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Bankers Still Rule

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Five Years After The Collapse of Lehman Brothers

September 15th is the fifth anniversary of the bankruptcy of Lehman Brothers. Let’s consider what’s changed during the five years since the meltdown of the financial sector brought the world to the brink of a new great depression.

  • The US government’s debt has increased by approximately $7 trillion or by 125%.
  • The US mortgage market was essentially nationalized when Fannie Mae and Freddie Mac were put into “Conservatorship”, but Fannie and Freddie remain unreformed.
  • The banking industry is much more concentrated than ever before. The four largest banks control roughly a third of all the deposits in the country.
  • The derivatives industry remains inadequately regulated. More the $600 trillion worth of derivatives still trade Over-The-Counter with little transparency or oversight.
  • The Volcker Rule banning banks from speculating for the own account has become law, but that law has not been implemented.
  • Larry Summers, who advocated derivatives deregulation and the repeal of Glass-Steagall as Treasury Secretary, is now the front-runner to replace Ben Bernanke as Fed Chairman in January 2014.
  • Roughly 1.5 million manufacturing jobs (more than 10% of the total) have disappeared in the US.
  • Median Income in the US (adjusted for inflation) has fallen back to where it was in 1989.
  • Household Net Worth, however, is at an all time high of more than $70 trillion.

So, what should we conclude from these facts? The obvious conclusion is that Creditism has survived and that the bankers still rule!

Our economic system has evolved from Industrial Capitalism, a system in which wealth was primarily derived from the manufacturing process, to Creditism, a system in which wealth is primarily derived from credit creation. During the age of Industrial Capitalism the “Captains of Industry” controlled the political power. Now the Bankers do. It should not be forgotten that whoever creates the wealth controls the political power.

Practically, what does this mean for our future? In the near term, it probably means that property and stocks prices are going to continue going up. The Financial Industry, the dominant political power, can be counted on to make sure that policies are enacted by the government that will benefit the Financial Industry. And, what the Financial Industry requires above all else in order to make money is for credit to expand.

If credit expansion is going to be sustainable, however, whoever borrows the money has to have the means of eventually repaying it. Since 2008, it has been the $7 trillion increase in government debt that has allowed credit to expand. Now that the budget deficit is falling sharply (by approximately 40% this year) due to sequestration and higher taxes, the government will borrow much less. That means some other sector of the economy will have to be encouraged to, incentivized to, in short, made to borrow much more. And that sector will have to be the Household Sector – in other words, people like you.

But the median income of the Household Sector is falling. So, if that sector is going to be able to service the interest expense on its new debt, the value of its assets (homes and stock portfolios) will have to be made to increase. As those assets appreciate in value, their owners will be able to borrow against them and, thereby, be able to pay the interest on the money they borrowed earlier.

So, as I see it, the Financial Industry will use all its immense political influence to make sure that the government (including the Fed) takes whatever actions necessary to force home prices and stock prices to continue to rise.

At present, Quantitative Easing is having the desired effect of pushing up asset prices. I expect this to continue. The Fed may soon begin to “taper” its pace of fiat money creation from its current rate of $85 billion a month, but it is very unlikely (in my opinion) to taper so much that asset prices stop rising.

Creditism is an economic system that requires credit growth to survive. It is managed at the macro level by the government, over which the Financial Industry holds dominate political sway.

This system is inherently unstable and, in all likelihood, unsustainable over the long run. That said, it would probably be a grave mistake to bet on it collapsing any time soon. Therefore, it would be wise to attempt to understand how this system works and how it is likely to evolve from here. If you would like to have a better understanding of How The Economy Really Works, please click on the link below:

Original publish date: September 16, 2013

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