Central Banks Stick to Controlled Disintegration of the Economy

Last week, the Federal Reserve and the European Central Bank raised interest rates by a quarter point, apparently unconcerned about what this means for an already contracting economy, and for the banking system itself, where the epidemic of bank failures in the U.S. is by no means under control.

The Fed raised rates by 5% in one year — something never done, except by Paul Volcker in 1980-81 under his proclaimed “controlled disintegration of the economy”. Each time central banks raise interest rates, it automatically depreciates banks’ assets and capital. So, what is the goal of the central banks?

What is emerging in America is the extermination of community and regional banks through being devoured by megabanks. In so doing, the financial authorities are applying the Credit Suisse model: CS, the second largest bank of Switzerland and a systemically relevant one, was bailed out in a takeover by the largest systemic bank, UBS. It was actually a government bailout, as UBS received guarantees amounting to over 200 billion Swiss francs. Now there is only one large bank left in Switzerland — UBS. And its blackmail power is larger than ever. Indeed, as Marc Chesney, a professor of finance at Zurich University, told Swissinfo on May 2: “We have an additional member in the government. He was not elected. He is more powerful than the others. He is the CEO of UBS.”

Similarly, the Federal Deposit Insurance Corporation (FDIC) engineered a takeover of First Republic Bank by JP Morgan, as we reported last week, backed by broad government guarantees. JPMorgan got about $200 billion in First Republic assets and only $92 billion in liabilities (deposits), according to Wolf Street’s account; and it got a $50 billion, 5-year loan from the FDIC to make good the deposits, including the $30 billion that it and other big banks had put into First Republic a month ago. Moreover, the FDIC promised to “share” any losses JPMorgan incurs on those assets. So, its stock only fell about 1.5% the following morning.

Since JPMorgan already had more than 10% of total U.S. banking system deposits, its takeover of another commercial bank was prohibited under the Dodd-Frank Act. But no problem – the FDIC simply declared an “exigent” exception.

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