*****Decades Of Regulatory Forbearance Destroyed The US Financial System*****

The chart below shows the US money supply. Remember that most of it is insured by the FDIC.

The next chart below shows the total reserve balances with Federal Reserve banks (the actual amount of "cash" in the financial system). Financial institutions (banks, thrifts, etc) use these reserve balances to pay each other using the Federal Reserve's Fedwire Funds Transfer System.

This third chart shows reserve balances with Federal Reserve banks VS the US money supply. Notice that at the end of 2007, financial institutions had .07 percent cash for every dollar in deposit, saving, money market, and other accounts.

The point here is that it is all one big crisis. The financial system as a whole has been rotting away for over fifty years. For more evidence of the progressive insolvency of the US financial system, look at the rising cost of resolving failed banks:

10.2% of deposits for 1985 failures
20.3% of deposits in 1989 failures
100% of deposits for 2009 failures (you can't get more insolvent than this)

Basically, a large and growing part of the financial system has been insolvant since the 1980s. Regulatory Forbearance has allowed this insolvency to fester until it exploded into the current financial crisis.

Decades of Regulatory Forbearance

One of the first forms of regulatory forbearance designed to prop up insolvent institutions was the Federal Reserve's emergency discount window lending, which was seriously abused in the 1980s. To stop this abuse by the Fed's discount window lending, in 1991 congress passed Federal Deposit Insurance Corporation Improvement Act (FDICIA). To keep propping up insolvent institutions despite FDICIA, gold leasing (the sale of central bank gold) was then heavily used in the 1990s.

The graph below shows how gold leasing replaced the Fed's discount lending as the means to keep insolvent institutions alive.

Unfortunately, central bank gold was not an unlimited resource. Especially after the 1999 Washington agreement, physical gold from central bank vaults stopped being a viable source of liquidity. To replace it, Wall Street was allowed to naked short sell trillions of treasuries.

To see the effects of the naked short selling of treasuries, below is a graph showing Treasury "failures to deliver" (naked short selling treasuries) VS the five year treasury yield. It shows how Treasury "failures to deliver" cause the price of treasuries to fall (and yields to rise).

Finally, for the 2005-2008 period, Wall Street was allowed to go wild with the selling of commodity IOUs. Open interest in all major commodities more than doubled during this time period.

Putting it all together, the chart below shows how decades of forbearance destroyed the US financial system.

The continuous regulatory forbearance over the last few decades is evidence that everything has been one big crisis, with the US financial system growing ever more insolvent and unstable, and The 2010 Food Crisis is what will finally bring the whole house of cards tumbling down.

This entry was posted in Background_Info, Currency_Collapse, Federal_Reserve, Gold, Wall_Street_Meltdown. Bookmark the permalink.

5 Responses to *****Decades Of Regulatory Forbearance Destroyed The US Financial System*****

  1. Thorleifur says:

    Hi Eric, good stuff!
    What do you say about this:

    GoldMoney founder James Turk, editor of the Free Gold Money Report and consultant to GATA, reports tonight that the Federal Reserve is vastly understating the growth of the U.S. money supply. Turk writes:

    "When deposit currency created by the Federal Reserve is added to the traditional definition of M1, M1 after adjustment is actually 170 percent higher at $2,918 billion. Its annual growth increases to 29.5 percent, nearly three times the rate reported by the Fed and, more importantly, an annual rate of growth in the quantity of dollar currency that is approaching hyperinflationary levels."

    Turk's commentary is headlined "U.S. Dollar Money Supply Is Underreported" and you can find it at the Free Gold Money Report Internet site here:


  2. Eric,

    While what you say is true to the extent that regulatory forbearance is associated with the destruction of the financial system, the ultimate cause of the destruction of the financial system is a compounding debt burden combined with increasing scarcity of resources. Regulatory forbearance has merely postponed the inevitable.

    As the debt burden increases, there is a need for increased effort to maintain confidence that debt will be repaid. Repaying debt with dollars that will purchase a smaller amount of goods is effectively a default on part of the debt burden. Since rising commodity prices add to the cost of producing most goods,increasing scarcity and rising prices of commodites means that the debt burden will be repaid with dollars that will purchase fewer goods.

    Manipulating commodity prices lower helps maintain confidence in the value of the debt burden since it implies that the dollars received by creditors as debt is repaid can be used to purchase more goods.This maintains the willingness to provide credit which allows the debt burden to be rolled over and continue to compound instead of collapsing as credit is removed.The other forms of deregulation that you mentioned have also helped to maintain liquidity. This means that although financial collapse has been delayed by deregulation,the consequences will be much worse when the system eventually collapses.

  3. To add to my comments above, an important implication of market manipulation being supported by the US government and motivated by the need to prevent collapse of the global financial system is that rather than being motivated only by the desire to support the greed of corporations, it is likely that a major part of the motivation for market manipulation was to prevent financial chaos and global war while buying time to deveop alternative energy. However, with oil prices rising relatively rapidly even with a temporary reduction in global demand,it appears that it will not be possible to develop alternative energy in time to prevent prices for oil and other commodities from rising to a level that will cause a collapse of the financial system by reducing the potential for economic growth and causing a default on the debt burden.

    If the US defaults on its debt, the extent to which the US had benevolent motivations for market manipulation and accumulation of treasury debt needs to considered in any agreement that occurs after a default caused by a financial system collapse or impending collapse. Preferably an agreement could be reached before a debt default occurs.

    It appears that the original intentions of the US after World War II were to spread prosperity and democracy around the world. As scarcity of resources increased, the need to prevent a collapse of the financial system sometimes trapped the US into resorting to using means to prevent financial collapse that appeared to be completely immoral and based on greed.

    It will not be easy to convince the world that the motivation of the US was at least somewhat benevolent. The depiction of the US in "Avatar" as being motivated only by greed clearly represents the perception of the US around the world.

    A possible response to what I have said is that it is clear that the US along with downward oil price manipulation has sometimes been involved in manipulating oil prices upward. However, it appears that at least some of the motivation for uprward oil price manipulation was to temporarily use rising oil prices to increase in the need around the world to accumulate dollars to purchase oil. This then tends to cause exporters to increase production of goods to export to the US as a means to accumulate dollars for purchasing oil. Increased production of goods then reduces the tendency toward a global recession which could have led to a collapse of the financial system at various times. Overall the need has been to manipulate commodity prices lower to prevent a collapse of the debt burden.

  4. stibot says:

    David Alexander, i agree the oil and alternative energy seems to be a keypoint.

    Your last comment recalled me what i consider the best summary/explanation of develepment to the current economic position i've ever read: Debt Dynamite Dominoes: The Coming Financial Catastrophe by Andrew Gavin Marshall. A bit longer but worth reading, it helped me much to understand.

  5. dashxdr says:

    The 2010 Food Crisis.

    Soon to be The 2011 Food Crisis.

    Followed shortly by The 2012 Food Crisis.

    Always Real Soon Now. Any minute. Just around the bend.

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