New Fed Alarm Over Shadow Banking

Fed's next power-grab coming, targeting private-sector lenders now free of Fed bail-outs...

 

IT COMES to something when every story you read in the papers makes you ask: What's the agenda? says Miguel Perez-Santalla at BullionVault.

 

But I can't help asking that question reading today's Wall Street Journal, and the article entitled " New Alarm on Shadow Loans".

 

Before I began reading it, I felt I knew what its intent would be: more control by the federal government, and less freedom for the private economy to serve consumers, householders and businesses as they would wish.

 

Once again, the Federal Reserve Bank – who has since its inception 100 years ago been a poor controller of banking practices and even poorer at policing banking entities – wants to expand its portfolio of lending institutions which it regulates and supports. These latest targets are those known as "Shadow Banking Businesses".

 

What that term actually reflects is businesses which lend money without any banking regulations. Of course, that doesn't mean they are unregulated. This "shadow banking sector" is regulated by all the normal business rules and regulations. We're talking about micro-lenders, pawnshops, auto lending, and any other form of lending that may not be directly controlled by the banking system.

 

Ask yourself why, in the last six months, you keep reading that the Federal Reserve Bank is concerned about shadow loans. Could it be the fact that all the quantitative easing – an $85 billion monthly injection of capital into the banking system – has not resurrected lending from the official banking sector? Could it be that they want to bring shadow banking under their umbrella so that they can claim that these loans are being made through the support of the fed banking system? Or is it just another power grab?

 

The WSJ article states there are one trillion dollars in this shadow lending sector. The New York Fed is quoted as saying "much of this money is being lent under loose conditions." It goes on to state that "the deterioration in loan underwriting has come hand-in-hand with an increased presence of retail investors in the leverage loan market."

 

I wonder: If these businesses are unregulated, how is it that the New York Fed has any idea about their lending practices? Moreover, why does it concern them at all anyway?

 

First I believe the Fed, the leader of the organized banking concerns, does not like competition. Secondly, they are losing business to the competition and so they want to bring it under their umbrella to stifle it. I can't see any other reason for their concern.

 

What if these "shadow lending" businesses did have problems with their loans? They would go bankrupt is the simple answer. They are not part of the banking system, they should not be bailed out, and there should not be any public money injected to help private lending institutions. So, it is not in the Fed's hands simply put.

 

So the Fed bringing these types of organizations under their umbrella would only undermine these already functioning lending institutions in the public domain. The Federal Deposit Insurance Corporation, or FDIC, which exists to support and regulate the banking institutions in essence increases the risk to both lender and depositor. Because it creates the ability to work with lower capital basis versus reserves, with the FDIC underwriting the risk of collapse.

 

Of course after the 2008 banking meltdown in the economy, we are all well aware of the deficiencies of our governing agencies in managing the licensed banking institutions which it already regulates. The question then remains, what would make their involvement in the shadow banking industry an important or positive influence?

 

One point made in favor is that individual investors, who represent roughly one third of the money behind leveraged loans issued in 2013, are at risk. No kidding! That is the risk they take when seeking high returns. This is why it is called an investment and not a deposit.

 

An investment is always a risk and the people and its government should not be responsible for risks taken by investors. Nor should the government step in every time it sees people taking risks, and spread that risk across all taxpayers instead by seeking to regulate – and so underwrite – the investment being done.

 

I sincerely fear that what I read in the Journal this morning intimates that the Federal Reserve Bank is gearing up to propose regulation of the shadow banking industry. This is an unwise and unjust cause. I for one would vote against if given any say, and I will write my representatives asking for them to vote against it whenever possible. Most likely if the ruling party agrees with the Federal Reserve it will find a way to give them this power.

 

In reverse, I would like to see all national US banking associations broken up by state. I would like to see more power given to state banking authorities. I would like to see a return to hands-on management of the banking industry something that cannot be done through a federally centralized organization.

 

This is also unlikely to happen. But in view of our constantly growing oligarchy – which we call the federal government – I consider it an omen that the problems we currently have and are trying to work through will only be exacerbated. Sadly as a citizen of the United States of America I lack confidence in the current structure that controls our money. For this reason alone I believe in holding gold as an asset that is outside of the banking industry and cannot be manipulated by machinations of governmental agencies.

 

With the current state of affairs, the government shutdown and the impending debt ceiling, I have little faith that the US government under its current leadership can get its affairs in order. Trying to extend its powers, and its responsibilities to utterly private risks taken freely, is just another example of how the state has lost its way.