Our government has turned balance-sheet games and lies into a legitimate business model. This in turn has left the markets worldwide subject to rumor and innuendo, along with fact. This is not acceptable in a financial system that is claimed to "need" these big institutions to remain stable.
The simple fact of the matter is that our entire market structure over the last 30+ years has been built on fraudulent edifice after fraudulent edifice. The premise of "Credit Default Swaps" being traded over the counter means that there's no nightly margin position enforcement and "netting" sounds great but is by and large a scam. You cannot ask a bank CEO exactly how much his bank is underwater or to the good in his present positions across these markets and get an accurate answer, because he doesn't know. This lack of knowledge is both intentional and structural - and it must change right now.
This is distinct from trading in the regulated markets. When I trade futures if I'm underwater by $200,000 in my positions that is tracked "by the minute" and my buying power reflects that. Each night I am forced to post cash against any underwater positions, and it is "held back" from my cash balance. If I run out of cash then an ominous number appears on my screen: Dollars to liquidation - and it means what it says; when that gets to zero the brokerage automatically closes my positions and my account goes poof!
Why don't we implement the same thing for banks? Markets have prices for nearly everything. If there's no price, then the value is simple: For the purpose of required reserves it's zero. That is, you must have one dollar of actual capital against anything you claim has no market price, or for which you refuse to accept the market's valuation.
We must also end ZIRP. Right now. Pull liquidity out of the system (start by selling down The Fed's balance sheet until it is at normal levels) until the short end of the curve rises to at least 1% above inflation. Borrowing is supposed to come with a cost and it should be expensive enough that it is unattractive to do so for anything except productive purposes - that is, it should be unattractive to borrow to consume, speculate or try to create Ponzi schemes. Left alone the market guarantees this will be the case - if The Fed won't stop interfering on its own then it must be forced to do so.
This stops all the BS immediately. It prevents market panics. It protects depositors without the possibility of one dime of loss of their funds. It forces bondholders to do diligence on what they're lending money for and what institutions are doing with it. It forces all credit instruments onto an exchange or forces banks to hold one dollar of capital for each dollar of notional exposure. If they want to trade them over the counter that's fine, but then they are by doing so refusing to accede to a market price valuation and by doing so must accept that they are unsecured credits - in full.
Oh, it also prevents banks from levering up 50:1, 30:1 or whatever, hiding risk and claiming that all is ok without strict proof.
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