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Chiefshrink
12-14-2009, 10:36 AM
how the corrupt Fed Govt did not allow the Free Market to function in a healthy way to avoid this whole financial mess.

Too Big Not To Fail
NICOLE GELINAS

The catastrophe that struck America's financial system in 2008 was not inevitable. Rather than a failure of markets, it was a failure by government to understand its proper role in markets — and the product of an unwise (and unnecessary) abandonment of a sensible system of rules and boundaries that had served American finance well for six decades.
Beginning in the 1980s, and continuing over the quarter-century that followed, Washington afforded the world of big finance a terrible *luxury: freedom from the fear of failure. Managers and lenders at financial companies came to understand that the larger and more complex their firms got, the more immunity from market discipline they would enjoy — since they could depend on government guarantees when necessary to protect the broader economy from their mistakes. The government thus countenanced and subsidized an untenable financial system. And it inevitably got more of what it paid for: reckless risk building up to disaster.

The errors laid bare by the financial crisis clearly call for regulatory reform. But in designing that reform, we should avoid the temptation to seek heavy-handed new approaches — and should instead look to the long-term success of the system of rules whose decay brought about the crisis.

THE OLD RULES
It is easy to abuse analogies between the recent crisis and the Great Depression, but such analogies really are helpful in the arena of financial regulation. The searing experience of the late 1920s — and the Depression that followed — showed that the world of finance, if left completely unrestrained, can threaten the free market itself. In the 1920s, as in the past decade, bankers, corporate executives, and investors expected only more good times — and acted accordingly. They borrowed against every last dollar of expected future profit and then some, leaving themselves no cushion if those future profits slipped even slightly. To wring ever more money out of tomorrow's earnings for today, these titans designed financial instruments many magnitudes more complex than straightforward stocks and bonds. And they were left free by the government to do it.

Most significantly, banks and investment firms lent freely for the purpose of making bets on stock securities. The lending allowed the fevers of short-term speculation to affect credit creation — the long-term business of borrowing and lending. Borrowing and lending are vital to any healthy economy, because some companies will always need to borrow, at least modestly, in order to grow. Contaminating credit creation with excessive speculation, then, made the entire economy vulnerable to a financial *crisis. But bankers simply didn't understand the risks that they were taking, and no one forced them to confront those risks. "Young men thought they could do anything," Albert Gordon, an executive who had helped rescue the Wall Street firm Kidder Peabody from the depths of the Great Depression, later said.

When something finally went wrong, starting in 1929, it wasn't only the rarefied financial world that suffered. The bankers had used the public's savings — the hard-earned dollars of regular Americans — as fuel for their financial experiments. People stopped trusting their neighborhood banks, which fell victim to the crisis. And without customer deposits to lend out, surviving banks couldn't make new loans or recoup their losses on old ones. The infrastructure of money and credit disintegrated.

It took a decade for the economy to recover from the shock that American finance had dealt it. During the 1930s, President Franklin Roosevelt and his policy wonks certainly committed policy errors that contributed to the length and depth of the Depression. But they also designed regulations to protect financiers from themselves and, more important, to protect the economy from financiers' future mistakes.

Because failing banks had helped cripple the economy, policymakers developed a mechanism — the Federal Deposit Insurance Corporation, created by the Banking Act of 1933 — to allow bad banks to fail in an orderly fashion without imperiling the rest of the economy. And when banks did fail, FDIC guarantees of small banking deposits assured ordinary citizens that they wouldn't lose their savings. These regulations made it less likely that masses of people would again suck the economy's lifeblood — money and credit — out of the banks. Failed banks would still go out of business, but the economy would not suffer needlessly in the process. Market discipline would continue to operate on banks, but the core system of money and credit would retain the public confidence it needed to function, particularly in times of economic woe. The government would provide a buffer between banks and the public to protect against panic.

Financial experts quickly came to understand the importance of orderly bank failures. In 1934, the New York Times reported that the then-chairman of the board of the Federal Reserve Bank of Chicago, Eugene Stevens, told delegates of the American Bankers Association that the cleansing of the American banking structure of "the parasites of occasional incompetency and dishonesty" in the previous year and a half had put it in the strongest position of safety and good management. A year later, many former opponents of the FDIC had changed their minds and embraced banking insurance.

In the same Banking Act of 1933, Congress also forced financial institutions to decide whether they wanted to be in the securities business or the banking business, thereby separating the relatively sober world of long-term bank lending and borrowing from the often frenzied world of underwriting and trading stocks and bonds. This separation gave commercial banks some insulation (but not immunity) from the short-term shocks — whether exuberant optimism or abject pessimism — of future economic cycles.
Wisely, Washington did not entirely banish risk-taking from the financial world. The Roosevelt administration understood that financial sophistication had helped drive American economic growth after World War I, attracting the world's money to American shores. Instead, policymakers imposed clear, consistent limits on risk-taking in the securities business, which remained freer than the banking business. New regulations prohibited securities firms and their customers from borrowing excessively to purchase securities, whose values could swing wildly. These restraints on speculative borrowing reduced the risk that debt supported by securities wouldn't be repaid if the value of the securities plummeted, thereby reducing the risk of dangerous strain on the *financial system.

Meanwhile, through the Securities and Exchange Act of 1934, the government also imposed an obligation of full and fair disclosure on the securities industry. The new law required companies that wished to raise money by selling stocks or bonds to the public to explain — soberly, clearly, and regularly — the financial, business, and economic risks that the companies and their investors faced. The public could then make investments with open eyes.

Taken together, these measures sought to protect the economy from risk without eliminating it entirely, and so to allow for financial experimentation and growth while averting panic and financial collapse. Yet even in its chastened state, Wall Street often reacted violently to these new requirements and regulations. "The financial liabilities imposed upon practically every person connected with the creation and distribution of new issues are proving to be serious obstacles in the way of important and necessary financing by reputable concerns," declared the Chamber of Commerce in 1933, after the first major securities bill became law. It took years for the White House to convince the business and financial sectors that the new regulations were permanent and wouldn't be quietly lifted once the crisis was over.

Over time, however, the new laws and rules governing banking and markets succeeded. With the protections these regulations provided, bad banks could fail and bad ideas could die, allowing markets to discipline the financial world without unduly harming the economy. Armed with basic facts available to everyone, investors could take risks in pursuit of profit and would suffer losses if their expectations proved wrong. Automatic financial stabilizers — like limits on borrowing to buy stock — helped check irrational exuberance.

RISKY BUSINESS
Because these Depression-era regulations encouraged free markets rather than smothering them, they served the country well for more than half a century — helping to propel American capital markets to even greater dominance after World War II. The world's investors knew that their wealth was safest in America. But in the 1980s, this regulatory infrastructure began to decay — and financial companies gradually grew so large, complex, and globally interconnected that they broke through the old rules' capacity to impose economic discipline. Washington did not understand the implications of this change — which *insulated some *companies from important market forces — until it was too late. The financial *industry, buoyed by an implicit government *subsidy, became an even stronger force in Washington with its lobbyists, campaign *contributions, and even cultural influence. It became harder and more politically costly for policymakers and regulators to rein in the industry's power.

Through a series of discrete incidents that over the years added up to a dangerous pattern, regulators and elected officials signaled to the financial world that the biggest and most complex players would be immune from failure — and so could take all the risks they wanted. In 1984, the government stepped in to rescue a large commercial bank, Continental Illinois, which had reached the brink of insolvency through a combination of bad loans and funding liquidity risk. Confronted with the demise of one of the nation's largest banks, the FDIC extended protection not just to the bank's insured depositors but also to all its other lenders — including big corporate depositors whose accounts exceeded FDIC limits — as well as to global bondholders.

The event proved a watershed, setting a now-familiar precedent. It also introduced a new phrase into the lexicon: As regulators explained their decision, they argued that the bank was simply "too big to fail."
The break from normal practice that the bailout represented divided the Reagan administration. Donald Regan, the Treasury secretary, found the intervention troubling: "We believe it is bad public policy, would be seen to be unfair..., and represents an unauthorized and unlegislated expansion of federal guarantees in contravention of executive branch policy," he wrote in a memo to his colleagues. But the White House, by offering its quiet support despite Regan's objections, agreed implicitly with the regulators' compelling argument that the only other choice was to "risk worldwide financial havoc."
Big, complicated financial institutions, then, had begun to outgrow the government's ability to enforce the market's verdict by shutting them down, since too much was at stake for the economy if they went under. But the government did little to address this new problem, and in fact made it worse. Uninsured lenders to big banks no longer worried that they would lose their investments; the government would intervene if things spiraled out of control. As a result, financial innovations proceeded without the natural checks and balances of market forces. Banks became adept at turning their insulation from disorderly failure into insulation from market discipline.
Innovations in finance, mostly in the world of credit, began to blur the 1930s-drawn line between traditional banking and the securities industry. Financial firms learned how to turn long-term debt, such as corporate bonds and mortgages, into tradeable securities. In doing so, they made the vital business of credit creation more vulnerable to short-term fluctuations between optimism and pessimism.

The financial world also found ways to avoid the Depression-era regulations that restrained financiers from borrowing unreservedly to speculate on stocks, by creating financial instruments in the derivatives world that escaped the regulations. Often, such innovations also escaped Depression-era disclosure requirements. The public and the media, and even regulators, had a hard time identifying, understanding, and quantifying the changes.
In the late '80s and early '90s, financiers' experiments with making tradeable securities out of long-term debt — from junk bonds at investment bank Drexel Burnham Lambert, to mortgage-backed securities at the Askin Capital Management hedge fund — caused miniature financial explosions that Washington should have seen as warnings. Instead, they were regarded as aberrations. Similar eruptions in unregulated derivatives competed for attention just as vainly.

In 1998, a combination of the two — unbridled derivatives creation and speculation on long-term credit — led to near-disaster. An obscure hedge fund, Long-Term Capital Management, proved that even though it was not a large bank (or a bank at all, actually), it, too, was too complex to fail through the normal bankruptcy process. The fund's opaque endeavors, enabled by unregulated borrowing and involving nearly every major Wall Street institution, seemed likely to result in a calamitous chain reaction — and the Federal Reserve Bank of New York orchestrated a bailout funded by its member banks.

Three years later, the Enron scandal — in which the energy giant used complex financial deceptions to create the illusion of *profits — *demonstrated how easy it was to use modern innovations to create credit out of nothing but blind trust. The scandal also revealed how eagerly the nation's biggest financial firms had enabled such spurious credit *creation. Enron's collapse showed how quickly everything could fall apart once the trust vanished.
The government treated the failures that the increasingly fragile system served up from time to time as isolated matters, best addressed with one-off, extraordinary solutions ranging from weekend financial *rescues to criminal prosecutions. Mainstream thinkers said that financial markets didn't need much regulation. Alan Greenspan, who took the helm of the Federal Reserve in 1987, told lawmakers and the public that financial companies, powered by a rational motive not to lose money, could police themselves and one another. Their use of new financial *innovations, he argued, would decrease risk, not increase it.

The financial world operated ever more freely under a long-*running illusion that elegant modern theories and technologies made the creation of nearly all manner of credit — lending to corporations and consumers alike — perfectly safe. Yet with each new innovation, financiers left themselves even less room for error should the tiniest thing go wrong (just as they had in the '20s). They also left themselves increasingly reliant on that ultimate guarantee (and market distortion): *government rescue.
Thanks to this illusion of safety, financiers were able to manufacture vast amounts of debt, and they encouraged Americans to become more dependent on borrowing — whether on credit cards or against the value of their homes. In this way, ordinary Americans, too, became more vulnerable to any eventual sharp decline in the availability of credit. Bankers had accomplished the opposite of what they, and regulators, had thought they were doing: They hadn't created safety out of danger, but danger out of safety, eventually turning the most sober investment that many people make — the purchase of a home — into a risky bet.
The financiers made mortgage lending seem risk-free to many *investors. As a result, money became available to anyone who wanted to get a mortgage for any house, regardless of his ability to repay the debt. This, in turn, led to the ultimately calamitous housing bubble: When more money is available to buy something, the price of that item goes up. And once the risks emerged and the easy credit tightened, the plunge proved even more disorienting than the rise.

The ensuing financial catastrophe reminded us of something that we had forgotten. When financial markets are too free of rational *regulation — and worse, free, by virtue of an implicit government *guarantee, from the threat of failure — they will eventually destroy themselves, and damage everything around them.

Here is the link for the rest of this article explaining our current situation-great read.
http://nationalaffairs.com/publications/detail/too-big-not-to-fail
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Chiefshrink
12-14-2009, 02:08 PM
After listening to Obama's economic speech today and knowing what we know now as to how all this happened; I wonder who are the "REAL FATCATS" calling the shots and profiting at the expense of the American people who caused all this? And I think we know, the intrusion of the corrupt Federal Govt.:shake::shake:

KC native
12-14-2009, 02:32 PM
After listening to Obama's economic speech today and knowing what we know now as to how all this happened; I wonder who are the "REAL FATCATS" calling the shots and profiting at the expense of the American people who caused all this? And I think we know, the intrusion of the corrupt Federal Govt.:shake::shake:

:spock: And you just fuck up a good article that you posted. These companies ran themselves into the ground due to their own incompetence and greed. The government stood by and watched it all and didn't lift a finger.

Chiefshrink
12-14-2009, 10:27 PM
The government stood by and watched it all and didn't lift a finger.

Explain Freddie and Fannie then:rolleyes:

Apparently you need a refresher course in "comprehension" or you didn't read the whole article. :rolleyes:

Government lifted more than a finger, how about a "sledgehammer"!!!!

Cannibal
12-15-2009, 08:39 AM
I bet General Patton could have prevented this situation.

KC native
12-15-2009, 09:02 AM
Explain Freddie and Fannie then:rolleyes:

Apparently you need a refresher course in "comprehension" or you didn't read the whole article. :rolleyes:

Government lifted more than a finger, how about a "sledgehammer"!!!!

Fannie and Freddie are a very small part of the whole credit crisis. That being said the government could have stepped in and done something about both of them much earlier and they didn't.

Chiefshrink
12-20-2009, 11:28 AM
Fannie and Freddie are a very small part of the whole credit crisis. That being said the government could have stepped in and done something about both of them much earlier and they didn't.

Small part????????????????? You are uneducated on the issue.:rolleyes: Do your homework 'rookie'!!

Yes govt could have stepped in earlier 'for the people' and eliminated Freddie and Fannie but this entity was created to look on the surface like it is providing housing for poor people who couldn't afford it (how is that economic sense?) but in reality it is nothing more than a big slush fund for corrupt politicians who forced bankers "to be on the take"(not that they didn't mind-some of them I'm sure) but bottom line: Govt tyranny!!!

KC native
12-20-2009, 03:39 PM
Small part????????????????? You are uneducated on the issue.:rolleyes: Do your homework 'rookie'!!

Yes govt could have stepped in earlier 'for the people' and eliminated Freddie and Fannie but this entity was created to look on the surface like it is providing housing for poor people who couldn't afford it (how is that economic sense?) but in reality it is nothing more than a big slush fund for corrupt politicians who forced bankers "to be on the take"(not that they didn't mind-some of them I'm sure) but bottom line: Govt tyranny!!!

I've already shown that fannie and freddie were but drops in the bucket through this whole crisis.

You need to read up on this not me as you don't even have the function of fannie and freddie correct. Fannie and Freddie bought loans from banks, bundled them together, and then sold pieces of pool of loans. They were a securitizer whose balance sheets were allowed to get too big. By the time that they got into subprime loans, subprimes were already exploding. In the end to show how little you know, FANNIE AND FREDDIE DON'T MAKE FUCKING LOANS THEY ONLY BOUGHT THEM.

Stewie
12-21-2009, 03:58 PM
I've already shown that fannie and freddie were but drops in the bucket through this whole crisis.

You need to read up on this not me as you don't even have the function of fannie and freddie correct. Fannie and Freddie bought loans from banks, bundled them together, and then sold pieces of pool of loans. They were a securitizer whose balance sheets were allowed to get too big. By the time that they got into subprime loans, subprimes were already exploding. In the end to show how little you know, FANNIE AND FREDDIE DON'T MAKE FUCKING LOANS THEY ONLY BOUGHT THEM.

Fannie and Freddie were the catalysts and absolutely responsible for a large portion of this debacle. The Federal Gov't said, "We need more home ownership and Fannie and Freddie will purchase the debt." The banks were all over that and here we are.

I love these headlines:

China Secures Oil and Gas Resources: U.S. Fiddles with ‘Green’ Energy

...with their dollar holdings no less!



...the Chinese don't fuck around with crooks... She ran a Ponzi scheme much smaller than Madnuts.

Woman, 28, sentenced to death for defrauding investors
Xinhua, December 20, 2009




China creates 10.13 mln jobs in urban areas in 1st 11 months
Xinhua, December 19, 2009

KC native
12-21-2009, 04:20 PM
Fannie and Freddie were the catalysts and absolutely responsible for a large portion of this debacle. The Federal Gov't said, "We need more home ownership and Fannie and Freddie will purchase the debt." The banks were all over that and here we are.

I love these headlines:

China Secures Oil and Gas Resources: U.S. Fiddles with ‘Green’ Energy

...with their dollar holdings no less!



...the Chinese don't **** around with crooks... She ran a Ponzi scheme much smaller than Madnuts.

Woman, 28, sentenced to death for defrauding investors
Xinhua, December 20, 2009




China creates 10.13 mln jobs in urban areas in 1st 11 months
Xinhua, December 19, 2009

Yea they may have secured oil and gas resources but they are also making a push to become the leader in green technology. If the US keeps pussyfooting around China will wind up the world leader in that field and we will be an also ran that misses a lot of growth due to wanting to stay married to what we have now.

Beyond that, China is a house of cards. Their statistics are so screwed that it's ridiculous.
http://www.foreignpolicy.com/articles/2009/09/03/how_china_cooks_its_books?print=yes&hidecomments=yes&page=full

How China Cooks Its Books
It's an open secret that China has doctored its economic and financial statistics since the time of Mao. But could it all go south now?
BY JORDAN CALINOFF | SEPTEMBER 3, 2009

In February, local Chinese Labor Ministry officials came to "help" with massive layoffs at an electronics factory in Guangdong province, China. The owner of the factory felt nervous having government officials there, but kept his mouth shut. Who was he to complain that the officials were breaking the law by interfering with the firings, he added. They were the law! And they ordered him to offer his workers what seemed like a pretty good deal: Accept the layoff and receive the legal severance package, or "resign" and get an even larger upfront payment.
"I would estimate around 70 percent of workers took the resignation deal. This is happening all over Guangdong," the factory owner said. "I help the Department of Labor, and they'll help me later on down the line."

Such open-secret programs, writ large, help China manipulate its unemployment rate, because workers who "resign" don't count toward that number. The government estimates that roughly 20 million migrant factory workers have lost their jobs since the downturn started. But, with "resignations" included, the number is likely closer to 40 million or 50 million, according to estimates made by Yiping Huang, chief Asia economist for Citigroup. That is the same size as Germany's entire work force. China similarly distorts everything from its GDP to retail sales figures to production activity. This sort of number-padding isn't just unethical, it's also dangerous: The push to develop rosy economic data could actually lead China's economy over the cliff.

Western media outlets often portray Chinese book-cooking as part and parcel of a monolithic central government and omnipotent Beijing bureaucrats. But the problem is manifold, a product of centralized government as well as decentralized officials.

Pressure to distort or fudge statistics likely comes from up high -- and it's intense. "China announces its annual objective of GDP growth rate each year. In Chinese culture, the government has to reach the objective; otherwise, they will 'lose face,'" said Gary Liu, deputy director of the China Europe International Business School's Lujiazui International Financial Research Center. "For instance, the government announced that it wanted to ensure a GDP growth rate of 8 percent in 2009, and it has become the priority for government officials to meet that objective."

But local and provincial governmental officials are the ones who actually fiddle with the numbers. They retain considerable autonomy and power, and have a self-interested reason to manipulate economic statistics. When they reach or exceed the central government's economic goals, they get rewarded with better jobs or more money. "The higher [their] GDP [figures], the higher the chance will be for local officials to get promoted," explained Liu.

Such statistical creativity is nothing new in China. In 1958, Chairman Mao proclaimed that China would surpass Britain in steel production within 15 years. He mobilized villages throughout China to establish backyard steel furnaces, where in a futile attempt to reach outrageous production goals, villagers could melt down pots and pans and even burn their own furniture for furnace fuel. This effort produced worthless pig iron and diverted enough labor away from agriculture to be a main driver in the devastating famine of the Great Leap Forward.

Last October, Vice Premier Li Keqiang said in a speech after inspecting China's Statistics Bureau, "China's foundation for statistics is still very weak, and the quality of statistics is to be further improved" -- a brutally harsh assessment coming from a top state official.

Indeed, China has predicated its very claim of being the healthiest large economy in the world on faulty statistics. The government insists that even though China's all-important export sector has been devastated -- contracting about 25 percent in the past year -- a massive uptick in domestic consumption has kept factories producing and growth churning along. A close examination of retail sales and GDP growth, however, tells a different story. China's domestic retail sales have risen about 15 percent year on year, but that does not really translate into Chinese consumers purchasing 15 percent more televisions and T-shirts. The country tabulates sales when a factory ships units to a retailer, meaning China includes unused or warehoused inventory in its consumption data. There is ample evidence that state-owned enterprises buy goods from one another, simply shifting products back and forth, and that those transactions count as retail sales in national statistics.

China's retail statistics seem implausible for other reasons, too. They would imply an increase in salaries among Chinese people, allowing them to purchase that extra 15 percent. To be sure, the Statistics Bureau reported salaries had increased 12.9 percent in the first half of 2009. But Chinese netizens complained such numbers were hard to believe -- as did the bureau's chief.

A look at GDP growth also raises serious questions. China's economy grew at an annualized 6.1 percent rate in the first quarter, and 7.9 percent in the second. Yet electricity usage, a key indicator in industrial growth and a harder metric to manipulate, declined 2.2 percent in the first six months of the year. How could an economy largely dependent on manufacturing grow while its industrial sector shrank?

It couldn't; the numbers don't add up. China announced a $600 billion stimulus package (equal to about 14 percent of GDP) last fall. At that point, local governments started counting the dedicated stimulus funds in GDP statistics -- before finding projects to use the funds, and therefore far before the trillions of yuan started trickling into the economy. Local governments keen to raise their growth and production numbers said they spent stimulus money while still deciding on what to spend it, one economist explained. Thus, China's provincial GDP tabulations add up to far more than the countrywide estimate.

Alternative macroeconomic metrics, such as the purchasing managers' index (PMI), which measures output, offer a no more accurate reflection. One private brokerage house, CLSA, compiles its own PMI, suggesting a sharp contraction in industrial output between December 2008 and March 2009. Beijing's PMI data, on the other hand, indicated that industrial output was expanding during that period.

Unfortunately, such obfuscation means China's real economic health is difficult to assess. Most indicators that would help an intrepid economist correct the government numbers -- progress on infrastructure projects, end-user purchases, and the number of "resigned" workers -- are not public.

Still, it is possible to infer the severity of the gap between economic reality and China-on-paper by looking closely at monetary policy. China's state-owned banks dramatically increased lending in the first half of 2009 -- by 34.5 percent year on year, to more than $1 trillion. This move seems intended to keep growth artificially high until exports bounce back. Most analysts agree that it is leading to large bubbles in the stock, real estate, and commodity markets. And the Chinese government recently announced plans to raise capital requirements -- an apparent sign it sees the need to reign in the expansion.

For the long term, China is banking on its main export markets -- in the United States, Europe, and Japan -- recovering and starting to consume again. The hope is that in the meantime, rosy economic figures will placate the masses and stop unrest. But, if the rest of the world does not rebound, China risks the bursting of asset bubbles in property and stocks, declining domestic consumption, and rising unemployment.

That's when the Wile E. Coyote moment could happen. Once Chinese citizens no longer believe that the economy is doing well, social unrest and more widespread worker riots -- already increasing in scope and severity -- are likely. That's something that China will have a harder time hiding. And then we'll know whether China's statistical manipulation was a smart move or a disastrous mistake.

HonestChieffan
12-21-2009, 04:44 PM
Freddie and Fannie were top of the heap forcing banks to make bad loans. No one can dispute that.

Then after all this Obama wants banks to give more bad loans.

Banks need to tell him to go to hell

KC native
12-21-2009, 09:17 PM
Freddie and Fannie were top of the heap forcing banks to make bad loans. No one can dispute that.

Then after all this Obama wants banks to give more bad loans.

Banks need to tell him to go to hell

Fannie and Freddie didn't force banks to do shit. They aren't regulators. They have no power over the banks.

HonestChieffan
12-22-2009, 11:54 AM
Fannie and Freddie didn't force banks to do shit. They aren't regulators. They have no power over the banks.

Your lack of understanding on these issues has no bounds.