Contagion could spread to Europe and beyond, Paul Craig Roberts warns
The policies of the US Federal Reserve are responsible for the unfolding banking crisis and could lead to more failures in the sector, Chairman of the Institute for Political Economy Paul Craig Roberts believes.
The official, who served in the US Treasury in the 1980s, talked to RT about the recent high-profile bank failures that have rattled the US financial system and the potential fallout of those events.
“For many years, the Federal Reserve kept the rates very low, so the interest on the financial assets that the banks have on their balance sheet is low. When the rates start rising, the values of their portfolios fall, but their liabilities don’t,” Roberts explained.
“The Fed’s policy of high interest rates pushes the banks into insolvency. And this is the cause of the problem,” he said, warning that “if the Fed continues raising interest rates, there will be more failures.”
The economist pointed out that the five large US banks – the three giant New York banks and the two giant California banks – have trillions of dollars of derivatives that they are currently holding. Yet, their capital base is only in billions. “So, they are exposed to risk in the trillions of dollars and they do not have the capital base to support that risk. So, if something happens again in these derivatives as it did earlier this century when we had the big crisis, those banks will be in jeopardy.”
Roberts proceeded to warn that, if those banks get in trouble from their derivatives, it will spread into Europe. He noted that those banks were simply too large and there’s much interrelatedness.
“I doubt if Biden or anyone in his administration, or even the Federal Reserve, has any idea of the extent of risk. To put it very [clearly], the five large US banks hold derivatives, the value of which is twice the size of the GDP of the entire world. They hold $188 trillion in derivatives. So, what is the risk of this? No one knows.”
According to Roberts, the troubles date back to 1999 when US authorities dramatically changed banking regulations. Prior to that, commercial banks couldn’t engage in investment banking, he explained, while investment banks took risk on their own money. However, when the commercial banks were let in, they started to gamble with the savings of depositors. That has allowed tremendous risk-taking, which was previously not part of the system, the expert stated.
He pointed out that the so-called Glass-Steagall Act had prevented panic buying and buying crises for 66 years until it was largely repealed in 1999. “When they took that away, they initiated a pattern of behavior that leads to crises.”
The former White House official suggested that the current crisis in the US banking sector could impact the rest of the world, noting that some European banks, like Credit Suisse, are already in jeopardy.
“So, we don’t really know the full extent of the trouble in the banks… It’s just like the derivatives that blew up in 2007/2008, and we lost banks, we lost Wall Street firms,” Roberts said, emphasizing that this was the reason for very low interest rates for the next 12 years, which led to the current crisis.
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