Today, appearing before the Senate Banking Committee, Fed chair, Janet Yellen had a discussion with Senator Warren about unwinding the risk in the event of a TBTF bank failure. This discussion is about leveraging the risk.
Notice that being “too big to fail” does not mean you can’t fail. In fact, leveraging the risk is likely to result in failure. The probable result, based on experience (in fact, occurring in every case), is why Senator Warren used a strident, urgent tone with Yellen about annual “plans” big banks submit to “resolve” this problem with government, regulatory authorities.
So, who is determining the risk here? Is it big banks and government authority or YOU applying risk on demand in the free marketplace?
Big, consolidated corporates are borrowing Fed funds at record-low rates to M&A and buy back stock. The result is slow, if not negative, growth, which yields a high rate of surplus labor (“the new normal”) that Yellen describes as “unexpected.” The problem, you see, is being used as the solution, which yields the risk supposedly being avoided. A risk tautology (a bubble) forms.
Firms are borrowing money and hoarding cash. Since hoarding cash hoards demand, there is a “big” nuisance value to be regulated, demanding “big” government. This forms an organized tautology, which supports the nuisance, resisting its value as little as possible, allowing the risk to become overleveraged.
These tautologies form a stable, routine task. They are formulated (like a mathematical equation) to predictably apply the risk. Described as “the new normal,” for example, the tautologies combine to form a deliberate method yield, but the yield is explained as a risk ontology (an “objective reality” and a “natural identity”) to limit the liability.
Senator Coburn alluded to the nuisance value of the tautology when he said it would be more rational to avoid bubbles by not feeding them. Yellen’s response was, well, naturally circular. We’ve got to bail out big banks with asset purchases (ex nihilo) and support demand with low rates because if we don’t we all go to %&@$ in a hand basket. That’s objective reality…just accept it. (Sounds like a racket to me!)
Senator Warren is apt to offer deconsolidation as a solution to the resolution that prevents revolution. She is quick to question the real value of the resolution authority to prevent the sudden value of catastrophic risk emerging out of dark pools. She is apt to remind us that the resolution authority is a reactionary measure that begs the question.
Being “too big” to fail doesn’t prevent failure but it does ensure the success (the cash) the method yields (on demand).
Not much is ever said about consolidation of assets being a problem. It must not be a problem then, right?
Cash is king. It is the measure of success (it gets you at the front of the line at the Fed’s discount window). The more cash you have the more you can determine the fate of others (like a god on Mount Olympus). The top income (asset) class now has so much cash that negative yield does not matter much except that it harms everybody else. It drives the economy into default, consolidating assets (confiscating property like only communists supposedly do) to resell to the victims at a profit, using money borrowed (rented on demand) from the hoard of cash.
Take a long look at the Walmart happy face–it’s the picture of “The Scream!”