Last week, Janet Yellen, Chair of the Board of Governors of the Federal Reserve System, in more than one ways revealed that the American central bank prepares to confront the next financial downturn. On Wednesday, 28 September, speaking at the House Financial Services Committee in Washington D.C. , she defended the Fed’s rigorous supervision over the eight American banks, which are considered by law as ‘too big to fail’. Officially, in case of insolvency the careless bankers will be rescued with taxpayers’ money.
The next day, Thursday, speaking at a Kansas City conference, Yellen said that the Fed could better support the American economy in a bad turn, if the central bank could purchase stocks and corporate bonds in the capital market. All this happens at a time when the Fed has already injected $4.5 trillion for free into the American banking system. Let’s take one thing at a time.
More capital needed
In her biannual appearance at the House Financial Services Committee, Yellen had to defend the Fed’s role in closely watching the banking system. Despite the Wells Fargo incident, where the lender opened two million accounts without the customers knowing it, some Republican representatives insisted that the Fed is drying up liquidity by the tough application of the rules. Still, Yellen said the Fed prepares even tougher and more risk-sensitive criteria, to be applied in the next series of the semi-annual stress tests on the eight largest US banks. Not to forget, that the American taxpayers are the insurers of the eight.
According to Reuters, she very explicitly concluded that the new criteria “would result in a significant aggregate increase in capital requirements”. Up to now nobody had expressed a reserve about the capital adequacy of the US banks. Instead, everybody had been pointing to the dangerously low capitalization of the European banks.
US and Eurozone
However, the Deutsche Bank case proved that if the European banks get pneumonia, their US peers cannot avoid contagion, so they need improved capitalization too. Reality underlined the contagion effect last week. The Wall Street stock exchange main indexes danced to the music played by the German lender, going up and down according to the rhythm. No wonder then, why Yellen thinks that it’s better to be prepared than not. No need to say that the American experts expect the next financial crisis to start from Eurozone.
Incidentally the Deutsch Bank affair is currently taking political dimensions, shadowing Angela Merkel’s chances to win a general election next year. The bank was initially bombarded by the American business media. They then were followed by the US Department of Justice, rendering the lender unable to recapitalize itself from capital markets.
Deutsche Bank on the spot
By the same token, last week, the German Chancellor rejected the option to bailout Deutsche Bank with taxpayers’ money, if need appears. In such an eventuality, which is, giving more money to bankers, Merkel’s party, the Christian Democratic Union (CDU) would lose much ground to the new Eurosceptic and anti-immigrant party Alternative for Germany (AfD). However, if Deutsche Bank comes to a critical point, both Berlin and Brussels would find it very difficult to let the largest German lender go bankrupt and trigger a global financial crisis.
Unfortunately, Deutsche is not the only German bank in dire straits. Many regional saving banks are dependent on Deutsche’s health. Then comes the second largest German lender, the ailing Commerzbank, a global financial group which is about to cut more than 9,000 jobs. In any case, the entire Eurozone banking system is in trouble.
Just think of the non performing loans of the Italian and Greek banking systems at the dizzying heights of around 40%. No wonder then why Yellen wants to strengthen the capitalization of the American banks, in order to bring them to an improved position, when the next financial typhoon strikes.
More cash needed
Last Thursday she was much more explicit about that, while addressing the bankers of Kansas City. In this case Yellen was plainer in indirectly foreseeing a financial crisis. She said that in an eventual recession, the Fed should be able to inject cash into the American financial system, through purchases of stocks and corporate bonds.
This is a bare recognition that, again, the Fed has to use the famous ‘Milton Friedman’s Helicopter’, spreading more free money above Wall Street, in order to save us all from a new financial Armageddon. This is where imprudent and unscrupulous bankers have brought us all again. Currently, the Fed is prohibited by law from buying corporate assets and Yellen wants to change that.
If the American people knew
If this issue gained widespread publicity for the hard-working American taxpayers to grasp, then Donald Trump would have no problem at all winning the 8 November election and becoming the next US President. He has already accused Hillary Clinton of receiving millions of dollars from Wall Street bankers.
Unquestionably, Janet Yellen is one of the very few people who have all the available information about our economic future. On top of that, she is amongst the even fewer, who are and feel responsible for protecting the economy from being dissolved. She has to do that, because during the past twenty years irresponsible politicians canonized the banks as the masters of the world. So, Yellen seems to have willy-nilly acknowledged that the Fed again has to feed the banking leviathans with more free cash.