The Alice in Wonderland World of Fast-tracked Secret Trade Agreements

“Sentence First, Verdict Afterwards”: The Alice in Wonderland World of Fast-tracked Secret Trade Agreements

Posted on June 21, 2015 by Ellen Brown 

 http://ellenbrown.com/2015/06/21/sentence-first-verdict-afterwards-the-alice-in-wonderland-world-of-fast-tracked-secret-trade-agreements/

`Let the jury consider their verdict,’ the King said, for about the twentieth time that day.
`No, no!’ said the Queen. `Sentence first–verdict afterwards.’
`Stuff and nonsense!’ said Alice loudly. `The idea of having the sentence first!’
`Hold your tongue!’ said the Queen, turning purple.
`I won’t!’ said Alice.
`Off with her head!’ the Queen shouted at the top of her voice.
                    — Lewis Carroll, “Alice’s Adventures in Wonderland”

Fast-track authority is being sought in the Senate this week for the Trans-Pacific Partnership (TPP), along with the Trade in Services Agreement (TiSA) and any other such trade agreements coming down the pike in the next six years. The terms of the TPP and the TiSA are so secret that drafts of the negotiations are to remain classified for four years or five years, respectively, after the deals have been passed into law. How can laws be enforced against people and governments who are not allowed to know what was negotiated?
The TPP, TiSA and Transatlantic Trade and Investment Partnership (or TTIP, which covers Europe) will collectively encompass three-fourths of the world’s GDP; and they ultimately seek to encompass nearly 90 percent of GDP. Despite this enormous global impact, fast-track authority would allow the President to sign the deals before their terms have been made public, and send implementing legislation to Congress that cannot be amended or filibustered and is not subject to the constitutional requirement of a two-thirds treaty vote.
While the deals are being negotiated, lawmakers can see their terms only under the strictest secrecy, and they can be subjected to criminal prosecution for revealing those terms. What we know of them comes only through WikiLeaks. The agreements are being treated as if they were a matter of grave national security, yet they are not about troop movements or military strategy. Something else is obviously going on.
The bizarre, unconstitutional, blatantly illegal nature of this enforced secrecy was highlighted in a May 15th article by Jon Rappoport, titled “What Law Says the Text of the TPP Must Remain Secret?” He wrote:

It seems like a case of mass hypnosis. . . .
Members of Congress are scuttling around like weasels, claiming they can’t disclose what’s in this far-reaching, 12-nation trade treaty.
They can go into a sealed room and read a draft, but they can’t copy pages, and they can’t tell the public what they just read.
Why not?
If there is a US law forbidding disclosure, name the law.
Can you recall anything in the Constitution that establishes secret treaties?
Is there a prior treaty that states the text of all treaties can be hidden from the people?

To Congressmen who say they cannot reveal what is in a treaty that will adversely affect the lives of hundreds of millions of people, Rappoport says:

Wrong. You’re lying. You can reveal secret text. In fact, it’s your duty. Otherwise, you’re guilty of cooperating in a RICO criminal conspiracy.

A Corporate Coup d’État

What is going on was predicted by David Korten in his 1995 blockbuster, When Corporations Rule The World. Catherine Austin Fitts calls it a “corporate coup d’état.”
This corporate coup includes the privatization and offshoring of the judicial function delegated to the US court system in the Constitution, through Investor-State Dispute Settlement (ISDS) provisions that strengthen existing ISDS  procedures.
As explained in The Economist, ISDS gives foreign firms a special right to apply to a secretive tribunal of highly paid corporate lawyers for compensation whenever the government passes a law to do things that hurt corporate profits — such things as discouraging smoking, protecting the environment or preventing a nuclear catastrophe. Arbitrators are paid $600-700 an hour, giving them little incentive to dismiss cases. The secretive nature of the arbitration process and the lack of any requirement to consider precedent give wide scope for creative judgments – the sort of arbitrary edicts satirized by Lewis Carroll in Alice’s Adventures in Wonderland.
To date, the highest ISDS award has been for $2.3 billion to Occidental Oil Company against the government of Ecuador over its termination of an oil-concession contract, although the termination was apparently legal. Under the TPP, however, even larger and more unpredictable judgments can be anticipated, since the sort of “investment” it protects includes not just “the commitment of capital or other resources” but “the expectation of gain or profit.” That means the rights of corporations extend not merely to their factories and other “capital” but to the profits they expect to receive. Just the threat of a massive damage award for impairing “expected corporate profits” could be enough to discourage prospective legislation by lawmakers.
The Trade in Services Agreement adds additional barriers to proposed legislation.  TiSA involves 51 countries, including every advanced economy except the BRICS (Brazil, Russia, India, China, and South Africa). The deal would liberalize global trade in services covering close to 80% of the US economy, including financial services, healthcare, education, engineering, telecommunications, and many more. It would restrict how governments can manage their public laws, and it could dismantle and privatize state-owned enterprises, turning those services over to the private sector. It would also block the emerging trend to return privatized services to the public sector, by limiting or prohibiting governments from creating or reestablishing public utilities and other “uncompetitive” forms of service delivery.
It seems that the TPP, TTIP and TiSA are not about the sort of “free trade” that would free local businesses to sell abroad. They are about freeing international corporations from the government regulation necessary to protect the economy, the people, and the environment. They are about preserving privatized monopolies and preventing competition from the public sector. And they are about moving litigation offshore into private arbitrary tribunals – the sort of tribunal that might have lost Alice her head, if she had not awakened from her bizarre dream.

Urge your local representative to vote “no” on Fast Track. For more information, see —
Flush the TPP
The Citizens Trade Campaign
Public Citizen’s Global Trade Watch
Eyes on Trade
________________
Ellen Brown is an attorney, founder of the Public Banking Institute, and author of twelve books including the best-selling Web of Debt. Her latest book, The Public Bank Solution, explores successful public banking models historically and globally. Her 300+ blog articles are at EllenBrown.com.

Conferencia Magistral del Presidente Evo Morales en la Universidad Bocconi

Bank of England governor Mark Carney crusades against bad bank behaviour

June 11, 2015

http://www.smh.com.au/business/world-business/bank-of-england-governor-mark-carney-crusades-against-bad-bank-behaviour-20150611-ghld7m.html 

Jonathan Shapiro

Senior Reporter

Bank of England Governor Mark Carney has presented 21 recommendations tabled by The Fair and Effective Markets Review. Photo: Reuters
 

The governor of the Bank of England and chair of the global Financial Stability Board, Mark Carney, is aggressively pushing ahead with new global standards to reign in wayward conduct of banks around the world, including Australia.
On Wednesday, Carney, a former Goldman Sachs banker that once headed the Bank of Canada, presented 21 recommendations tabled by The Fair and Effective Markets Review, which he helped establish to examine conduct and culture in London's financial markets.
Experts said the recommendations, which calls for tougher personal penalties in loosely regulated markets and greater oversight of hedge funds, will form the blueprint for global standards designed to restore trust in financial markets that had been eroded by a series of scandals in interest rate, bond and commodity markets.
"This is an important report for financial markets. They want this to be a platform for global policy discussion," said Deloitte lead risk partner Kevin Nixon, who was in little doubt that there would be a push for the final recommendations to be adopted around the world.
He said Mark Carney as chair of the Financial Stability Board was well placed to push for the proposed standards to be adopted globally and championed by other global bodies such as the Bank of International Settlements and IOSCO, which is currently chaired by Greg Medcraft of the Australian Securities and Investment Commission.
"He is calling for international action because it won't work if we don't all do it. We don't have to read the tea leaves."
The two bedrocks of the proposals are in raising standards of accountability among individuals and ensuring all recommendations are enforced globally.

Outlawed in equity markets

Behaviour that is outlawed in equity markets – but has prevailed in over the counter bond and currency markets – such as front running and insider trading will be subject to criminal sanctions.
Hedge fund managers will also be on alert. Patrolling bad behaviour will no longer be limited to banks but all market participants that have the potential to manipulate markets.
"The [recommendations] are now saying the market is made of more players and you'll all be held to account. If its bad practice for a group of banks, it's bad for a group of hedge funds. That's a big change," Mr Nixon said.
The recommendations presented by Carney come as local regulators step up the rhetoric in stamping out misconduct in financial markets calling for tougher penalties for bankers and institutions guilty of misconduct.
In December last year, the chair of ASIC Greg Medcraft pledged to "lift the fear and smother the greed" by using the real threat of jail time to stamp out white collar crime.
This week Medcraft told a Senate Committee that the behaviour of some institutions it was investigating for interest rate manipulation had been "absolutely appalling."
The comments are understood to have referred to the ANZ Banking Group, which in December stood down seven traders that are subject to an investigation by the corporate watchdog.
Also last week ASIC commissioner John Price said the regulator would target companies with bad culture and form part of its risk-based surveillance programme.
Meanwhile the chair of the Australian Prudential Regulation Authority, Wayne Byers, told an audience in Singapore last week that strengthening culture was critical to long-term financial stability suggesting that too many participants in financial markets had wayward ethics.

Something serious amiss

"For an industry that is ultimately founded on trust, something serious is amiss, and strong and ethical leadership within financial firms is needed to set this right," he said.
The chair of the government's financial system inquiry, David Murray, reaffirmed his support for tougher penalties for misconduct in financial services, and the need for more funding for the watchdog.
The inquiry, now being considered by the government, recommended the Australian Securities and Investments Commission have access to "substantially higher criminal and civil penalties" for policing misconduct, and that it be better resourced, via a fee for service on industry.
"We were charged with and gave significant effort into dealing with fair treatment of consumers in the market," Mr Murray said.
"We felt that the penalty regime was not tough enough and we put significant consideration into the effectiveness and accountability of the regulators."
Mr Murray did not comment on Mr Carney's report but he has previously compared ASIC's penalty regime to "being hit with a lettuce leaf."
The inquiry last year also raised "serious concerns" about the culture with in some firms but said changing the rules was only part of the answer.
"The report expressed our view that it's difficult to legislate for culture and I still believe that to be the case," Mr Murray said.

BofE: Governor Mark Carney speaks at the Mansion House

TISA: Stealth Block to Monetary Reform

Ellen Brown Become a fan Author, Web of Debt, Public Bank Solution; President, Public Banking Institute

The Trade in Services Agreement: Stealth Block to Monetary Reform

Posted: 06/12/2015 2:19 pm EDT Updated: 06/12/2015 2:59 pm EDT 

http://www.huffingtonpost.com/ellen-brown/post_9606_b_7569638.html 

It is well enough that the people of the nation do not understand our banking and monetary system, for if they did, I believe there would be a revolution before tomorrow morning.
-- Attributed to Henry Ford

In March 2014, the Bank of England let the cat out of the bag: money is just an IOU, and the banks are rolling in it. So wrote David Graeber in The Guardian the same month, referring to a BOE paper called "Money Creation in the Modern Economy." The paper stated outright that most common assumptions of how banking works are simply wrong. The result, said Graeber, was to throw the entire theoretical basis for austerity out of the window.
The revelation may have done more than that. The entire basis for maintaining our private extractive banking monopoly may have been thrown out the window. And that could help explain the desperate rush to "fast track" not only the Trans-Pacific Partnership (TPP) and the Trans-Atlantic Trade and Investment Partnership (TTIP), but the Trade in Services Agreement (TiSA). TiSA would nip attempts to implement public banking and other monetary reforms in the bud.
The Banking Game Exposed The BOE report confirmed what money reformers have been saying for decades: that banks do not act simply as intermediaries, taking in the deposits of "savers" and lending them to borrowers, keeping the spread in interest rates. Rather, banks actually create deposits when they make loans. The BOE report said that private banks now create 97 percent of the British money supply. The US money supply is created in the same way.
Graeber underscored the dramatic implications:

. . . [M]oney is really just an IOU. The role of the central bank is to preside over a legal order that effectively grants banks the exclusive right to create IOUs of a certain kind, ones that the government will recognise as legal tender by its willingness to accept them in payment of taxes. There's really no limit on how much banks could create, provided they can find someone willing to borrow it.

Politically, said Graeber, revealing these facts is taking an enormous risk:

Just consider what might happen if mortgage holders realised the money the bank lent them is not, really, the life savings of some thrifty pensioner, but something the bank just whisked into existence through its possession of a magic wand which we, the public, handed over to it.

If money is just an IOU, why are we delivering the exclusive power to create it to an unelected, unaccountable, non-transparent private banking monopoly? Why are we buying into the notion that the government is broke - that it must sell off public assets and slash public services in order to pay off its debts? The government could pay its debts in the same way private banks pay them, simply with accounting entries on its books. What will happen when a critical mass of the populace realizes that we've been vassals of a parasitic banking system based on a fraud - that we the people could be creating money as credit ourselves, through publicly-owned banks that returned the profits to the people?
Henry Ford predicted that a monetary revolution would follow. There might even be a move to nationalize the whole banking system and turn it into a public utility.
It is not hard to predict that the international bankers and related big-money interests, anticipating this move, would counter with legislation that locked the current system in place, so that there was no way to return money and banking to the service of the people - even if the current private model ended in disaster, as many pundits also predict.
And that is precisely the effect of the Trade in Services Agreement (TiSA), which was slipped into the "fast track" legislation now before Congress. It is also the effect of the bail-in policies currently being railroaded into law in the Eurozone, and of the suspicious "war on cash" seen globally; but those developments will be the subject of another article.
TiSA Exposed On June 3, 2015, WikiLeaks released 17 key documents related to TiSA, which is considered perhaps the most important of the three deals being negotiated for "fast track" trade authority. The documents were supposed to remain classified for five years after being signed, displaying a level of secrecy that outstrips even the TPP's four-year classification.
TiSA involves 51 countries, including every advanced economy except the BRICS (Brazil, Russia, India, China, and South Africa). The deal would liberalize global trade in services covering close to 80% of the US economy, including financial services, healthcare, education, engineering, telecommunications, and many more. It would restrict how governments can manage their public laws, and it could dismantle and privatize state-owned enterprises, turning those services over to the private sector.
Recall the secret plan devised by Wall Street and U.S. Treasury officials in the 1990s to open banking to the lucrative derivatives business. To pull this off required the relaxation of banking regulations not just in the US but globally, so that money would not flee to nations with safer banking laws. The vehicle used was the Financial Services Agreement concluded under the auspices of the World Trade Organization's General Agreement on Trade in Services (GATS). The plan worked, and most countries were roped into this "liberalization" of their banking rules. The upshot was that the 2008 credit crisis took down not just the US economy but economies globally.
TiSA picks up where the Financial Services Agreement left off, opening yet more doors for private banks and other commercial service industries, and slamming doors on governments that might consider opening their private banking sectors to public ownership.
Blocking the Trend Toward "Remunicipalization" In a report from Public Services International called "TISA versus Public Services: The Trade in Services Agreement and the Corporate Agenda," Scott Sinclair and Hadrian Mertins-Kirkwood note that the already formidable challenges to safeguarding public services under GATS will be greatly exacerbated by TiSA, which blocks the emerging trend to return privatized services to the public sector. Communities worldwide are reevaluating the privatization approach and "re-municipalizing" these services, following negative experiences with profit-driven models. These reversals typically occur at the municipal level, but they can also occur at the national level.
One cited example is water remunicipalization in Argentina, Canada, France, Tanzania and Malaysia, where an increasing frustration with broken promises, service cutoffs to the poor, and a lack of integrated planning by private water companies led to a public takeover of the service.
Another example is the remunicipalization of electrical services in Germany. Hundreds of German municipalities have remunicipalized private electricity providers or have created new public energy utilities, following dissatisfaction with private providers' inflated prices and poor record in shifting to renewable energy. Remunicipalization has brought electricity prices down. Other sectors involved in remunicipalization projects include public transit, waste management, and housing.
Sinclair and Mertins-Kirkwood observe:

The TISA would limit and may even prohibit remunicipalization because it would prevent governments from creating or reestablishing public monopolies or similarly "uncompetitive" forms of service delivery. . . .
Like GATS Article XVI, the TISA would prohibit public monopolies and exclusive service suppliers in fully committed sectors, even on a regional or local level. Of particular concern for remunicipalization projects are the proposed "standstill" and "ratchet" provisions in TISA. The standstill clause would lock in current levels of services liberalization in each country, effectively banning any moves from a market-based to a state-based provision of public services. This clause . . . would prohibit the creation of public monopolies in sectors that are currently open to private sector competition.
Similarly, the ratchet clause would automatically lock in any future actions taken to liberalize services in a given country. . . . [I]f a government did decide to privatize a public service, that government would be unable to return to a public model at a later date.

That means we can forget about turning banking and credit services into public utilities. TiSA is a one-way street. Industries once privatized remain privatized.
The disturbing revelations concerning TiSA are yet another reason to try to block these secretive trade agreements. For more information and to get involved, visit:
Flush the TPP
The Citizens Trade Campaign
Public Citizen's Global Trade Watch
Eyes on Trade

Follow Ellen Brown on Twitter: www.twitter.com/ellenhbrown

Big Pharma Revealed As Puppetmaster Behind TPP Secrecy

Submitted by Tyler Durden on 06/11/2015 04:13 -0400

http://www.zerohedge.com/news/2015-06-10/profits-over-public-health-big-pharma-revealed-puppetmaster-behind-tpp-secrecy

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It is no secret that US healthcare corporations have been among, if not the biggest beneficiaries of Obamacare: by "socializing" costs and spreading the reimbursement pool over the entire population in the form of a tax, pharmaceutical companies have been able to boost medical product and service costs to unprecedented levels with the help of complicit insurance companies who have subsequently passed through these costs to the consumer, in the process sending the price of biotech and pharma stocks to levels not seen since the dot com bubble.
But when it came to the highly confidential TPP, it was unclear just which corporations were dominant in pulling the strings.
Now thanks to more documents published by Wikileaks, and analyzed by the NYT, it appears that "big pharma" is once again pulling the strings, this time of the Trans Pacific Partnership, which if passed will "empower big pharmaceutical firms to command higher reimbursement rates in the United States and abroad, at the expense of consumers" according to "public health professionals, generic-drug makers and activists opposed to the trade deal."
In other words, just like the narrowly-passed Obamacare was a gift for big Pharma, so America's legal drug dealers are now trying to go for another price boosting catalyst, one which however will involve not just the US but some 12 countries in the Asia-Pacific region. Worst of all, the negotiations for the next price increase is taking place in utmost secrecy where "American negotiators are still pressing participating governments to open the process that sets reimbursement rates for drugs and medical devices."
As RT notes, the latest disclosure links the Healthcare Annex to the secret draft of the quite aptly-named "Transparency" Chapter of the TPP, along with each country's negotiating position. The leaked "Annex on transparency and procedural fairness for pharmaceutical products and medical devices" is dated from December 2014, with the draft being restricted from release for four years after the passage of the TPP into law.

RELEASE: TPP Transparency Chapter Healthcare Annex https://t.co/jc4hYqh06V #TPP #TTIP #TISA pic.twitter.com/xIlO4QCUu6

— WikiLeaks (@wikileaks) June 10, 2015

Worse, while in the US the rising healthcare costs are at least spread across a broader social safety net, the TPP is targeting countries where the potential jump in drug prices will have dramatic effects. As the NYT notes, "foreign governments and health care activists have accused pharmaceutical giants, mostly based in the United States, of protecting profits over public health, especially in poor countries where neither the government nor consumers can afford to pay rates anywhere close to those charged in wealthier nations."

That fight re-emerged in the Pacific trade negotiations, which involve countries with strong cost-containment policies, like New Zealand, as well as poor countries like Peru and Vietnam.

The agreement “will increase the cost of medicines worldwide, starting with the 12 countries that are negotiating the Trans-Pacific Partnership,” said Judit Rius Sanjuan, a lawyer at Doctors Without Borders, a humanitarian organization that provides medical care in more than 60 countries.

None other than the CEO of Mylan explained in the simplest possible way what is going on: a government mandated monopoly under the guise of a trade pact: "Heather Bresch, the chief executive of Mylan, one of the largest generic-drug makers, said the brand-name pharmaceutical industry was “establishing, through U.S. trade policy, an international system designed to maximize its monopolies."
But where the alarm bells truly go off is when someone, anyone, uses the word "fair" to justify policy, such as surging drug costs. To wit: "drug companies, however, say they need to be able to charge fair prices to compensate for the billions of dollars and decades of research that go into their medicines."
What is amusing is that the true motive behind the TPP's secrecy have been quite clear to virtually everyone but the population of the TPP's host nation:

“It was very clear to everyone except the U.S. that the initial proposal wasn’t about transparency. It was about getting market access for the pharmaceutical industry by giving them greater access to and influence over decision-making processes around pricing and reimbursement,” said Deborah Gleeson, a lecturer at the School of Psychology and Public Health at La Trobe University in Australia. And even though the section, known as the transparency annex, has been toned down, she said, “I think it’s a shame that the annex is still being considered at all for the T.P.P.”

RT adds that one country that should be in arms over the TPP is Australia:

The secret negotiations now allegedly reveal that Australia's Pharmaceutical Benefits Scheme might be undermined, pushing up the cost of medicines in the country.

"United States trade negotiators have aggressively pushed for provisions favoring multinational pharmaceutical manufacturers at the expense of national governments and public healthcare systems," the Sydney Morning Herald wrote.

But the one place where the biggest price shock may be unleashed is, not surprisingly, the US itself :

The leaked TPP document "shows that the pact could expose Medicare to pharmaceutical company attacks and constrain future policy reforms, including the ability of the US government to curb rising and unsustainable drug prices," the US consumer rights advocacy group and think tank Public Citizen said in its Wednesday statement.

The group says president Obama's administration has been "acting at the behest of pharmaceutical companies," and the secret negotiations it has been holding within the partnership might affect Medicare, limiting "Congress' ability to enact policy reforms that would reduce prescription drug costs for Americans."

The same Congress, incidentally, which gladly washed its hands of any discussion of the TPP when the Senate "fast-tracked" its passage and as the NYT further notes, "a House vote on final passage of the bill, now expected on Friday, appears extremely close."
In other words, in exchange for a few million in lobby spending, aka bribes, by Big Pharma, the US Congress has once again sold out the US population, and this time it even voluntarily bypassed even the mock democratic process of debating the law it will pass.
Why? Just so shareholders of pharmaceutical companies could reap even greater profits at the expense of not just the US population, but of the populations of some of the biggest US trading partners, all of whom are about to see the prices of medical care skyrocket.
And since nothing is confirmed until it is officially denied, here is the punchline:

“The transparency annex in T.P.P. is not subject to Investor-State Dispute Settlement, and nothing in its provisions will undermine our ability to pursue the best health care policy for Americans, including any future action on health care expenditures and cost containment,” a trade representative spokesman said.

Those Americans who may wish to challenge the claim well, they are out of luck: Congress is about to make sure there is no way anyone can have a say into what big corporations have in store for the US population.
The full Transparency Chapter Healthcare Annex below:
https://www.scribd.com/doc/268327932/Wiki-Leaks-Annex

Deutsche Bank Head Of Asia-Pac Equities Kills Innocent Bystander

Deutsche Bank Head Of Asia-Pac Equities Loses Control Of His $580,000 Ferrari, Kills Innocent Bystander

Submitted by Tyler Durden on 06/10/2015 19:49 -0400

http://www.zerohedge.com/news/2015-06-10/deutsche-bank-head-asia-pac-equities-loses-control-his-580000-ferrari-kills-innocent

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As recently as several months ago, the financial press was surprised when a wave of Deutsche Bank employees, particularly those in the bank's legal department (such as here and here), decided to take their own lives. Now at least one Deutsche Banker, perhaps perturbed by the recent news involving the unexpected departure of his co-CEOs coupled with the even more unexpected raid of the bank's global headquarters, has decided to show the jump from sui- to homicide is a simple one.
Earlier today, Hong Kong police arrested a 48-year-old Deutsche Bank employee on "suspicion of dangerous driving and causing death." The fatal accident happened early on Tuesday at a car park near Deutsche's office at International Commerce Center, across the harbor from the city's financial district.
According to Reuters, the driver was Deutsche's head of Asia-Pacific equities trading, Robert James Ebert, 48, who was behind the wheel of a Ferrari at the time of the accident.
Below is his Linkedin profile:

Police said the arrested driver, whom it identified only as James, had said he lost control of his car. The police said a 53-year-old man, who was next to the barriers, died after suffering serious head and shoulder injuries. He was pronounced dead in the hospital early in the afternoon.
The Apple Daily newspaper also identified the driver as Ebert and said he was driving a black, HK$4.5 million ($580,502) Ferrari 458 Spider, which was in collision with a HK$2.4 million Maserati at the car park entrance before hitting a security guard.



The police said the driver was not charged.  "We are investigating whether the car was driving beyond the speed limit of 30km/h at the time," a police source said.
It is safe to say the answer is yes, as a simple check of the security cameras would confirm.
Ebert was released on bail in the early hours of Wednesday and has to report back in mid-July, the police said.
Ejiinsight adds that Ebert’s car went on to sweep across three barricades and hit the guard, who was pinned to a post at the carpark entrance.

Koo was rushed to the hospital but was pronounced dead by 2 p.m.

Ebert and the Maserati driver were unhurt. Police said both drivers passed a breathalyser test.

Skid marks stretching 10 meters were found at the entrance of the carpark.

Ebert told police his car had a brake failure. He was arrested on suspicion of dangerous driving causing death.

So guy drives a car which costs more than most Americans will make in a decade (pretax), crashes in what may have been an improvised drag race, kills an innocent bystander, and promptly posts bail and is allowed to roam, and drive, in freedom.
Meanwhile Nav Sarao rots in the UK's worst prison unable to pay his ridiculous $5 million bail, for the simple reason that he was a good trader and dared to expose the HFTs' rigging to regulators. He faces a maximum sentence of 380 years in jail.
It's ok though: when Stan Fischer and Mark Carney said bankers have to go to prison for "at least" 10 years when caught rigging markets they said nothing about bankers who engage in homicide. It appears the legal system will need a central bank explainer on how to proceed in that specific case.

Deutsche Bank Offices Raided By Authorities

Submitted by Tyler Durden on 06/09/2015 06:26 -0400
http://www.zerohedge.com/news/2015-06-09/deutsche-bank-offices-raided-authorities

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Just two days after Deutsche Bank co-CEOs Anshu Jain and Jürgen Fitschen announced their resignations, the bank's offices in Germany, France, and the UK have been searched by authorities.

• DEUTSCHE BANK HQ SEARCHED BY AUTHORITIES THIS MORNING: CNBC
• DEUTSCHE BANK SAYS SEARCH RELATED TO SECURITY DEALS BY CLIENTS
• DEUTSCHE BANK SITES IN FRANKFURT, LONDON, PARIS SEARCHED: BILD

Deutsche says the searches are related to "security deals by clients" and apparently do not involve allegations of wrogndoing by the employees.
From Reuters:

Deutsche Bank confirmed its offices in Frankfurt had been searched on Tuesday and said investigators were looking for evidence related to client transactions, with no Deutsche Bank employees accused of wrong-doing.

A spokesman for Germany's largest lender said the raid had been conducted on behalf of prosecutors in the German city of Wiesbaden, who were seeking evidence of securities transactions by the bank's clients.

Statement from the bank:

Today the offices of Deutsche Bank in Frankfurt are being searched by the Public Prosecutor's Office. The search relates to an investigation into securities transactions by clients. Employees of Deutsche Bank are not accused of any wrongdoing.

From Spiegel (via Google translate):

The specific allegations, the Attorney General's Office Frankfurt declined to comment first. Introduce "in an ongoing process procedural coercion" by a judiciary spokesman said on Tuesday in Frankfurt.

To subject and scope of the investigation, the authority could not say anything because "operational phase" nor walk. However, the spokesman said no one associated with the procedure for VAT fraud in the trading of pollution rights (CO2 allowances).

According to a German bank spokesman, the raid directed against shady business of individual customers. "I can confirm that there is on behalf of the prosecutor's office in Wiesbaden today searches offices of Deutsche Bank in Frankfurt," the spokesman said. "The search aims to ensure evidence in connection with investigations against customers with respect to certain securities transactions. There are no employees of the bank accused." More details - about the shops the customer - did not want to call the speaker.

*  *  *
Over the past several years, Deutsche Bank has paid out some $9 billion in connection with legacy litigation and may settle with the DoJ in the coming months over the bank's role in selling shoddy MBS in the pre-crisis years. Here's more on the bank's various legal troubles.
From DB annual report:

We are currently the subject of regulatory and criminal industry-wide investigations relating to interbank offered rates, as well as civil actions. Due to a number of uncertainties, including those related to the high profile of the matters and other banks’ settlement negotiations, the eventual outcome of these matters is unpredictable, and may materially and adversely affect our results of operations, financial condition and reputation. 

A number of regulatory and law enforcement agencies globally are currently investigating us in connection with misconduct relating to manipulation of foreign exchange rates. The extent of our financial exposure to these matters could be material, and our reputation may suffer material harm as a result. 

A number of regulatory authorities are currently investigating or seeking information from us in connection with transactions with Monte dei Paschi di Siena. The extent of our financial exposure to these matters could be material, and our reputation may be harmed. 

Regulatory and law enforcement agencies in the United States are investigating whether our historical processing of certain U.S. dollar payment orders for parties from countries subject to U.S. embargo laws complied with U.S. federal and state laws. 

We have been subject to contractual claims, litigation and governmental investigations in respect of our U.S. residential mortgage loan business that may materially and adversely affect our results of operations, financial condition or reputation.

Central banks can save the world ?

Breakingviews

Edward Hadas: Central banks can save the world

By Edward Hadas, REUTERS, June 10, 2015

americas | asia | central banks | Europe | monetary policy | policy

The author is a Reuters Breakingviews columnist. The opinions expressed are his own.

Central banks made a hash of things in the 2000s. But their failures – the credit bubble and the 2007 financial crash – have too many precedents.
There was the unexpectedly high inflation in the 1960s and 1970s. And two generations earlier, central bank activity and inactivity bore much of the responsibility for the boom of the 1920s, the great bust of the 1930s and quite possibly the United States’ fall back into recession in 1937.
Something has been fundamentally wrong with monetary policy. The central banks’ weakness is especially glaring when set against the ability of most parts of the economy to get over their serious problems. For example air and water pollution, widely considered existential threats, have been tamed thanks to the advance of technology, the widening of corporate agendas, and the dynamic efforts of governments and lobby groups.
Money and credit present a lesser challenge. It may sound easier to manage effluent than to restrain mass exuberance and forestall mass panic. But the monetary authorities have superpowers which environmental regulators could only dream of. Central banks can determine many interest rates, control lending, and create and destroy money at will.
They have not used these powers well. To do so, three intellectual revolutions are needed.
First, central bankers should recognise that price stability is at least as valuable for financial assets as for consumer goods. Raging stock markets encourage greed more than investment. They invite subsequent crashes and recessions. House price bubbles distort the behaviour of both buyers and builders. Sharp moves in commodities wreak havoc on producers and users alike. Unsteady interest rates can eventually lead to unsteady economic activity.
Central banks need not try to be omniscient and omnipotent central planners for asset markets. They do not have to decide the right price for copper or Google shares. But it is not that hard to tell when financial markets and emotions are getting out of hand. Besides, little is lost by acting firmly. Too-stable asset prices do much less harm than too-volatile ones.
It may take a few hard lessons for investors and speculators to learn about the new world order. But if central banks figure out how to squash big rallies and limit routs, the hot money will eventually retreat to horse races and other activities which can do little damage to the real economy.
But there is a problem, even if the successors of Janet Yellen at the U.S. Federal Reserve and Mario Draghi at the European Central Bank firmly believe they should push financial markets around. The current toolkit is nowhere near powerful enough. Policy interest rates are a blunt instrument –interest rates that are high enough to slow down financial markets will also crush economies. But the current techniques of financial regulation are not very ambitious.
The toolkit is the subject of the second revolution. Central bankers should take more control over money creation. The process is too important to be entrusted almost entirely to banks.
That is the current practice – bank loans create cash deposits. It often works reasonably well, but bankers in greedy mode create too much money, burdening the economy with leverage while fuelling speculation and inflation of asset or goods prices. In their fearful mode, bankers withdraw credit and deposits, starving the economy of useful funds.
Central banks need to get a grip, with the help of money-issuing governments. Most new money should be created directly by fiat, not by lending. Regulation of banks should be intensive, actively guided by economic principles. Loans should be limited to productive activities. Lending based on the value of land should be treated as radioactive. Lending which pushes up the value of land or any other financial asset should be taboo.
One financial asset deserves special attention – currencies. The current practice of allowing or encouraging the market to devalue the euro, yen or pound is counterproductive. Such falls provide only temporary economic relief, and currency volatility deters productive investments. It also creates international friction.
To change their ways, central bankers need a third revolution: they should become leaders in global thinking. Actually, this would be a counter-revolution. The maintenance of fixed exchange rates was for many decades a standard goal for monetary authorities. The goal was largely abandoned in the 1960s, for reasons which seemed good at the time. But sharply shifting currency values help spread financial instability around the world.
Discussions of monetary policy mishaps and financial industry malpractice are often fatalistic. It is said that excesses cannot be avoided since herd thinking, greed and fear are built into human nature.
Such pessimism is unnecessary. Consider the sharp decline in road accidents. These are mostly caused by the weaknesses of human nature: drunk driving, excessive confidence and poor judgement. But thanks to better rules and improved designs, deaths per miles driven in the United States have declined by 79 percent over the last 50 years.
An even greater decline in financial crises is perfectly possible. The first step is to change the accepted ideas of what central bankers can and should do.

It’s big time regulators understood banking and tax

It’s time regulators understood banking and tax: if they did we would have a better economy

June 3 2015

http://www.taxresearch.org.uk/Blog/2015/06/03/its-time-regulators-understood-banking/#comment-area

The FT ran a report on Monday that said:

Non-bank lenders have overtaken US banks to grab a record slice of government-backed mortgages, after regulatory curbs on risk-taking and billions of dollars in fines forced mainstream providers to retreat from the $9.8tn home loan market.

So-called shadow banks such as Quicken Loans, PHH and loanDepot.com accounted for 53 per cent of government-backed mortgages originated in April — almost double their share in April 2013.

They explained as follows:

Shadow banks perform banklike functions such as lending but are subject to lighter supervision because they are funded by professional investors rather than retail depositors protected by government insurance schemes.

This is deeply worrying. As a new Working Paper for the Bank of England, published in the last few days, has shown the idea that banks are intermediaries between savers and borrowers is just wrong, in which case the idea that some banks are funded by retail depositors and others by professional investors is also just wrong. As the Bank of England paper says (my emphasis added):

In the intermediation of loanable funds model of banking, banks accept deposits of pre-existing real resources from savers and then lend them to borrowers. In the real world, banks provide financing through money creation. That is they create deposits of new money through lending, and in doing so are mainly constrained by profitability and solvency considerations. This paper contrasts simple intermediation and financing models of banking. Compared to otherwise identical intermediation models, and following identical shocks, financing models predict changes in bank lending that are far larger, happen much faster, and have much greater effects on the real economy.

In other words, the whole model of bank intermediation on which the UDS regulatory model is based is wrong:  there is no such thing as intermediary banking.  In the real world all bank loans are created out of thin air and are dependent upon there being  confidence that the bank will be able to meet its obligation to others when call is made upon the  funds created in the course of this process.
Official recognition of this reality, which some of us have talked about for a long time, has been slow in coming, and was only officially recognised by the Bank of England in 2014.  It is high time that regulators caught up with it: regulation based on a completely false model of how banks work can never be effective.  But, the sting is also in the tail of the above comment  from the Bank of England working paper:  the reality is that a true understanding of our banking model shows just how vulnerable it is there any loss of confidence because there is nothing else that backs it.  If confidence disappears money can vaporise remarkably quickly, as we saw in 2008.
Positive Money suggest that the appropriate response to this is to remove bank’s capacity to create money, and to transfer it entirely to the Bank of England.  I am aware that this has quite a lot of positive support amongst left of centre think tanks, but I have my reservations, as does Ann Pettifor.  No  one who reads this blog can doubt that I believe the state has an enormous capacity to do good work on behalf of the people of the UK, but I also think that there are many occasions when this must be  undertaken through positive partnerships with business.  What I mean by a positive partnership is one in which each party recognises the importance of their role, and respect that of the other, and works together as a consequence to achieve a common goal.
In the case of money creation it is my belief that this requires the recognition that all money creation is, effectively, the responsibility of the state, which is the only authority with the eventual legal and practical capacity to define the legal tender of a jurisdiction.  However, it also requires recognition that decision-making on loan creation has to be devolved if it is to be effective to meet the needs of a modern economy.   This means that I do not think the total money supply can be rationed by a central committee  which is a proposal at the core of Positive Money’s suggestions.  The right to lend does, instead, have to be given to banks  but be subject considerably more direct regulation than at present where such  blunt, and ineffective, instruments as interest rates are used in a vague attempt to regulate the process with some of the disastrous outcomes that we have seen in the past.
I admit that it amazes me that the Bank of England’s recognition that bank intermediation does not exist has not, already, given rise to such suggestions which are the obvious consequence of that realisation. I can only presume that the reality of banking has yet to permeate the Treasury. It is high time that they did because until action on this issue is taken the risk that we face in the next financial crisis (which on balance of probabilities must happen within the next few years) will be greatly increased.

- See more at: http://www.taxresearch.org.uk/Blog/2015/06/03/its-time-regulators-understood-banking/#comment-area

It’s time regulators understood banking and tax: if they did we would have a better economy

Posted on June 3 2015

The FT ran a report on Monday that said:

Non-bank lenders have overtaken US banks to grab a record slice of government-backed mortgages, after regulatory curbs on risk-taking and billions of dollars in fines forced mainstream providers to retreat from the $9.8tn home loan market.

So-called shadow banks such as Quicken Loans, PHH and loanDepot.com accounted for 53 per cent of government-backed mortgages originated in April — almost double their share in April 2013.

They explained as follows:

Shadow banks perform banklike functions such as lending but are subject to lighter supervision because they are funded by professional investors rather than retail depositors protected by government insurance schemes.

This is deeply worrying. As a new Working Paper for the Bank of England, published in the last few days, has shown the idea that banks are intermediaries between savers and borrowers is just wrong, in which case the idea that some banks are funded by retail depositors and others by professional investors is also just wrong. As the Bank of England paper says (my emphasis added):

In the intermediation of loanable funds model of banking, banks accept deposits of pre-existing real resources from savers and then lend them to borrowers. In the real world, banks provide financing through money creation. That is they create deposits of new money through lending, and in doing so are mainly constrained by profitability and solvency considerations. This paper contrasts simple intermediation and financing models of banking. Compared to otherwise identical intermediation models, and following identical shocks, financing models predict changes in bank lending that are far larger, happen much faster, and have much greater effects on the real economy.

In other words, the whole model of bank intermediation on which the UDS regulatory model is based is wrong:  there is no such thing as intermediary banking.  In the real world all bank loans are created out of thin air and are dependent upon there being  confidence that the bank will be able to meet its obligation to others when call is made upon the  funds created in the course of this process.
Official recognition of this reality, which some of us have talked about for a long time, has been slow in coming, and was only officially recognised by the Bank of England in 2014.  It is high time that regulators caught up with it: regulation based on a completely false model of how banks work can never be effective.  But, the sting is also in the tail of the above comment  from the Bank of England working paper:  the reality is that a true understanding of our banking model shows just how vulnerable it is there any loss of confidence because there is nothing else that backs it.  If confidence disappears money can vaporise remarkably quickly, as we saw in 2008.
Positive Money suggest that the appropriate response to this is to remove bank’s capacity to create money, and to transfer it entirely to the Bank of England.  I am aware that this has quite a lot of positive support amongst left of centre think tanks, but I have my reservations, as does Ann Pettifor.  No  one who reads this blog can doubt that I believe the state has an enormous capacity to do good work on behalf of the people of the UK, but I also think that there are many occasions when this must be  undertaken through positive partnerships with business.  What I mean by a positive partnership is one in which each party recognises the importance of their role, and respect that of the other, and works together as a consequence to achieve a common goal.
In the case of money creation it is my belief that this requires the recognition that all money creation is, effectively, the responsibility of the state, which is the only authority with the eventual legal and practical capacity to define the legal tender of a jurisdiction.  However, it also requires recognition that decision-making on loan creation has to be devolved if it is to be effective to meet the needs of a modern economy.   This means that I do not think the total money supply can be rationed by a central committee  which is a proposal at the core of Positive Money’s suggestions.  The right to lend does, instead, have to be given to banks  but be subject considerably more direct regulation than at present where such  blunt, and ineffective, instruments as interest rates are used in a vague attempt to regulate the process with some of the disastrous outcomes that we have seen in the past.
I admit that it amazes me that the Bank of England’s recognition that bank intermediation does not exist has not, already, given rise to such suggestions which are the obvious consequence of that realisation. I can only presume that the reality of banking has yet to permeate the Treasury. It is high time that they did because until action on this issue is taken the risk that we face in the next financial crisis (which on balance of probabilities must happen within the next few years) will be greatly increased.

- See more at: http://www.taxresearch.org.uk/Blog/2015/06/03/its-time-regulators-understood-banking/#comment-area

Reserves Do NOT Allow Banks to Make More Loans

http://www.pragcap.com/reserves-do-not-allow-banks-to-make-more-loans


I must apologize in advance. This article will sound repetitive to regular readers. Sadly, because the message is not getting out I keep repeating the point….
If you wanted real-time evidence of my “vacuum problem” in economics (my theory that much of economics is tested in a vacuum and never properly translated to the real world), well, here it is. In a piece published today Martin Feldstein writes that all those Central Bank reserves that were added via QE should have created sky high inflation. He calls this “the inflation puzzle”.  But this isn’t a puzzle at all if you understand how banking works in the real world.  He writes:

When banks make loans, they create deposits for borrowers, who draw on these funds to make purchases. That generally transfers the deposits from the lending bank to another bank.

Banks are required by law to maintain reserves at the Fed in proportion to the checkable deposits on their books. So an increase in reserves allows commercial banks to create more of such deposits. That means they can make more loans, giving borrowers more funds to spend. The increased spending leads to higher employment, an increase in capacity utilization, and, eventually, upward pressure on wages and prices.

To increase commercial banks’ reserves, the Fed historically used open-market operations, buying Treasury bills from them. The banks exchanged an interest-paying Treasury bill for a reserve deposit at the Fed that historically did not earn any interest. That made sense only if the bank used the reserves to back up expanded lending and deposits.

A bank that that did not need the additional reserves could of course lend them to another bank that did, earning interest at the federal funds rate on that interbank loan. Essentially all of the increased reserves ended up being “used” to support increased commercial lending.

The emphasis is mine. Do you see the flaw there? As I described in my link on “The Basics of Banking” a bank does not lend out its reserves except to other banks. That is, when a bank wants to make new loans it does not calculate its reserves first and then lend those reserves to the non-bank public. It makes new loans and then finds reserves after the fact. If the banking system were short of reserves then the new loan would require the Central Bank to overdraft new reserves so the banks could meet the reserve requirement.
The key point here is the causation. The Central Bank has very little control over the quantity of loans that are made. As I’ve described before, new lending is primarily a demand side phenomenon.  But Feldstein is using a supply side money multiplier model where banks obtain reserves and then multiply them up. He has the causation precisely backwards! And if you get the causation right then it’s obvious that there isn’t much demand for loans. And there isn’t much demand for loans because consumer balance sheets have been unusually weak. It’s not a puzzle if you understand how the monetary system works at an operational level.
This is scary stuff if you ask me. We’re talking about a Harvard economist who was President Emeritus of the National Bureau of Economic Research and chaired President Ronald Reagan’s Council of Economic Advisers from 1982 to 1984. His theory of how the banking system works is not just wrong.  It is demonstrably wrong.  And it has led to all sorts of erroneous conclusions about how things might play out. Even more scary is the fact that he’s far from alone. Just look at the list of prominent economists who have said almost the exact same thing over the years:

“But as the economy recovers, banks should find more opportunities to lend out their reserves.”
   –  Ben Bernanke, Former Fed Chairman, 2009

“Commercial banks are required to hold reserves equal to a share of their checkable deposits. Since reserves in excess of the required amount did not earn any interest from the Fed before 2008, commercial banks had an incentive to lend to households and businesses until the resulting growth of deposits used up all of those excess reserves.”
   – Martin Feldstein, Harvard Economics Professor, 2013

– “[The Fed knows] that if there is an opportunity cost from these massive reserves they’ve injected into the system, we are going to have a hyperinflation.”
   – Nobel Prize Winner Eugene Fama on why the Fed is paying interest on Reserves, 2012

“the Fed is paying the banks interest not to lend out the money, but to hold it within the Fed in what are called excess reserves.”
   – Laurence Kotlikoff, Boston University Economics Professor, 2013

“Notice that “excess reserves” are historically very close to zero. This reflects the tendency (assumed in textbook discussions of “open market operations”) for commercial banks to quickly lend out any reserves they have, over and above their legally required minimum.”
   –  Robert Murphy, Mises Institute, 2011

“In normal times, banks don’t want excess reserves, which yield them no profit. So they quickly lend out any idle funds they receive. “
   –  Alan Blinder, Princeton University Economics Professor, 2009

“given sufficient time, [banks] will make enough new loans until they are once again reserve constrained. The expansion of money, given an increase in the monetary base, is inevitable, and will ultimately result in higher inflation and interest rates.”
   –  Art Laffer, Former Reagan Economic Advisor, 2009

“First of all, any individual bank does, in fact, have to lend out the money it receives in deposits. Bank loan officers can’t just issue checks out of thin air”
   –  Paul Krugman, Nobel Prize Winner & Princeton University Economics Professor, 2012

“Ohanian points out that the Fed has done a lot already, having increased bank reserves from $40 billion to $900 billion. But this liquidity injection was not what it seems — indeed, if it was, we’d now have hyperinflation. In reality, the Fed completely neutralized the injection by starting a new policy of paying interest on reserves, causing banks to simply hoard these “excess reserves,” instead of lending them out. The money never made it out into the economy, so it did not stimulate demand.”
  –  Scott Sumner, 2009

This isn’t some minor flaw in the model. It’s the equivalent of our foremost experts in automobiles thinking that, if we pour gasoline into cup holders, that this will allow our cars to move forward. If this doesn’t make you deeply question the state of economics then I don’t know what will….
Related:

• The Basics of Banking
• Banking is Primarily a Demand Side Issue

Banking

Free Lunch: Banking — even more dangerous than you thought

Martin Sandbu, Financial Times, June 8, 2015

http://www.ft.com/cms/s/3/0945e8d0-0b6f-11e5-994d-00144feabdc0.html#axzz3cT8cajsK

Why everything you were taught about banks is wrong and why it matters

Create, don’t intermediate

We’ve been told to think of the business of banks as accepting deposits from savers and lending them out to those who need funds to invest. From this simple understanding flow many implications about how monetary policy and banking regulation affect the rest of the economy. The problem is that the “folk” view of banking is wrong. Does it follow that policy thinking implicitly based on it is wrong, too?

The Bank of England has for some time been providing sterling public service in explaining how banking actually works – even though the public’s ear remains frustratingly uncocked. Two very accessible papers in the BoE quarterly review at the beginning of last year (an introduction and a more detailed paper) explained the magic by which banking works: rather than waiting for pre-existing savings to be deposited to then lend them out, things work in reverse. Banks create deposits and credit them to borrowers whenever they want to make a loan – that is how the loan is made – and they will do so when they find the profit of making the loan outweighing the risk. Private commentators have also done a good job of explaining this – see for example Cullen Roche’s blog post on the basics of banking. And for the simplest way in, the BoE has a video explainer, filmed against the backdrop of the Bank’s gold vaults.

The fact that banks create money “out of thin air” has three profound implications for how we think about credit and monetary policy and financial regulation.

The first is that it invalidates common views about the effect of central bank reserves – the banks’ own deposits that they are required to hold with their central bank in proportion to their deposits. Roche succinctly explains that when you know how banking works, you will know that inflation will not explode because of “quantitative easing” (QE) – central banks’ policy of creating reserves to buy securities in the market. That is because the quantity of central bank reserves does not typically constrain the amount of lending – and thus money creation – the banks engage in; instead the constraints are expected profitability and equity requirements. The flip side is that QE will not necessarily increase lending – though it will make non-bank financing cheaper. And as Frances Coppola explains in detail, the interest rate on reserves still influences interbank rates (the rates banks charge one another) and therefore, indirectly, lending rates to the public, even when the system is flush with reserves, as now. All the more reason to lower the rate on reserves below zero to break through the so-called zero lower bound on interest rates.

The second is that the right model of how banks work gives rise to a more correct – and much scarier – appreciation of how banking affects the macroeconomy. A new working paper from the BoE compares the “financing” model to the conventional, but incorrect, “intermediation” model. The comparison is sobering: “Following identical shocks to financial conditions . . . [financing] models predict changes in the size of bank balance sheets that are far larger, happen much faster, and have much greater effects on the real economy . . . [They] also predict pro-cyclical rather than countercyclical bank leverage, and a significant role for quantity rationing of credit rather than price rationing during downturns.” Banking is even more dangerous for your health than you may have thought.

This both makes proposals for nationalising money creation more attractive (such as Martin Wolf’s call for narrow banking or Laurence Kotlikoff’s limited-purpose banking proposal) and risky, as other advocates of banking system reform worry. For abolishing private banks’ money-creating prerogative leaves you with the choice between purely public creation of money – and loans, or no out-of-nothing creation at all.

The third is that “shadow banking system” is a bit of a misnomer. That’s the label commonly given to a swath of the financial sector outside of formal banks. The idea is that many non-bank institutions (such as money market funds) perform the same function as banks – and therefore should be regulated in a similar way lest destabilising behaviour simply migrates from the formal banking sector by the time the regulation has fully caught up with it. Creating rules for shadow banks is one of the main goals of the Financial Stability Board, the global forum for financial regulators.

This argument relies on an important thing banks and the relevant non-banks have in common: they engage in maturity transformation, which is a way to say they have liabilities their clients can demand at any time (such as deposits) but assets that will only be returned in the long term (such as 30-year mortgages). But there is a key difference, too, because unlike banks, “shadow banks” do, in fact, need to attract pre-existing savings before they can channel them into investments. So if the biggest systemic risk created by the banking system is that it creates and destroys money willy-nilly, there is no equivalent problem in the shadow banks, which in this regard are not banks at all. Regulators should beware of taking their eyes off the (banking) ball when they go off chasing shadows.

• Heard on the Street

Separating Bank Loan Signal From Deposits Noise

Even though loans trail deposits, banks are seeing solid loan growth

http://www.wsj.com/articles/separating-bank-loan-signal-from-deposits-noise-1433358384

ENLARGE

Banks have seen a surge of deposits resulting from the Federal Reserve’s bond-buying program. Photo: CHUCK MYERS/MCT/ZUMA PRESS

By

John Carney

June 3, 2015 3:06 p.m. ET

1 COMMENTS

A common measuring stick of bank lending may be misleading some investors to overlook solid growth.
In the first quarter of 2015, loans grew 5.9% from a year earlier. That is the fastest rate of growth in over six years and above the long-term average, according to a recent Barclays report. Surprisingly, that hasn’t silenced those ringing alarm bells about credit conditions being too tight.
One reason some may be overlooking healthy loan growth is that it hasn’t been a very visible contributor to bank earnings growth. Persistently low interest rates have squeezed margins on loans, meaning banks have to lend more just to keep interest income steady.

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Plus, many have noticed that deposits have grown much faster than loans in recent years, throwing the ratio of deposits to loans far off its historical balance. The Brookings Institution, for example, recently issued a report describing the decline of loans in relation to deposits at the largest U.S. banks a “troubling” sign.
“Banks may be reluctant to lend because of continued concerns about risk, or they may be restrained from lending by regulatory pressure,” the think tank wrote. “This trend may be a cause for concern among policy makers, consumers, and industry alike if it continues.”

ENLARGE

While it is likely the loan-to-deposit ratio will continue to look off-kilter, this might not be a reason for great worry. Excess deposits aren’t necessarily a sign big banks are reluctant to lend. Nowadays, the loan-to-deposit ratio is more noise and less signal.

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Before the financial crisis, bank loans and deposits tended to grow in step with each other. This is because loans create deposits, so when loans are growing, deposits grow as well.
What makes the current situation so different is that banks have seen a surge of deposits that weren’t created through bank loans. They came from the Federal Reserve’s bond-buying program.
Quantitative easing swapped Treasurys and mortgage-backed securities for bank deposits, driving up the overall level of deposits more rapidly than the pace of loan growth. This inevitably led to “excess deposits” in the banking system.
The notion those deposits should lead to a flood of loans is based on an outdated view of banks as intermediaries between savers and borrowers, institutions that gather deposits to be lent out. As a recent paper from the Bank of England put it: “In the real world, the key function of banks is the provision of financing, or the creation of new monetary purchasing power through loans...The bank therefore creates its own funding, deposits, in the act of lending, in a transaction that involves no intermediation whatsoever.”
The real determinant of lending is the difference between the return on loans and the opportunity cost of making a loan, which is based on a bank’s cost of capital and the price of reserves. The latter isn’t a function of the quantity of reserves, but the fed-funds target and the rate paid on excess reserves.
Once the distorting lens of the loan-to-deposit ratio is tossed aside, it is easier to see that lending has been relatively robust of late. And that holds out some promise of improving bank earnings as pressure comes off interest margins once the Fed begins to raise rates.
Write to John Carney at john.carney@wsj.com