Banks are Too Big To Fail, But Not For the Reasons You Believe

It never ceases to amaze how often people assume that banks aren’t ‘too big to fail’. When the next banking crisis comes around, they say, we should just let them die. See how they like it!

It’s not that simple. The world doesn’t work the way that most people think it does. Or rather  the way most people wish it did.

If we assume the rules that govern society are equitable, then we fall into the trap of thinking everything follows certain logic. But don’t make that mistake. They aren’t. And they never were. Even if we like to delude ourselves from time to time.

Truth is, most people have it all wrong when it comes to banks. They are too big to fail. Not because they’re special. Not because we need them to avoid reverting back to the prehistoric age. It’s because banks, for all intents and purposes, run the world.

Bankers can convince us that they need bailouts because there’s nothing to stop them from doing so. They put on a show, in concert with government officials, to make it seem genuine. But it’s nothing more than a charade. Something to convince the public that bailouts are the result of a democratic process, and not a simple handshake between old pals.

In fact, these bailout decisions are made well in advance, without public knowledge. The people that set the rules (the banks) are the very same ones who can break them when they like.

So as we sit here, watching on as cracks appear in the global banking system, we’d be wise to remember that.

We’ve seen European banking stocks decline by a third in the space of a few weeks. US, Asian, and Australian banks have all felt the effects of this. In the past few days, the big banks contributed $40 billion in selloffs on the ASX.

When the inevitable crash comes, what are we going to do?

We’ll clench our fists at the likes of Deutsche Bank, baying policymakers to let it die should things escalate that far (…they won’t).

As we watch this, we’re seeing a rise in the number of talking heads preaching that things should be ‘different’ next time around. That, in order to take control out of the banks’ hands, we must let troubled lenders go under.

We look on at near zero interest rates in Europe and assume that the banking system has, somehow, gotten it ‘wrong’. And we do all this because we assume that the world ticks to a sensibility we’re led to believe is both just and fair. It isn’t, and it never has been. But we keep making the mistake of thinking that it does.

Here’s an excerpt, from a Sydney Morning Herald op-ed, that sums up the mainstream zeitgeist:

Another round of bail-outs is unacceptable. The public finances won’t stand the strain, the public would be outraged, and the moral hazard would be too great. If we do see some banks collapse, we should be ready and willing to let them go under.

There are certainly plenty of worrying signs of trouble brewing in the banking sector. The Stoxx Europe 600 Banks Index, which includes all the major banks across the continent, has now declined for six straight weeks. The last time that happened? Well, that was back in 2008, as the global financial system went into meltdown.

…What we can do is work out our response in advance. In the midst of the last crisis, with fears that the global economy was going into full-scale meltdown, governments stepped in with hugely expensive bail-outs. This time around, if there is a similar crisis, that should be resisted.

It goes on to state that governments can’t afford the bail-outs (wrong). Of course they can afford it; they can just borrow money from central banks that print money for commercial lenders whenever they please.

The article also states that public outrage would be so great, that we would just…we would just…? Do what, exactly? Nothing, that’s what…We’d hold rallies, Occupy Something (anything!), and resume our daily lives once it becomes patently clear who holds the cards. We like to believe out anger influences what policymakers do, without realising how naïve that is.

As for the question of morality, we don’t even need to waste time entertaining the thought of that one. Not bailing out banks wouldn’t be sending the wrong message to bankers. They’re not looking for guidance on standards, ethics or morals. The sooner we realise, once and for all, that they have no use for righteousness, the faster we can all move on.

Where banks are taking the crisis

This coming crisis, which will revolve around banks (it always does), is not without precedent. And there’s a good reason for that. History may not repeat itself, but it certainly does rhyme.

So here’s what’s going to happen in 2016, 2017, or 2018. The date itself is irrelevant. A crisis can be orchestrated overnight, or it can be put off for decades. It all depends on the will of banks. When it does take place, two things will happen. Banks will get their bail-outs, with the public footing the bill for it. At the same time, some banks will be ‘allowed’ to die.

The banks that die won’t do so because of any publically led victory against the big bad banks. They’ll be allowed to die because they’ll become the designated ‘fall guys’ for other commercial banks. It’s exactly what happened in 2008 with Lehman Brothers. And it’s exactly what happened during the Great Depression in the 1930s.

Central banks are tools of commercial banks. They were birthed by the US banking cartel in the early 20th century. This isn’t hearsay, or supposition. It’s fact.

Knowing this, we can safely assume that there is no misstep in the global banking system today. It’s all planned out in tandem with commercial banks that use central banks as a way to benefit themselves.

Record low interest rates are not a by-product of independent policy. They’re the inevitable outcome of a system in which banks are allowed to run the world. The big banks will gorge on the smaller banks snapping up all their assets.

Don’t think of the next banking crisis as the outcome brought on by bad policy alone. Instead, see it for what it is: an epic swindle that you’ve been convinced is too immoral, too unjust, to be true. But as Kevin Spacey likes to remind us in The Usual Suspects, ‘the greatest trick the devil ever pulled was convincing the world he didn’t exist’. We’d be wise to remember that.

Mat Spasic,

Junior Analyst, Markets and Money

PS: Markets and Money’s Vern Gowdie says we’re already standing on the edge of this next financial crisis.

Vern is the award-winning Founder of the Gowdie Letter and Gowdie Family Wealth advisory services. As one of Australia’s Top 50 financial planners, Vern believes there’s nothing we can do to stop what’s coming.

It won’t be only stock markets that crash when the crisis hits. There’s another multibillion dollar market that’s poised to collapse when the credit bubble pops. Australia’s gone through two such credit bubbles in its history. The third, and latest, has been building for the last 65 years. When it pops, it won’t be pretty.

The fallout of this crash could do serious harm to your wealth. Yet, with a little bit of work, you can safeguard your wealth from the worst effects of the crisis. Vern will show you how to do this in his brand new report. To download a free copy of ‘Global Financial Crisis 2016: 3 Crisis Scenarios, and How They’ll Impact Australia’, click here.


Markets and Money offers an independent and critical perspective on the Australian and global investment markets. Slightly offbeat and far from institutional, Markets and Money delivers you straight-forward, humorous, and useful investment insights from a world wide network of analysts, contrarians, and successful investors.

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