The safe-keepers turned rogue. Banks are not what you think they are
With modern banking laws and requirement, personal finances are much more centralized and are not serving the best internet of the masses for what they were designed to do
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All of this starts with human convenience and an urge for fast progress. Why couldn’t you just keep your hard-earned tangible assets to yourself rather than handing them over to people in suits and trusting them with your life? What did they give you? A piece of paper that stands for what? A promise that has been reprimanded multiple times in the past and has left nothing but wounded scars still bleeding. A place that is meant to custody funds securely and lends out justly has turned into a tool for mass manipulation and controlling every person’s financial reach. Can we even trust the banking system now? Is our money really our money now? Let’s dive deep.
The Money Printer
The US officially went off the gold standard on June 5, 1933, marking the end of money managed by discipline. Then, it has been an ebb and flow of monetary policies that dictate how the world will interact with each other. Now, obviously, money wasn’t backed by anything so it had to have its non-fungibility. That is where the Gioro company and its dominance come into question. An Italian company operating since World War II, highly distinguished in its ability to print special notes and sell these printing machines expanded its operations to America by partnering with the British company De La Ru in 1965 having its dominance in the region. All tricks and trades to ensure its hegemony over the money printer. Above all, these companies don’t accept the dollars or euros they print, they know it is worthless. They take 2% of the income generated for every note published. A great trade, right? The shift to digital money does decrease these profits but they made their mark in the olden times, and now the central banks are stepping in. All of this is possible because of the term “fractional reserve banking”.
Banks become the most trusted.
The first thing that comes to your mind when talking about money. Obviously, banks. Well, not if you are worried about keeping it. Then inflation becomes the priority. You can’t store your money below your mattress, nor in a safe buried underground. Those were the old methods. They were surely ineffective which is why a change was inevitable. But did we choose the right methods? Handing our hard-earned capital to banks where we, the owner, don’t have a dominant hold will eventually be catastrophic.
In the US, a National Bank Act was passed in 1863. Obviously, if you keep your funds in the ban, they must be redeemable for real assets like gold and silver. The initial claim was as such. A bank is also responsible for borrowing and lending so you keep funds in it to receive interest and the borrower has to pay that interest. Simple as that but the banks had to complicate that. In 1913, The Federal Reserve Act was passed which created a system whereby centralizing all the reserves of commercial banks.
Reserve requirements for banks under the Federal Reserve Act were set at 13%, 10%, and 7% (depending on the type of bank) in 1917. In the 1950s and '60s, the Fed had set the reserve ratio as high as 17.5% for certain banks, and it remained between 8% to 10% throughout much of the 1970s through the 2010s.
Source: Investopedia
Alas in 2020, the reserve requirements were set to 0% of the deposits allowing banks to lend freely. This is regarded as beneficial for the economy in such a way that capital is made available and growth does not halt. However, at the time of contagion, it does have serious consequences.
Adding fuel to a crackling fire
What happens when everyone rushes to get their money out of the bank? Well, we saw it happen quite clearly in 2008 when big banks were on the verge of collapse and central banks hopped in to inject capital to save the dying banks. People were given a false sense of hope by the FDIC but turns out it was also lacking enough capital. Long lines in front of banks, people in a constant state of worry, and delays in withdrawals are all seen wide open. All the money printing by the Central Bank led to rampant inflation and artificial support to keep things going. That inflation is what we all have to endure collectively now.
The spectacular display of hypocrisy when it comes to the protection of funds by institutions came in 2010 with the advent of the Dodd-Frank Act 2010. The most striking point made in this act is that derivative debt owned by the big banks is paid first. In simple terms, the bank takes on leverage, can’t pay it back, is on the verge of collapse, and now unsecured creditors, depositors, and bondholders who fall under the derivative claim can be used to pay the money back that the bank owes. Again these have a limit and are insured by the FDIC. That’s a relief, no?
The bank was bailed in by none other than the depositor
So, the concept of bail-ins i.e. where unsecured creditor funds are used to pay back loans incurred by the bank. It is officially legalized in the US through the Dodd-Frank Act in 2010, in the UK through the Financial Services Act in 2013, and in the EU through the Bank Recovery and Resolution Directive in 2016. So face, the government is broke, the banks are broke, and who pays for the damage, well the hard-working laborer and the people living from pay cheque to pay cheque, those are the easy target.
The bail-in procedure was tested on a major skill when the IMF and EU provided ten billion euros to the dying banks in Cyprus. The effects of 2008 financial crisis caused ripple effects around the globe and Cyprus was hit hard. With a debt-to-GDP ratio of 150%, something was about to break. The IMF stepped n and the taxpayers had to suffer an undeserved punishment.
The scope of bail-ins
Bail-ins are methods for governments and large banks to seize your funds in the best way possible making their unnecessary spending your problem as well. There is no actual safeguard of your funds when kept in a bank. There is a $250K threshold for funds in a bank to be considered for use in the case of a bail-in. The banks with a higher number of assets under management and are globally important are allowed to use the depositors’ funds. The derivative market is close to a quadrillion dollars when considering notional value. That is a heck of a number and cannot be ignored. Simultaneously, it poses a major risk to the thin thread by which all of our finances are tied together.
A grim future ahead
When you remove the cap from anything, it will surely go beyond its means. That is what describes today’s governments, their unnecessary sending, lack of proper policies, and a huge mess all of us have created as a result. What happens when a bail-in occurs? Well, you can get cents on a dollar back, how does that sound? And surely, the mega banks would keep it secret and tell the public last as they don’t want to cause a “contagion”. Also, the introduction of a CBDC will further strengthen censorship and control of the financial institutions on your funds.
To protect your assets in the best possible way, a simple ethos is to be kept in mind: “Not your keys, not your coins”. You don’t know what is happening behind the closed doors of large banks neither do you know what the suited guys are planning in their glass door offices. All you know is that your funds are there. Isn’t that a weak promise? And then there is bitcoin. A public, immutable, and decentralized ledger is available for anyone to check and verify. Bitcoin is code, it is math and does what gold couldn’t do, hand over power and private ownership to people in the best way possible.
The FTX contagion hasn’t received the punishment it rightfully deserves and the people using it are eventually the ones holding the bag. The elites don’t care. You have to care for yourself. Owning assets that are actually yours is what truly counts. They are not just dollars on a personal income sheet. That is the progress you are going to hand over to the next generation to build on. Preserve it with all your might.
Hope you enjoyed my perspective on bail-ins.
Till next time.
Azeem, signing off.