Will the Central Bank, the Fed, Take Down Banks to Steal More Capital from MainStreet?

Bankers are incredibly stupid. They have sacrificed main street USA, and in the process have worn out their welcome with the taxpayer. Reason is, Bernanke's job is to create demand and sell treasury bonds. If there is too much debt, too much tax receipt destruction, then the treasury is forced to borrow by issuing too many treasury bonds.

For a short term profit in the housing bubble of the last decade, the bankers have put in jeopardy demand for bonds. And this is not because the bonds don't have demand. But by weakening main street, the bankers force governments to issue too much supply of bonds.

A lot of this supply will be swallowed up by demand for collateral in the interest rate swaps market. But if debt grows too large, the supply will swallow up demand. Certainly that has to be on the mind of the Fed.

If interest rates rise, banks will be destroyed, unless, unless, they steal a portion of the deposits. One of the biggest sources of deposits is pension funds. One wonders if the Fed is going to crash the bond markets on purpose, in order to steal deposits!

That is what I said. I have been worried about this since Cyprus. Market Oracle has written about it now. Bernanke said it would be "unlikely" that he would go after bank savings like the ECB did in Cyprus. 

Now, unlike Market Oracle, I could not yet believe at this point that the Fed would crash the banks on purpose. I don't understand how the unwinding of trillions of dollars of derivatives positions, crushing the banks, would help the financial system.

However, I am close to believing in their view. If there is not enough capital for banks, forcing them to lend less, they will not have enough loans with which to generate more interest rate swaps profits. You see, as it is now, the banks force business borrowers to take an interest rate swap with the high and fixed rate. The banks take the low and floating rate.

If there are not enough swaps created in this process, the banks can't make much money. If the Fed allows interest rates on treasuries to rise too much, then the banks will be headed toward financial destruction.

So it may be that they have to obtain new sources of capital! Will that be our savings and pensions and corporate profits?

I have a lot of respect for Market Oracle, although I don't believe in Austrian Economics. So, the question is whether capital is that scarce to keep the system going that banks should be put in jeopardy in order for capital to be stolen in a bailin? 

Certainly, if interest rates rise, the banks will be in jeopardy of destruction, as they will be on the wrong side of the massive Swaps trade as I showed before in a chart. 

In that chart you can see where the red line crossed the blue line, and this caused the financial crisis.

I understand that the ponzi housing scheme was a scam and was premeditated. Hot money left the markets and that resulted in a predictable crash that the Fed was really aware of. Did the central banks orchestrate the departure of hot money in the housing market in order to get the inventory of houses back from main street?

Like the housing market, the hot money could leave treasury bonds, and that could cause a crash. Would it be premeditated? That  would be just disgusting and vile. I hope that is not what is being contemplated. I really do.

But we have to be watching for clues as to this potential course of action and for why central banks would do anything like this and hope it doesn't happen.

Update: I communicated with Ellen Brown on this subject and reformulated this issue to her as follows:

Hi Ellen, your question is actually almost the same as mine. The collateral is there. Treasuries are the collateral for the shadow banking system. Pristine collateral is needed and the US has never defaulted. So the US has the most pristine collateral.

Now, there is going to be a shortfall in the shadow banking system because of the new clearinghouses popping up that most have pristine collateral in order to secure interest rate swaps trades. They no longer can be made without collateral for the most part if I understand the process correctly.

The more that the Fed borrows, the fewer treasuries will be available for use as collateral.

But then something weird happened, the Fed said it would taper and interest rates on treasuries rose. I am puzzled about this. Why would this happen if there is such great demand for them? The 10 year was 2.5 times subscribed, so you would think there is plenty of demand.

The only way there would not be demand is if the underlying lending to companies is falling flat on its face. I don't know if that is happening but I seemed to have read an article where that was happening.

If that is true, then perhaps the need to collateral is waning. I don't know.

So, why would the need for collateral be waning? Is it because there is not enough capital in the banking system and so lending has been curtailed? I don't know.

And if there is not enough capital in the banking system will the Fed tank the interest rate swaps business in order to steal capital from the depositors, ie pensions, corporations, individuals with a bailin? Market Oracle says that will happen.

So Ellen, if you are interested in finding the answers to all this, you will have solved the conspiracy to take down the banks again, as posed by Market Oracle.

Gary

So then, we need to prove if there is a conspiracy under way to put the banks in jeopardy and temporarily destroy the interest rate swaps business. Indeed, if the floating rate goes higher than the fixed rate, the banks will have to pay out on trillions of dollars in swaps. That is a temporary situation if there are bailouts or bailins. Do the banks need that extra capital to become solvent?

Remember, deposits are loans to the banks, assets. They are not capital. They only become capital if they are confiscated by the banks! Remember Cyprus.

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