(MENAFN- Asia Times) This is the second part of a three-part series
During the last financial crisis, Carmen Reinhart and Kenneth Rogoff, both now teaching at the Charles River campus of Plagiarism University, wrote an engagingly readable and well-received book, This Time is Different (2009), describing ways in which debt boom and default cycles have varied little since the Middle Ages.
The most amusing of these similarities is that those who profit most from each such cycle's bubble phase sustain it by assuring the gullible that this debt bubble, unlike all its predecessors, will not end badly – that this time is different.
Reinhart's and Rogoff's warning seems best appreciated as reverse-reprising Tolstoy's bon mot, in“Anna Karenina”, that although“all happy families are alike, every unhappy family is unhappy in its own way.”
Although all debt bubbles end unhappily, the happy thoughts used to assure each bubble's victims that it will not end unhappily must differ enough from the happy thoughts used to sustain recent previous bubbles to seem credible, at least to the gullible.
If a US financial crisis occurs in 2024, it will be novel in certain ways. Of these, the most widely anticipated is that it will occur electronically.
Fear that fast transactions via the Internet and“disinformation” via insufficiently censored electronic media might cause bank runs to spread rapidly have recently troubled elites both in the US and Europe .
Less widely discussed is the possibility that the alienation of customers by the growing electronic automation of financial institutions could aggravate a financial crisis.
During the past decade, bankers and brokers have increasingly hidden from depositors behind websites that often function poorly and phone answering services that often have long wait times and ill-trained staff. This has coincided with the closing of so many branch offices as to give rise to a new financial term,“banking desert ,” to describe any of the increasingly numerous and large areas with no physical banking services in which millions of disproportionately lower-income Americans now live.
As an executive of a US-based digital services firm recently observed in discussing the limits of bank automation, having human contact with staff gives a bank's depositors more confidence in the bank. What might move a depositor to trust bankers who hide from him behind new infotech, and whom he never meets in person? And how can a banking desert dweller tell a failing bank from a bank whose website is dysfunctional or whose phone service wait time is impossibly long?
It seems not to have occurred to America's ruling elites that the automation of banking might aggravate a banking crisis in these ways. Perhaps that's because folks who live in America's wealthier towns and neighborhoods not only still have branch banks, but increasingly have branch banks newly redesigned to include coffee bars and social lounges . Only from working-class stiffs do bankers hide behind websites and phone banks.
A more important novel aspect of any 2024 financial crisis is that it will occur after the widely touted but still little-tested replacement of taxpayer-funded bank bailouts by financial industry-funded bank“bail-ins” authorized by Title II of the Dodd-Frank Wall Street Reform and Consumer Protection Act , enacted on July 21, 2010, and implemented by Title 12, Part 380 , of the Code of Federal Regulations, promulgated on January 25, 2011.
Title II of the Dodd-Frank Act, titled“Orderly Liquidation Authority,” authorizes the Federal Deposit Insurance Corporation (FDIC) to conduct“ball-in” liquidations, funded by the financial sector, of failed or failing banks or bank-like financial firms, in the hope of obviating taxpayer-funded bailouts .
Title II authorizes the Secretary of the Treasury to put into FDIC receivership, pending liquidation, any bank or bank-like financial firm that is in default or deemed by the Secretary to be in danger of default, and the default of which may endanger general economic stability.
Title II authorizes the FDIC to use the equity, debt securities or uninsured deposits of the financial firm in receivership, salaries or bonuses recently paid to that firm's management or directors, or assessments levied on other financial firms, in order to honor that firm's obligations to its employees and the government, including to the FDIC as insurer of its small depositors.
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