by Matthias Chang
August 31, 2010
Too Big To Fail Global Banks
Will Collapse Between Now and First
When Quantitative Easing Has Run Its Course and Fails -
my articles will recall that I have warned as far back as
December 2006, that the global banks will collapse when the Financial
Tsunami hits the global economy in 2007.
And as they say, the rest is
Quantitative Easing (QE I) spearheaded by the Chairman of
Ben Bernanke delayed the inevitable demise of the fiat shadow money banking
system slightly over 18 months.
That is why in November of 2009, I was so confident to warn my readers that
by the end of the first quarter of 2010 at the earliest or by the second
quarter of 2010 at the latest, the global economy will go into a tailspin.
The recent alarm that the US economy has slowed down and in the words of
Bernanke “the recent pace of growth is less vigorous than we expected” has
all but vindicated my analysis.
He warned that the outlook is uncertain and
the economy “remains vulnerable to unexpected developments”.
Obviously, Bernanke’s words do not reveal the full extent of the fear that
has gripped central bankers and the financial elites that assembled at the
annual gathering at Jackson Hole, Wyoming.
But, you can take it from me that they are very afraid.
Let me be plain and blunt.
The “unexpected developments” Bernanke referred
to is the collapse of the global banks. This is FED speak and to those in
the loop, this is the dire warning.
So many renowned economists have misdiagnosed the objective and consequences
of quantitative easing. Central bankers’ scribes and the global mass media
hoodwinked the people by saying that QE will enable the banks to lend monies
to cash-starved companies and jump start the economy. The low interest rate
regime would encourage all and sundry to borrow, consume and invest.
This was the fairy tale.
Then, there were some economists who were worried that as a result of
FED’s printing press (electronic or otherwise) working overtime,
hyper-inflation would set in soon after.
But nothing happened. The multiplier effect of fractional reserve banking
did not take off. Bank lending in fact stalled.
Let me explain in simple terms step by step.
All the global banks were up to their eye-balls in toxic assets. All the
AAA mortgage-backed securities etc. were in fact JUNK. But in the balance
sheets of the banks and their special purpose vehicles (SPVs), they were
stated to be worth US$ TRILLIONS.
The collapse of Lehman Bros and AIG exposed this ugly truth. All the
global banks had liabilities in the US$ Trillions. They were all INSOLVENT.
The central banks the world over conspired and agreed not to reveal the
total liabilities of the global banks as that would cause a run on these
banks, as happened in the case of Northern Rock in the U.K.
A devious scheme was devised by the FED, led by Bernanke to assist the
global banks to unload systematically and in tranches the toxic assets so as
to allow the banks to comply with RESERVE REQUIREMENTS under the fractional
reserve banking system, and to continue their banking business. This is the
essence of the bailout of the global banks by central bankers.
This devious scheme was effected by the FED’s quantitative easing (QE)
the purchase of toxic assets from the banks. The FED created “money out of
thin air” and used that “money” to buy the toxic assets at face or book
value from the banks, notwithstanding they were all junks and at the most,
worth maybe ten cents to the dollar. Now, the FED is “loaded” with toxic
assets once owned by the global banks. But these banks cannot declare and or
admit to this state of affairs. Hence, this financial charade.
If we are to follow simple logic, the exercise would result in the global
banks flushed with cash to enable them to lend to desperate consumers and
cash-starved businesses. But the money did not go out as loans. Where did
the money go?
It went back to the FED as reserves, and since the FED bought US$
trillions worth of toxic wastes, the “money” (it was merely book entries in
the Fed’s books) that these global banks had were treated as “Excess
Reserves”. This is a misnomer because it gave the ILLUSION that the banks
are cash-rich and under the fractional reserve system would be able to lend
out trillions worth of loans. But they did not. Why?
Because the global banks still have US$ trillions worth of toxic wastes
in their balance sheets. They are still insolvent under the fractional
reserve banking laws. The public must not be aware of this as otherwise, it
would trigger a massive run on all the global banks!
Bernanke, the US Treasury and the global
central bankers were all praying and hoping that given time (their
estimation was 12 to 18 months) the housing market would recover and
asset prices would resume to the levels before the crisis.
Let me explain: A House was sold for say US$500,000. Borrower has a mortgage
of US$450,000 or more. The house is now worth US$200,000 or less. Multiply
this by the millions of houses sold between 2000 and 2008 and you will
appreciate the extent of the financial black-hole.
There is no way that any
of the global banks can get out of this gigantic mess. And there is also no
way that the FED and the global central bankers through QE can continue to
buy such toxic wastes without showing their hands and exposing the lie that
these banks are solvent.
It is my estimation that they have to QE up to US$20 trillion at the
minimum. The FED and no central banker would dare “create such an amount of
money out of thin air” without arousing the suspicions and or panic of
sovereign creditors, investors and depositors.
It is as good as declaring
officially that all the banks are BANKRUPT.
But there is no other solution in the short and middle term except
another bout of quantitative easing, QE II. Given the above caveat, QE II
cannot exceed the amount of the previous QE without opening the proverbial
But it is also a given that the FED will embark on QE II, as under the
fractional reserve banking system, if the FED does not purchase additional
toxic wastes, the global banks (faced with mounting foreclosures, etc.) will
fall short of their reserve requirements.
You will also recall that the FED at the height of the crisis announced
that interest will be paid on the so-called “excess reserves” of the global
banks, thus enabling these banks to “earn” interest. So what we have is a
merry-go-round of monies moving from the right pocket to the left pocket at
the click of the computer mouse.
The FED creates money, uses it to buy toxic
assets, and the same money is then returned to the FED by the global banks
to earn interest. By this fiction of QE, banks are flushed with cash which
enable them to earn interest.
Is it any wonder that these banks have
declared record profits?
The global banks get rid of some of their toxic wastes at full value and
at no costs, and get paid for unloading the toxic wastes via interest
payments. Additionally, some of the “monies” are used by these banks to
purchase US Treasuries (which also pay interests) which in turn allows the
US Treasury to continue its deficit spending.
THIS IS THE BAILOUT RIP OFF of
Now that you fully understand this SCAM, it is left to be seen how the FED
will get away with the next round of quantitative easing - QE II.
Obviously, the FED and the other central banks are hoping that in time,
asset prices will recover and resume their previous values before the
crisis. This is a fantasy. QE II will fail just as QE I failed to save the
The patient is in intensive care and is for all intent and purposes brain
dead, although the heart is still pumping albeit faintly. The Too Big To
Fail Banks cannot be rescued and must be allowed to be liquidated. It will
be painful, but it is necessary before there is recovery. This is a given.
When the ball hits the ceiling fan, sometime early 2011 at the earliest,
there will be massive bank runs.
I expect that the FED and other central banks will pre-empt such a run and
will do the following:
Disallow cash withdrawals from banks beyond a certain amount, say
US$1,000 per day
Disallow cash transactions up to a certain amount, say
US$10,000 for certain transactions
Transactions (investments) for metals
(gold and silver) will be restricted
Worst-case scenario - the
confiscation of gold AS HAPPENED IN WORLD WAR II
Imposition of capital
Legislations that will compel most daily commercial
transactions to be conducted through Debit and or Credit Cards
Legislations to make it a criminal offence for any contraventions of the
Maintain a bank balance sufficient to enable you to comply with the above
Start diversifying your assets away from dollar assets. Have foreign
currencies in sufficient quantities in those jurisdictions where the above
anticipated impositions are least likely to be implemented.
There will be a financial tsunami (round two) the likes of which the world
has never seen.
Global banks will collapse!