In a major story out of the Wall Street Journal, the Federal Reserve is ‘easing capital requirements’ for major banks until March 2021.
The Federal Reserve on Wednesday said it was temporarily taking steps to ease an obscure capital requirement for large banks to address strained conditions in the Treasury market.
The Fed said it was easing the supplementary leverage ratio—a way of curbing bankers’ risk-taking—for one year and hoped the change would free up lenders’ ability to serve homeowners and businesses rather than to increase share buybacks and dividends to shareholders.
The temporary change would exclude U.S. Treasury securities and deposits at Federal Reserve Banks from the calculation of the leverage ratio, and will be in effect until March 31, 2021. The vote to ease the requirement was unanimous. (source)
This is a huge decision.
I’m going to try to explain this in simple terms.
Every credit and liquidity (access to cash) crisis starts out differently but always ends up the same. Each crisis begins with distress in a particular area where too much money is borrowed, then it spreads from sector to sector until the whole world is screaming, “Oh no! I want my money back!”
It starts after one asset class has a surprise drop. The investors, who usually purchased the asset with borrowed money (leveraged) will sell the sinking asset, but soon nobody wants the asset because its value is going down. People who borrowed on credit lose money and are forced to pay out of pocket to meet minimum account balance maintenance requirements (margin call). Investors then sell good assets to raise cash to meet the margin calls. This spreads the panic to banks and dealers who were not originally involved with the weak asset. Soon the contagion spreads to all banks and assets, as everyone wants their money back all at once out of fear of losing it. Banks begin to fail, panic spreads and finally central banks step in to separate winners and losers and re-liquefy the system for the benefit of the winners. Typically, small investors (and some bankrupt banks) get hurt the worst while the big banks get bailed out and live to fight another day.
When the bank gets rid of capital requirements, it means that the minimum requirements of cash they need to have on hand in the case of a liquidity crisis are no longer there. If there was even a slight increase in requests for money back, let alone bank run, there is no guarantee that anybody could get paid their investments back, causing the banks to collapse and either be forcibly bailed out by the government or people just lose their investments.
What we are seeing right now is the creation of conditions for the largest bankruptcy in American history.
This is another reason why Trump needs to get re-elected. He has a history of bankruptcies, and given his actions, far from MAGA, Trump is likely going to go down in history as the one on whose watch the greatest bankruptcy in American and world history will take place- the bankruptcy of the American empire, the breakdown of the dollar, and the economic chaos that will lead to global chaos.
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