Dodd-Frank Turns Four and Nothing Fundamental has Changed

This is an abridged version of my remarks on the 1933 Glass-Steagall Act and impotence of the 2010 Dodd-Frank Act at the Schiller Institute's 30^th Anniversary Conference in New York City. June 15 2014. Full text and video are here. July 21, 2014 marks four years since the Dodd-Frank Act was signed.

Thank you. I want to address a few things today, one of which is the Glass-Steagall Act, and what it meant to our country’s history, why it was passed, how it helped, and how the repeal of that Act in 1999 has created a tremendously unstable environment for individuals at the hands of private banking institutions and political-financial alliances with governments and central banks.

I also want to talk about how some of the remedies that have been proposed in the wake of the 2008 subprime crisis, including the Dodd-Frank Act, and its allegedly most important component, the Volcker Rule, are ineffective at combatting this risk; and that what we really need to do is go back to a time, and go back to a policy, and to use the strength and intent of the original Glass-Steagall Act to [attain] a new Glass-Steagall Act, in order for us to be safe going forward. When I say “us,” I mean everybody in this room. I mean the population of the United States. I mean the populations throughout the globe.

Because what we have today, and what we’ve had in the wake of the repeal of the Glass-Steagall Act, is [a condition] where the largest banking institutions have been able to increase the concentration of their capital, of their influence, and of their power. This has been subsidized and substantiated by [bi-partisan] political forces within the White House, the Treasury Department, the Federal Reserve, and governments throughout the world—in particular, throughout Europe and through the ECB—and it’s something that must change to achieve more [financial and] economic stability for the greater citizenry.

How the Glass-Steagall Act Came To Be

Let’s go back in time, to [consider] how the Glass-Steagall Act came about. We had a major crash in 1929. It was the result of a tremendous amount of speculation, and also rigging of markets by the larger financial institutions, as well as things called trusts, which were small components of these institutions, that were set up in order to bet on various industries, and collections of companies within those industries, and so forth, as well as to make special bets on foreign bonds in foreign lands; as well as to make bets on the housing market, which is something we’ve seen and are familiar with quite recently.

A lot of this activity was done, in particular, by the Big Six banks at the time—which included National City Bank and First National Bank, which today we know as Citigroup; the Morgan Bank and the Chase Bank, which today we know as JPMorgan Chase; as well as two other Big Six bank.  [The men running these banks] got together in the wake of the crash in 1929, which they had helped to [perpetrate], and decided that they needed to save the markets, as they were deteriorating very quickly.

The reason they wanted to save the markets was not because they wanted to protect the population; it was because they wanted to protect themselves. The way they chose to do that, was to put in $25 million each, after only a 20-minute meeting that occurred at the Morgan Bank on No. 23 Wall Street, catty-corner from the New York Stock Exchange. After this 20-minute meeting, which was called together by a man named Thomas Lamont, who was a major banker at the time, and the acting chairman of the Morgan Bank, these six bankers broke and went out into the streets. The press heralded them as heroes who [had] saved the day, and in particular, heralded the Morgan Bank as an institution that [had] yet again save the economy from virtual catastrophe.

It [the press] compared the decision that was made after that 20-minute meeting to what had happened after the Panic of 1907, when J.P. Morgan, the patriarch of the Morgan Bank, had been called upon by President Teddy Roosevelt, to save what was then a situation of deteriorating markets, and of deposits being crushed, and of citizens losing their money because of the rigging of markets.

At the meeting, the decision was to buy up stocks. The stocks that were bought were the ones in which the Big Six banks had the most interest. The market rose for a day, which is why the newspapers were so happy. It was why President Herbert Hoover, at the time, decided he might actually get re-elected, as opposed to facing not just “un-election”, but also, a bad historical legacy. And everybody was quite pleased with the results.

Unfortunately, as we know, after the market rose, after that day, after they put in the money to buy those stocks, it crashed by 90% over the next few years. The country was thrown into a Great Depression. Twenty-five percent of the individuals in the country were unemployed. There was a global depression that was ignited because of [global speculation and debt gone awry]. Foreclosures skyrocketed, businesses closed, thousands of smaller banks [collapsed], and the country plunged into dire straits, [as did the world].

FDR’s Bankers

Into that, came President FDR, and something that’s very interesting historically, that I did not even know before I [researched] my latest book, All the Presidents’ Bankers. FDR had friends - and they were bankers. Two of [his banker] friends were James Perkins, who ran the National City Bank after the Crash of 1929, and Winthrop Aldrich, who was the son of Nelson Aldrich, who happened to have been [the] Senator that [spawned] the Federal Reserve Act, or its precursor, as created at Jekyll Island in 1910 with four big bankers [See Chap. 1 in All the Presidents’ Bankers for more detail on this.]

These were men of pedigree. These were men of power. These were men of wealth. Even before the Glass-Steagall [or Banking] Act was passed in [June] of 1933, and signed into law, these men worked with FDR, because they believed that if they separated the institutions they were running - their banks, the biggest banks in the country - into keeping deposits of individuals safe and divided from speculative activities and the creation [and distribution] of securities that could sour very quickly - then not only their banks, but the general economy [would be sounder.]

That was the theory behind the Glass-Steagall Act: if you separate risky endeavors and practices, and the concentration of that risk, from individual deposits and loans, then you create a more stable banking system, a more stable financial market, a more stable population, and a more stable economy. FDR believed that, and the bankers believed that.

Even before the Act was passed, Aldrich and Perkins [met] with FDR in the first 10 days of his administration, and promised FDR they would separate their banks. And that’s why [Glass-Steagall] was more than just legislation. It was the [result] of a [positive] political-financial alliance and policy to stabilize the system, so that everybody could benefit.

Those [bankers] also did benefit. Their legacies benefitted. The National City Bank that was run by Perkins, the Chase Bank that was run by Aldrich—those banks exist today. But the Glass-Steagall Act enabled them to grow in a more stable manner. Aldrich and Perkins chose to keep the deposit-taking and lending arms of their banks. They promoted the Act [publicly] alongside FDR. Congress, in a bipartisan fashion and enthusiastically, passed the Glass-Steagall Act. So, it was a [sound] national platform on every level.

That’s something we don’t have today.

The Take-Down

What we’ve had since—and it started to a large extent in the late ’70s, and accelerated throughout the Reagan Administration, the Bush Administration, the Clinton Administration, and then ramifications through the second Bush Administration and the Obama Administration, is a disintegration of the idea of that Act. The idea that risky endeavors and deposits should be kept separate in order for stability to exist throughout.

In the ’80s, banks were allowed to merge across [more product lines]. In the ’90s, banks were allowed to [merge across state lines] and increase their share of financial services by re-introducing insurance companies, brokerages, the ability to create securities that we now know today can be quite toxic, as well as trade in derivatives and other types of more technologically complex, even more risky, securities, all under one roof.

[Because] in 1999, under President Bill Clinton, an act was passed, the Gramm-Leach-Bliley Act that summarily repealed all the intent of the Glass-Steagall Act. What it created in its wake, was a free-for-all, a merging and concentration and consolidation of the largest banks into ever-more powerful and influential entities: influential over our capital; over our economy; and with respect to the White House.

This is not something that the bankers ‘pushed’ upon the White House. We should realize this. It is something that [also stemmed from] Washington, under several administrations, under bipartisan leaderships, under different types of Treasury secretaries that came from the very same banking system that they were supposedly going to watch over from public office—they all collaborated to repeal this Act.

In 2002, 2003, 2004, when rates were low, and subprime loans started to be offered in bulk, these banks, that now had much more concentration over deposits, over insurance products, over brokerages, and over asset management arms, were able to create [toxic] securities out of a very small amount of loans. Out of a half a trillion dollars worth of subprime loans, extended to individuals, they were able to create a $14 trillion mountain of toxic assets. They were able to leverage that mountain, $14 trillion, to $140 trillion of risk, by virtue of the co-dependencies of the Big Six banks, by virtue of the derivatives involved in the securities [administered through other financial entities], that were laced with these mortgages, and by all sorts of complex different types of financial engineering.

As we know, that practice concluded [badly] in 2008. [But] this time, the result of that implosion was not to chop off the arms of these banks. It was not having men running these banks, like Winthrop Aldrich, say, “You know, this was a bad idea. We screwed up our banks, we screwed up the markets, we screwed up people, we screwed up the economy—let’s separate. Let’s go back to a time that was simpler, that was saner.”

That decision wasn’t made. What occurred instead was a decision at the highest levels of Washington, the Treasury Department, the Federal Reserve, the New York Federal Reserve, to coddle this very banking system, and to subsidize it, to sustain it, and all its flaws, and with all the risks that permeated [from it] around the entire population in the United States, and throughout the world, with trillions of dollars of loans, of debt, [of purchases], of cheap money, of a zero-interest-rate policy approaching its sixth year, which means these banks can continue to be liquid, even though they are very unhealthy, and promoting their interests over the interests of the wider population [or customer-base].

Dodd-Frank: The Banks Are Bigger Than Ever

The Dodd-Frank Act was passed and signed into law by President Obama on July 21, 2010. President Obama, then-Treasury Secretary Timothy Geithner, then-Federal Reserve Chairman Ben Bernanke, as well as many pundits in the media, said it would dial back this immense risk and [act as] sweeping regulation [just] like in the Great Depression.

But it has done absolutely nothing of the kind. In the wake of the 2008 crisis, the big banks are bigger. JPMorgan Chase was able very cheaply [to acquire] Bear Stearns and Washington Mutual, to become the largest bank in the United States again. This ties back to the legacy of J.P. Morgan in the 1907 Panic, throughout the decisions that were made at its request before 1929, in the wake of the 1929 Crash, and so forth.

Citigroup has managed to survive. Goldman Sachs, Morgan Stanley, Wells Fargo, [Bank of America]—all of these banks, the Big Six today, which are largely variations of the Big Six banks, historically, 100 years ago, with a couple of additions and many mergers along the way—have been able to sustain themselves due to a government policy that has enabled them to grow and promote risky practices that are dangerous to all of us.

The Dodd-Frank Act doesn’t separate these banks. It doesn’t make them smaller. It doesn’t diffuse their derivatives concentration [and co-dependencies]. The Big Six banks today in the United States, control 96% of all the derivatives trading in the United States. They control 45% of all the derivatives trading throughout the globe. They control 84% of the FDIC-assured deposits throughout all of the banks in the United States, and 85% of the assets throughout all of the banks in the United States. So their concentration, their power, is immense in the wake of the 2008 crisis, and in the wake of this alleged remedy to the crisis, which is the Dodd-Frank Act.

And the final component of that Act, which is supposed to at least reduce their riskiest trading practices, or proprietary trading: The Volcker Rule is an 892 page [piece of legislation], that [contains] 55 pages of definitions and rule, and the rest is exemptions to that rule. The banks can continue to make markets, to hedge, to provide hedge funds and private equity funds, just under different language, to keep their insurance arms, to keep their brokerages, to create complex securities that are so interlocked that if one fails, the rest of them fail. And if the bank that has the most of them fails or falters, the other banks in this entire system will fail or falter as well. So, nothing in the Volcker Rule of the Dodd-Frank Act materially changes anything.

Resurrect Glass-Steagall!

What we need is a resurrection of the Glass-Steagall Act. And We need to realize it wasn’t just a law; it was a policy of stability. It was a political and financial alliance between the White House and the biggest bankers of the time, and the population.

That’s what we must press, and that’s the only thing—a complete separation of risky endeavors from our money, from normal lending practices, [from government subsidies]—that can even start to foster a more stable financial system, banking system, and economic environment for all the rest of us.

That’s the take-away from today. There’s more information about the lead-up to the Glass-Steagall Act, the swipes at it over time, the particular alignment and relationships of Presidents and bankers that actually cared more about the population’s economic stability as well, as the ones that didn’t care at all. This can be found in my book All the Presidents’ Bankers, which I urge you to check out, to gain [further] knowledge about the reasons for why we had that Act, and why it’s more necessary than ever, today.

The Seven Sins of Wall Street by Bob Ivry - My Book Review

The Seven Sins of Wall Street: Big Banks, their Washington Lackeys, and the next Financial Crisis by Bloomberg reporter, Bob Ivry is both incredibly scary and ironically extremely funny – in a very dark way. This makes it essential reading for anyone with a finely tuned bullshit meter that doesn’t buy the notion that we’re all economically safer now than before the financial crisis of 2008 – which should be everyone. Ivry’s voice is appropriately sardonic and exasperated, his journalism and on-the-foreclosed-ground research, impeccable. His ability to empathize with readers that don’t hold a PhD in financial jargon (derivatives = “four syllables that launched a thousand naps”) allows him to render otherwise arcane topics simple enough to make you want to throw things at Jamie Dimon.

Most people living in the real world have a sense that the Wall-Street-Washington driven crisis hasn’t exactly evaporated into a haze of CEO repentance, or former politicians choosing to become gardeners rather than bagging plush jobs at elite financial firms. But Ivry’s book shows the ongoing crimes are much, MUCH worse than even the most alert or pessimistic of us think.  Not only has there been no meaningful reform or jail terms for committing fraud in broad daylight, but the same Big Six banks at the core of the crisis, are back to their old, and some new tricks, with a pat on the back from Uncle Sam. They are bigger and badder than ever, despite public rhetoric to the contrary.

Ivry divides his book into chapters paralleling the seven sins  - gluttony, wrath, envy, pride, lust, sloth, and greed. He doesn’t just excoriate the big bankers that played, and continue to play, freely and loosely with what he refers to as “Grandma’s money”, but embarks on an investigative search for the people living personal nightmares at the hands of these banks years after the “supposed” economic recovery and great reform myth of Dodd-Frank. Though the banks have supposedly repaid their bailout money with $20 billion interest to the American people (sure, no one got a check, but whatever), Ivry shines a harsh light on this irrelevant political babble. The big banks are not only bigger,  but they are also "fail –i- er” he says. Take note, Stephen Colbert.

Ivry’s aim is “not to re-litigate the bailouts, but to illustrate their legacy.” As he writes, “In the months and years after the financial crisis, the top people in Wall Street and Washington had engineered a closed loop the insured their feet never touched the dirty ground. Wall Street would originate the mortgages, and Washington would buy them. The Treasury would sell debt, and Wall Street would buy it, then sell it back to the Federal Reserve. (This was called “quantitative easing.”) The Federal Reserve would print money, and mostly would use it to push up prices on stocks and all sorts of commodities. Bankers traded derivatives…without anyone in the outside world catching a glimpse of the details. Ordinary people only got in the way.”

Ivry tells the tale of whistle-blower Sherry Hunt at Citi Mortgage who supplied Dick Bowen, her boss, with much of the data he used to first blow the whistle on Citi Mortgage’s quality-control department failures post crisis of 2008. Though she feared losing her job, as he actually did, and was demoted during the process of alerting the federal regulators to Citi’s ongoing frauds and cover-ups, she feared saying nothing more.

Ivry describes a January 2010 staff meeting, in which 1000 Citi Mortgage employees “gathered to listen to pep talks and sales reports. Then it came time to announce the workers of the month award. It went to the quality rebuttal crew.” Quality rebuttal was Citi’s way of stifling employees like Hunt that raised red flags about fraudulent practices.

Ivry’s more emotional passages relate to the efforts that Mark Pittman, fellow reporter-tour-du-force at Bloomberg, made to force the Federal Reserve to disclose details of the loans provided in particular to the Big Six US banks during the crisis that most of the media ignored. Bank of America, J.P. Morgan Chase, Wells Fargo, Citigroup, Goldman Sachs and Morgan Stanley got far less from TARP openly, than they got from the Fed behind the scenes. The secrecy surrounding those extra trillions of dollars of loans was what Pittman sought to uncover. Pittman died too young, a moment Ivry captures poignantly, but Ivry continues to forge ahead unveiling ongoing secrets and deception -  no longer at the heart of the 2008 financial crisis, but at the heart of its aftermath. Of Pittman, Ivry writes "He knew what was at stake. Not just money. Not just economic policy. Not just the functioning of the world financial system. But the future of capitalism. The credibility of democracy.”

Ivry reveals the myriad Big Six bank schemes that continue unabated; the shadiness still rampant in the mortgage market, how the Fed is permitting banks with FDIC deposit support to make leveraged bets with Grandma’s money on everything from arcane derivatives to aluminum to copper, the Obama assistance programs that assisted the banks and not borrowers, the disgusting remorseless of Wall Street.

Ivry introduces us to people like Rebecca Black, one of the borrowers forced to leave her home at 698 Hazelwood Road. Her lender, a division of J.P. Morgan Chase called EMC Mortgage was part of Bear Stearns before it was taken over - with government aid - by J.P. Morgan Chase in late 2008. As Ivry says, "overnight borrowing by J.P. Morgan Chase, peaked on October 1, 2008 at $68.6 billion. Jamie Dimon, the lender’s Chief Executive Officer, got $23 million in compensation for 2011. All Rebecca Black got was the landscaping bill (for a house she could no longer afford, in the face of payments that blew up in her face, a by-product of some very shady practices.)

When Ivry visited Hazelwood Road in 2012, it was “four years after bad mortgages triggered a meltdown in the world's most resilient economy.” At the time,  “the biggest banks were reporting record profits and government agencies were trumpeting statistics showing a robust recovery.” On Hazelwood Road, there was just unnecessarily shattered lives, boarded homes and crime After the 2008 financial crisis, “an economic and political apartheid had emerged,” Ivry writes, “Washington, in the form of the federal government and Federal Reserve, the country's bank for banks, sacrificed the common good for the profit of the few.” And so the cycle of crime-and-no-punishment continues.

Ivry concludes with his stance “on the whole too big to fail thing: get rid of it. It's anti-competitive and antidemocratic.” Ivry calls out the Dodd-Frank Act for the sham it is: an Act that did nothing to level the playing field in which the biggest banks enjoy the most government-perks, and the lion’s share of the ability to abuse, and extort from, ordinary citizens. His book is an eye-opener, a wake-up call for those in Washington to get their heads out of Wall Street’s asses, a state unthinkable for most politicians. But, it’s also a wake-up call to us, to be ever more vigilant with every one of our financial dealings, because the worst is yet to come. 

The White House, the Fed, the Debt, the Inequality and Larry

It’s going to be an explosive fall, financially speaking, regardless of what transpires in the Middle East. The culmination of faux regulation, debt ceiling debates, derivatives growth and the ever-expanding Federal Reserve books will provide lots of volatility- for which the White House will be caught unprepared.

In the wake of the Great Crash of 1929, FDR and Congress passed an act to isolate people’s deposits from the speculative pursuits of financiers. The Glass-Steagall or Banking Act of 1933, was even promoted by some of the biggest bankers of the time, as I will explain in greater detail in All the Presidents’ Bankers.

Their reasons were self-serving, yet they also helped the population. They wanted a safer banking structure, they wanted citizens to feel more confident in the financial system that they dominated, and they were willing to forego their trading and securities creation operations to achieve this goal. They were willing to become smaller and substantively less risky in accordance with the Act that FDR signed on June 16, 1933.

We got nothing like that legislation this time around, just a lot of talk about ‘sweeping reform.’ President Obama signed the Dodd-Frank Act in July, 2010 to supposedly protect consumers from Wall Street. But it did not make big banks smaller. It did not separate their speculative / securities creation ability from their FDIC backed deposit and lending business. It did not require banks to dramatically reduce their derivatives positions, the leverage imbedded in complicated assets, or the dangerous chains of inter-dependent exposures to other firms.

Despite billion of dollars of fines, which mean little in the scheme of their bottom lines, the biggest banks are bigger and more complex than ever, and thus, their leaders more sheltered by Washington. Unnecessary global risk remains in the system. We need banking reform ala Glass-Steagall. Anything less is an exercise in political posturing and regulatory futility, no matter how many back-pats accompany the procedure.

Derivatives Take over the World

Last quarter, the total notional value of US banks’ derivatives positions increased by $8.5 trillion to $232 trillion, still mostly concentrated in interest rate products. Credit derivatives, 6% of the total, increased 5.4% to $13.9 trillion. The four largest banks account for 93% of that amount, and 81% of industry credit exposure, 36% of it below investment grade.

The total assets of JPM are $1.95 trillion and total derivatives notional $70.3 trillion, or more than 35 times its asset amount. Citigroup has $1.3 trillion in assets and  $58 trillion in derivatives notional. Bank of America has $1.4 trillion in assets and $44 trillion in derivatives, and Goldman has $133 billion in assets and $42 trillion in derivatives. Banks will say they are hedged, notional volume does not equate to the total potential loss, but that just doesn’t matter. In the event that one area of the market or one firm goes belly up, the rest follow. No mega-bank is isolated from the others, though some are more politically connected, have more lobbyists, or are better subsidized than others.

Before the fall of 2008, US banks’ notional derivatives exposure was $180 trillion.  Then, five banks held 97% of that notional, and 85% of the industry’s net credit exposure. The concentration of risk and amount of derivatives has increased, since before the government orchestrated bank bailout and subsidization, and Dodd-Frank.

There are $564 trillion worth of notional over-the-counter derivatives that the Bank of International Settlements (BIS) knows about, as of June 2013. America’s global derivatives presence, has now eclipsed its comparative military expenditures; the US is responsible for 39% of the world total of $1.7 trillion of such expenditures, but US banks account for a whopping 41%, and JPM for 12.4%, of the world’s derivatives.

Debt Ceiling Drama

In the backdrop of ongoing discourse conducted by minions of lobbyists over the minutia of Dodd-Frank that can be still be deliberated to keep them employed, comes the major déjà vu non-debate of the season, resurfacing from two years ago – that of the infamous Debt Ceiling. Tune it out. For, Congress will do a lot of partisan grumbling and then vote to raise the debt ceiling anyway.

In the highly unlikely event that it doesn’t, the US is in no danger of defaulting on its debt. At its current credit rating, it’s many notches away from that, plus, it just won’t happen. S&P pre-empted even the potential of a downgrade in June, when it raised its outlook from ‘negative’ to ‘stable’ and left the rating at AA+, citing the Fed’s “timely and conservative actions” to mitigate the effects of the “great recession” of 2008 and 2009 and noted it expects the US economy to match or top other highly rated countries in the next few years.

And, even in a pinch, the Fed is holding about $2 trillion worth of Treasury securities in excess reserves. Technically, these could be returned or sold– which won’t occur because that would mean the end of Zero-Interest-Rate-Policy, an even tighter credit market and plummeting stock and bond market. Congress and Bernanke won’t let that happen.

For the record, I’d retire that $2 trillion in debt, since it’s doing nothing productive anyway, which would alleviate the need to discuss raising the debt ceiling, or put it to some productive job-creating purpose, so we wouldn’t have to hear Bernanke talk about the need for more jobs to be created, while presenting no concrete ideas as to how to do that. Oh gee, I have an extra $2 trillion lying around here, what to do?

But none of that matters. Since Obama came to office, the debt limit has been increased from $10.6 trillion in 2008 to $16.394 trillion now. Under Bush, the debt limit rose from $5.95 trillion to $10.6 trillion.  Republican and Democrat controlled bodies of Congress approved the steps along the way.  They will again.

Epic Inequality and Excess Capital of the Wealthy

While hundred of trillions of dollars of derivatives and trillions of dollars of debt swirl around the bankosphere, the top 10 percent of earners nabbed more than half of the country’s total income in 2012, the highest level recorded since the government began collecting income data in 1917, according to the latest study by noted Economists, Emmanuel Saez and Thomas Piketty.

These are sad, but unfortunately not shocking results. Income and wealth inequality will continue to grow because of the wealth-accumulation effect of excess capital investment in a political system whose restrictions on damaging financial speculation are so lax. In this construct, it still “takes money to make money.” During the pre-Depression years of the 1920s, investors with more ‘cash to burn’, could – and did - take more investment risks like speculating in the stock market or the various trusts, than those living from paycheck to paycheck. Those with less excess capital to begin with, that did chose to invest it more speculatively, or that were otherwise impacted by losses related to the speculation of others and the general economic crisis (losing jobs because their employers had borrowed or invested recklessly and were cut off from bank loans to run payrolls as banks shut or entered hoarding-survival mode), had no financial cushion for necessary expenses, let alone investments later.

Still during and after the Great Depression, for several decades, inequality shrank because even the wealthier investors chose to behave more prudently, and the financial institutions were forced to by legislation.

Today, more complex investing and speculating avenues abound - from stock market options to credit derivatives to commodities indices - through advanced technology and the sheer scope and opaqueness of the practices of major players.

What is particularly scary about the timing of this study, is that it did not take place during the build-up to this financial crisis, which would have been a more even parallel to the 1920s build-up before the 1929 Crash and 1930s Great Depression. Instead, these results were tabulated after the height of this recent crisis - the plummeting of the stock market in 2009, the escalating foreclosures, and the restriction of credit to individuals and small businesses. The resurgence of the stock market - on the back of the Fed’s Zero-Interest-Rate and QE programs and other forms of cheap capital made available to the banks, and the hedge funds, and other wealthy individual clients to which they cater -  has increased capital returns for these participants, but not helped those with less excess capital to begin with that continue struggling for jobs, more livable wages, more affordable health-care and education, and are under mounting other daily expenses.

This time around, there has been a marked divergence in the thing that the White House and Main Stream press calls a “recovery” that renders our overall economy in a more precarious position for more people. The Saez-Piketty study is another indicator that this “recovery” was for the banks and that were disproportionally subsidized by the Fed, Treasury and government policies, and for their wealthy clients and customers that could afford to pick up and churn cheap assets. It was not for the general population.

The Fed and the Fat 

Meanwhile, the US bank subsidization exercise isn’t over. It’s in its fifth year. Despite all the will-he-or-won’t-he speech analysis games, the Fed remains an active buyer of securities from banks and holder of treasuries in excess reserve. Since the Fed instituted its plan to buy $85 billion per month (up from an original $40 billion, why be incremental when you can double-down?) – or more than $1 trillion per year – of mortgage securities from banks, its actions have artificially boosted the prices of those securities and related ones. This provides the illusion of a healthier banking system.

The Fed continues to shatter its own records monthly, now holding a total of $3.6 trillion of debt securities on its books, about ten times the figure of 5 years earlier (in July 2008), including $2 trillion of US Treasuries in excess reserve balances maintained by banks at the Fed, receiving .25% interest. The Fed’s mortgage backed securities component is $1.3 trillion, up from zero 5 years ago.  None of this helps the general economy, all of it helps interest rates remain low, securities prices high, and money cheap for the big banks.

And, not only are banks coddled by the Fed, they are sitting on record amounts of cash. JPM Chase, for instance, is holding a record $345 billion in cash, just to protect itself, while its earnings statements say things are fine. Hoarding is never a sign of stability.

Then, there’s Larry

As the Fed’s books bulge at the seams, chatter about who the next Fed Chairman will be, persists.  Given his proven tendency to populate his inner economic circle with Clintonite-Rubinites, it makes perfect sense for Obama to go with his former economic advisor, and Clinton’s former Treasury Secretary, Larry Summers – if Summers wants the job. Obama has verbally applauded Bernanke many times for saving the country from a Depression (while ignoring the risk, that his policies are infusing into the economy that will manifest after he leaves office). Summers was there through the ‘tough times’ too. 

Wall Street will be as happy with Summers in Bernanke’s chair, as they were when Summer’s replaced Robert Rubin as Treasury Secretary under Clinton, days after Congress passed the Financial Modernization Act that repealed the last remnants of the Glass-Steagall Act, and present for Clinton's signing ceremony. Plus, when Hillary Clinton runs for president, she will need all of Rubin’s circle of campaign contributors. What better way to secure them, than to also have an old friend that understands their need to remain ‘globally competitive’ at the Fed? Summers, fresh from a Citigroup-arranged, Kuwait Investment Authority sponsored May talk in Kuwait, would also keep relations with the Middle East sweet for his banker friends.  

Obama’s argument for Summers, after he retrieves his foot from his mouth regarding Syria, will be continuity, just as it was for Bernanke’s reappointment, and as it was Bush’s argument for Bernanke after Alan Greenspan. Continuity is a big theme with Congress and with bankers, too. Ergo.