By refusing to increase its key interest rate, the Federal Reserve indirectly admits the fragility of the financial system: while the big banks – which have taken refuge in trading activities – are coping, the smallest banks – in contact with the real economy – pay the price for unemployment and bankruptcies.
It’s the bankruptcies of small- and medium-sized firms, of lower-class Americans, of subcontractors … it’s the fifth biggest bankruptcy in the history of the United States: Sunday, November 1, CIT bank filed for bankruptcy after lending to small companies for a hundred years. Only the holding company is in bankruptcy: Its subsidiaries are supposed to be able to continue their work … for now!
Contrary to what the insolent health of the big bank beneficiaries of the Obama recovery plan might allow one to believe, American finance, and the economy of the United States in general, are not in good shape. Friday, October 30, nine regional banks also closed their doors, bringing the number of financial services sector bankruptcies since the beginning of this year to 98.
A “Technical Recovery” Far From Being Sustainable …
The main cause of these bankruptcies: The thousand little regional banks of the United States carry on their shoulders those loans to small- and medium-sized companies that have been collateral victims of the crisis and to unemployed retail customers. The real economy has been pitiless to the sector!
Some signals do not lie: By announcing Thursday morning, November 5, that it would maintain its rates low for a long time, the Federal Reserve indirectly revealed its concern over the fragility of a banking sector that has benefited primarily from a return to speculation and from a technical recovery of an industry which is reconstituting its inventories.
“In the framework of a ‘W-shaped recovery,’ we’re in the rising stage of the first ‘V,’ the one profiting from the 700 billion dollars Barack Obama injected,” summarizes Jean-Michel Quatrepoint, author of “La Dernière Bulle.” Now, with information technology and a real time economy, the recovery, like the crisis, spreads much more quickly and it’s big business that benefits from it.” It remains to be seen what will happen to the American economy when all the stimulus juice has been consumed … just as we may worry about the future of the European economy after the end of the cash-for-scrap scheme!
Big Banks Benefit From Speculation and Big Business
In the meantime, the big banks feed themselves: with the help of speculation, they are rebuilding their margins, taking advantage of low rates. After generously remunerating themselves on loans to states riddled with debt, the latest technique in fashion for taking advantage of the Federal Reserve’s largess is called the “Carry Trade.” It consists of borrowing in a low rate currency (dollar, euro …) and lending at a ceiling rate at the other end of the world. In India or Australia, rates above 5 percent allow phenomenal returns with no risk the authorities will stick their noses into the transactions …
To boost their results, speculative banks have no need of the real economy (except for the unemployed, on whom they may foist the latest version of subprimes): Their income circuits are totally disconnected from it. For example: By advising Burlington Northern Sante Fe in its acquisition by Warren Buffet, Goldman Sachs could earn a little commission on a huge 44 billion dollar cake! Plenty to guarantee some juicy bonuses for its traders. In the absence of any reduction in unemployment, there’s always that to inject into the real economy …
Translation: Truthout French Language Editor Leslie Thatcher.