Why We Are All Now

in the
New Age of Bail-Ins

According to the mostly ignored and hardly covered piece of news from a couple of weeks ago, it turns out that 11 of the 28 European Union countries have been scolded by the European Commission for failing to implement a new set of rules intended to prop up failed banks. Known as the Bank Recovery and Resolution Directive (BRRD), the stated purpose of the newly required rules is to purportedly protect taxpayers from having to cover the losses of any possible future bank failures, similar to the failures that occurred back in 2008. Taking the place of the more conventional taxpayer-funded "bail-outs," banks would see their losses recapitalized with the newly-minted practice of the "bail-in."

A bail-in, in case you aren't familiar with it, is the emerging alternative to the well-known bail-out. Back in 2008 when a slew of "too big to fail" (TBTF) banks crumbled due to $147 barrels of oil and the bursting of the housing bubble, the entire financial system was put at risk and was deemed to be in need of a rescue. What occurred was an influx of money from outside sources to cover the bank losses, one example being the $700 billion life-line from the US government (which essentially means from the US taxpayer). This is known as a bail-out.

This differs from what occurred with the Cypriot banking system back in 2013, of which has since come to be known as a bail-in. In short, due to Cyprus' insolvent banking system, all banks in the country were shut down under the "bank holiday" rubric, to go along with withdrawals being limited, if not completely cut off. Upon cessation of the bank holiday measures, it was announced by officials that all bank accounts in excess of €100,000 would have their balances reduced by 47.5% (also known as a "haircut"). As the practice now goes, confiscated bail-in funds are used to recapitalize failed banks, and the depositors who had their balances reduced essentially become owners of a bank that no one has much of an interest in owning.

Call it theft of one's deposits if you will, but since the mandate of financial entities such as the US Federal Reserve, the European Central Bank, the Bank of International Settlements (BIS, the central bank of central banks), and so forth, is to ensure financial stability of the system (read: protect the big banks), this can only be expected. But on top of that, it turns out that it's entirely legal.

For as odd as it may sound, when a person makes a deposit into a bank the money actually becomes the property of the bank, and the depositor becomes an unsecured creditor with a claim against said bank. Since back in the day depositors would routinely lose their money when banks went bankrupt, entities such as the United States' Federal Deposit Insurance Corporation (FDIC) were created to secure some of those deposits. The numbers differ from country to country, but any deposits within the protected limits of the FDICs of the world (such as €100,000 in Europe, $250,000 in the US) are deemed safe, supposing that the coverage exists in the first place. For to use the US as the example here, since the $4.5 trillion in US bank deposits are covered by about $46 billion in the FDIC piggy bank, the reserve ratio is a measly 1% or so. Take from that what you will.

Russian President Vladmir Putin getting shirtfronted by Australian Prime Minister Tony Abbott at the G20 in Brisbane, 2014
Russian President Vladmir Putin getting shirtfronted by Australian Prime Minister Tony Abbott at the G20 in Brisbane, 2014

Meanwhile, a new set of rules put forth by the Financial Stability Board (FSB), and similar to the BRRD, was rubber-stamped by G20 leaders meeting up in Brisbane in late-2014: the "Adequacy of Loss-Absorbing Capacity Global Systemically Important Banks in Resolution." According to author Ellen Brown and several others, what has been enacted with the plan of the FSB (which is basically an unelected consortium of finance ministers and central bankers from around the world, headquartered at the BIS in Switzerland) is essentially the institutionalization of the TBTF banks. If they fail, when they fail, the TBTF bank-losses will be once again covered, although this time with the funds of their creditors via the bail-in template already tried and tested in Cyprus.

Of course, one might say that bail-in rules are simply precautionary measures being taken in the purely hypothetical situation of another "slip-up." I mean, can we really expect another meltdown of the financial system?

Well, it turns out that pretty much nothing has changed since the Great Recession that began in 2008, and although promises were made that measures would be taken, the four largest TBTF banks in the US have actually increased in size by nearly 40%. On top of that, the total exposure to derivatives (basically a bet about what will or will not happen in the future) by the six largest TBTF banks stands at nearly $300 trillion – and exposed we are since depositor accounts are deemed as collateral for the derivative bets of the TBTF banks. If only one of those banks were to fail, never mind that that could set off a cascade that could spread to other banks, but even a single bank failure could exhaust the entire funds of the FDIC.

Meanwhile, as already described in a previous post of mine, the shale oil industry pretty much owes its existence to the creation of its very own fracking bubble. Since shale oil wells have a very steep rate of increase (Saudi America!), but also a similarly steep decline once they go over the edge (samurai America!), there's a good chance that when fracking plays begin their over-all decline, we might very well see a repeat of the 2008 financial crash.

However, for Ellen Brown to state that we can address this mess by "protecting our funds from Wall Street gambling" via "reining in the massive and risky derivatives casino" is to miss the even larger story here. For what Brown consistently misses, as far as I've noticed, is the role that energy plays in the financial system (as I've previously described it, money is a proxy for energy). Giving just one example, Brown described the recent crash in oil prices by stating that

the shocking $50 drop in the price of oil was not due merely to the forces of supply and demand... [but to] an act of geopolitical warfare administered by the Saudis.

But if only it were so nice and tidy. Fact is, the crash in prices was caused by demand destruction, of which several years of oil in the $100 range led to: too-expensive-to-bear-prices for a populace still trying to recover from the Great Recession led to a diminished demand for oil, precipitating the crash in prices. (To this you can add the flooding of world oil supply levels with the recently tapped into – and expensive to extract – US shale oil.)

Moreover, even if the Wall Street derivative casino could be reined in, there's still the fact that the Wall Street derivatives casino is based on the fractional-reserve banking system. And since this Ponzi scheme requires ever more energy to propel its expansion and hold back the system from imploding in on itself, the emerging conundrum of tightening energy supplies due to peak oil throws a spanner into all that.

What I'm trying to get at is, not only is the mainstream media's bail-in explanation of "providing a shield for taxpayers" rather misleading, but to see the new bail-in setup as simply some way for nefarious fat-cats to steal our money and/or to maintain the status quo is to completely miss out on the big picture here.

Bail-outs are funded by taxpayers (via the government), while bail-ins are funded by depositors. But to a large degree, taxpayers are depositors and depositors are taxpayers. In other words, whether you pay for it out of one hand (a bail-in) or out of the other (a bail-out), there really isn't that much of a difference. Of the differences that do exist, two of them predominantly stand out.

First off, bail-ins make the whole process of rescuing banks a whole lot smoother. Since the procedural work is already out of the way thanks to previously implemented statutes, politicians and their banker friends are negated from having to deal with uncooperative congresses or other branches of governments, and are similarly able to obviate the opinions of the electorate decrying "socialists!," "greedy one-percenters!," or whatever. Bail-ins are like a fast-track bail-out.

Secondly, since bail-outs sometimes entail funds coming from outside sources (such as Germany contributing to Greece's current bail-outs), and since less growth due to fewer fossil fuels means less plentitude to go around, richer countries are going to become less and less willing to sacrifice their dwindling excesses for the sake of others. In other words, bail-ins mean that rather than foreign taxpayers having to bail out the banks of others, domestic taxpayers will have to bail-in their own crumbling banks, if even that. This is how you triage early-bird victims of the collapse of industrial civilization, is why some think that Greece may be about to experience its own bail-in, and is why Greeks are reportedly now withdrawaling nearly €400 million from their bank accounts a day.

A bail-in in the good ol' days (photo: Melisa D.)

So to make a long story short, bail-in, bail-out, what's the big diff'?

A bail-in in the good ol' days (photo: Melisa D.)

For the record, although Ellen Brown does have many interesting things to say, I'm more of the Herman Daly camp and so believe we should nationalize the currency, not the banks.

Having said that, since there's not really much I can do about that besides write a few words about it all in a blog and dream about voting for a federal party that might actually have 100% reserves as one of its policies, perhaps the best thing the rest of us can do is work to set up local currencies in hopes of averting some of the upcoming problems from when the bail-ins come rolling our way.

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Comments (2)

Jun 2015
First Poster
Bail-ins are just another example of how all modern society is just a remake of the Slaves on the Master's Plantation way of life.
Jeepers, we don't even 'own' our own homes, we are actually not home owners at all but TENANTS of the local municipality all paying our monthly rent by way of property rates.
Let's face it..we are toast!
Allan Stromfeldt Christensen
Aug 2014
Top Poster
Davebee: Yeah..... for those paying attention, things don't really look too good. I can't say how all this is going to turn out, which is why I like to say that the least we can do is start up local currencies to try and cushion the fall. But of course, it's not as if mortgages are going to be payable with the local scrip, and I'm not even going to try and guess how that's going to work out. Nationalizing the currency, and so disallowing banks to create money out of thin air (and charge interest on top of that!), would at least give people a fair chance at paying back their debts. For as far as I see it, if we are "toast" as you say, one of the core problems, if not the core problem, is fractional-reserve banking.

As I said in reply to a comment from an earlier post, and as a friend said to me, "not much can be fixed until we fix the monetary system, but just fixing the monetary system isn't necessarily going to fix anything."

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