The Federal Reserve, as expected, cut rates a quarter-point. The Fed also warned that further moves to ease interest rate policy may be coming to an end. The rate cut of 25 basis points to a range of 1.5% to 1.75% has been the third cut this year, which Fed Chairman Powell characterized as a “mid-cycle adjustment” in a maturing economic expansion. The Liquidity Crisis that has emerged in the REPO Market has been deeply concerning behind the curtain as many remained clueless as to why it was even unfolding. Many analysts claimed the Fed was hiding something and US shares of banks tumbled when they were traceable to Deutsche Bank exposure.

QUESTION: Might you clarify this response you gave on one of your very recent blogs. You said bail-in may NOT be permitted on US soil. Did you mean that despite the laws written in the USA to allow it, you don’t think it is likely to happen to USA citizens banking in the USA?

OR were you only meaning in regards to overseas banks with locations within the USA would most likely not use bail-in.

OR because of all the EU money fleeing to USD/USA that the banks stable in the USA (for now) and thus no bail-in needed?

Do you think there would EVER be the case for a USA bank bail-in? Or is this just more conspiracy talk? For obvious reasons, this is of great concern to all of us as this USD repo madness, liquidity crisis and DB’s derivative contagion begins to spread throughout Europe into the next ECM turn in mid-January 2020.

Thank you in advance for your efforts and response to this question.

L

ANSWER: The bail-in laws were passed during the last crisis which was a popular response at that time because no bankers were ever punished for what they did in New York City. To the extent that FDIC exists, they would certainly honor that or it would be political suicide. However, the fine print is FDIC cover per person. Putting money at 5 different banks would seem to get around their limitations, but I would not count on that.

The gray area comes in two aspects.

1. First, there are at any given time money from one bank which can be at another (REPO) which is also why there is a liquidity crisis
2. Second, there are business accounts which exceed $100,000

The problem with a bail-in is that the ramifications would be far worse than the Great Depression. You would destroy businesses that would then be unable to make payroll and the unemployment would be massive – far greater than the 25% high of the Great Depression.

The BAIL-IN policy of Europe is a different animal altogether. This has nothing to do with bailing-out bankers. This stems from the refusal to consolidate debts. If banks failed in Southern Europe, then a bailout would mean money from the north could go to the south. This is the structural design. It is WHY Europe adopted the bail-in, quite different from the question of bankers’ conduct. Germany’s demand to join the Euro was that there would be no consolidation of debts. As I have said, the EU is like a family reunion with the cousin who is the drunk than people smile at, but would never lend him a dime. You can pretend it one happy family, but that is just the surface.

A bail-in would actually be devastating economically. It defeats the very idea of banking for if the burden is shifted to depositors to monitor banks when we have agencies who are supposed to do that, then why do we need governments or pay taxes?

Despite the laws, they were never thought threw and it is a huge difference between a regional bank and Goldman Sachs. The hatred was directed at the New York Banks – and rightly so. Because the federal court in New York City has protected the bankers, they have actually undermined the entire country by their stupid actions.

QUESTION: Hi Martin,

Recently you wrote: “Recently, this has manifested in laws that have attacked foreign investment in real estate, which is not the “hot” money that blew up the world in 1997. ”

I live in Vancouver where real estate prices are completely divorced from local wages. If it is not hot overseas money that is driving our real estate market then what is? Your analysis is appreciated as always.

Nick

ANSWER: It is foreign money pouring into Vancouver seeking to park in a world that is in economic and political chaos. This has been accelerated by the decline in the C$, which has made the prices appear cheap in other currencies. When you look at our Canadian Real Estate Index in terms of different currencies, you can see that it has been attracting capital. The problem is rather clear. Foreign capital buys the trophies. Others may raise the price of houses because they see the high-end rising, but it is not foreign capital that is bidding for the average home in general. The problem comes when they put in punitive laws that become permanent because of a trend based entirely upon currency.

QUESTION: You commented that the central banks had a difficult position when they were on the gold standard compared to post-1971. Could you explain that difference?

Thank you for the education. Its better than any classroom.

EJ

ANSWER: The United States created the Federal Reserve in 1913. Prior to World War I, central banks were long-established in Europe like the Bank of England in 1694. What you have to understand is that BEFORE World War I, the central banks of Europe were faced with two duties because there was the gold standard.

1.) The first was to defend their currency’s parity with gold and thereby the entire edifice of the international gold standard. This required raising interest rates and keeping the total volume of money and credit under control, often with contractionary effects.

2.) The second responsibility was to act as a lender of last resort for their banking system by supplying emergency liquidity. This necessitated an expansion of credit and a lowering of interest rates.

Post-1971, the central banks were no longer required to intervene to maintain the exchange rate relative to the gold standard, which is more or less similar to Hong Kong managing the peg to the dollar today.

Paul Volcker raised interest rates insanely into 1981 to stop inflation, but he ignored the consequences that would have on the value of the dollar on world markets. This was the stone that hit the standing pool of water which then at the 1985 Plaza Accord suggested that Europe create a single currency. One mistake is never corrected and never acknowledged. They constantly create a new scheme to solve the last one they created.

COMMENT: You and Maggie could have solved BREXIT in a week!

HS

REPLY: She would have done precisely that. Of course, they staged a coup against her to take the UK into the euro. She was not against the EU as long as it remained a trade union. We had discussions on that subject. Maggie said at the Bruges Speech:

“We have not successfully rolled back the frontiers of the state in Britain, only to see them reimposed at a European level with a European superstate exercising a new dominance from Brussels.”

While some people are claiming she would NEVER have had a referendum, that is total nonsense. Her Poll Tax was to make people have a stake in government and then they would vote and pay attention. That was her true motive behind that step which nobody understood and it backfired on her.

She was against the euro and the federalization of Europe; she would MOST DEFINITELY move to exit the EU under these terms. She would NEVER have agreed to surrender the sovereignty of Britain.

The idea of the euro was born at the Plaza Accord in 1985. The purpose was to create a single currency to compete against the dollar. It was James Baker’s idea that if there was a single European currency, then the dollar would not be the main currency and it would not rise excessively. Nigel Lawson was a big supporter of joining the euro at that time. The entire Plaza Accord and then the Louvre Accord were all about managing the dollar value in FOREX markets.

Using her Bruges Speech and trying to twist things around that she would have been against a referendum and would be in the remain camp is TOTAL nonsense. We had deep discussions about the problems with the euro. The commission designing the euro came to our WEC in London. I met with them about the structural design of the euro. I think I knew where this went all wrong and I knew where Maggie stood. She also respected that I was one of the leading currency specialists on the subject with real experience and not just theories.