U.S. Federal Deposit Insurance Corporation Issues Ruling To Enable Banks To Purchase Derivatives, Build Speculative Bubble
June 26, 2020 (EIRNS)—The U.S. Federal Reserve Board voted on June 25 to require large banks to “preserve capital” by suspending share repurchases and to cap—though not suspend—dividend payments in the upcoming third quarter. This occurred, after the Fed allegedly ran a worst-case scenario for the U.S. economy ravaged by the coronavirus pandemic, showing it would cause the nation’s 34 largest banks to collectively lose $700 billion.
Some media played this as the Federal Reserve getting “tougher” to prevent inappropriate activities by the banks. This Fed announcement, however, will not even get one additional dollar of lending into the U.S. real physical economy. It is largely cosmetic.
However, like a skillful act of legerdemain, it got the audience to focus on the activity of one hand, while disregarding the activity of the other hand. On June 25, CNBC reported that
“Officials from the Federal Deposit Insurance Commission said on a call that they are loosening the restrictions from the so-called Volcker Rule, allowing banks to more easily make large investments into venture capital and similar funds. The companies will also be able avoid setting aside cash for derivatives trades between different units of the same firm, potentially freeing up billions of dollars in capital for the industry” (emphasis added).
What this will mean is that first, banks can now more easily invest in “venture capital funds,” which someone like a Jeff Bezos will set up to thereby invest in, for example, a start-up firm. This is often a highly speculative activity, which banks can now more freely engage in. Second, at the same time, banks will be required to hold less reserves against derivatives bets, enabling them to make even more such bets. In combination with the Fed’s massive quantitative easing, this facilitation of speculative activity on an even grander scale will further destroy the economy. This is the real activity of the past 48 hours.