed? Some are rules, some are modifications and some facts are hidden intentionally. Here are some questions to ask yourself about what you would have done three years ago if you were convinced that the following events would have occurred by today.

1. The government would pay unemployed people for 99 weeks (or more) to not work. The resulting debt to the federal government to pay these benefits is in the billions for most states.

2. The government in conjunction with the Federal Reserve would implement two stimulus plans.

3. The unemployment rate would reach 10%.

4. The unemployment rate would appear to drop due to manipulation of the total work force by the bureau of labor statistics.

5. Gasoline would double.

6. The national debt would increase $6 trillion in three years.

7. The Federal Reserve would transfer $1 trillion to save Europe by converting dollars to Euros since December 2011.

8. The government would take over the student debt program which ballooned to almost $1 trillion.

9. Food stamp recipients would reach an all time high.

10. Our banks would steal private property to pay off European speculation and the government would do nothing.

I will stop at ten as the point is hopefully made. As written about earlier, Bank of America has $2.3 trillion and assets and $75 trillion in credit derivatives. As the following article points out for JP Morgan Chase, our banks will collapse when the EU collapses. One large bank failure will bring down America’s economy. The government will not be able to cover the upcoming losses for one bank: what happens when five large banks close? The credit rating agencies have been warning us that our financial institutions are not credit worthy but no one is listening. We expect the government to fix these “minor problems” and that life will continue to go on as usual.

Did you answer my initial question? What would you do if your bank shut its doors and electronic banking was shut down? This scenario is happening today.

David DeGerolamo

U.S. Banks Aren’t Nearly Ready for Coming European Crisis

The euro area faces a major economic crisis, most likely a series of rolling, country-specific problems involving some combination of failing banks and sovereigns that can’t pay their debts in full.

This will culminate in systemwide stress, emergency liquidity loans from the European Central Bank and politicians from all the countries involved increasingly at one another’s throats.

Even the optimists now say openly that Europe will only solve its problems when the alternatives look sufficiently bleak and time has run out. Less optimistic people increasingly think that the euro area will break up because all the proposed solutions are pie-in-the-sky. If the latter view is right — or even if concern about dissolution grows in coming months — markets, investors, regulators and governments need to worry not just about interest-rate risk and credit risk, but also dissolution risk.

What’s more, they also need to worry a great deal about what the repricing of risk will do to the world’s thinly capitalized and highly leveraged megabanks. Officials, unfortunately, appear not to have thought about this at all; the Group of 20 meeting and communique last week exuded complacency and neglect.

Very few people seem to have gotten their heads around dissolution risk. Here’s what it means: If you have a contract that requires you to be paid in euros and the euro no longer exists, what you will receive is unclear.

According to my calculations with John Parsons, a senior lecturer at MIT and a derivatives expert, JPMorgan’s balance sheet using the European method isn’t $2.3 trillion but closer to $4 trillion. That would make it the largest bank in the world.

What are the odds that JPMorgan would lose no more than $50 billion on assets of $4 trillion, much of which is complex derivatives, in a euro-area breakup, an event that would easily be the biggest financial crisis in world history?

A few officials see the storm coming. The Swiss National Bank should be commended for putting renewed pressure on Credit Suisse to increase its capital levels by suspending dividends. The Bank of England has set up emergency liquidity facilities, and continues to press for more bank capital, although it could do more.

The Federal Reserve should apply the same approach to big U.S. banks, with an emergency and across-the-board suspension of dividend payments, but it won’t. The Fed is convinced that its recent stress tests show U.S. banks have enough capital even though these tests didn’t model serious euro dissolution risk and the effect on global derivatives markets.

The striking thing about JPMorgan’s recent London-based proprietary trading losses is not the amount per se. If the world’s largest bank can lose $2 billion to $3 billion in a relatively calm quarter through incompetence and neglect on the fringes of its operations, how much does it stand to lose when markets really turn nasty across a much broader range of its activities? And how might that harm the U.S. economic recovery?


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