It all starts with the Arab oil embargo of 1973-74.
The Arab members of OPEC proclaimed an oil embargo to punish the U.S. for aiding Israel. This action quadrupled the price of oil, roiling commodity markets, equities, bonds, and foreign exchange markets.
Energy prices soared. Speculation in oil exploration and production became feverish.
There was money everywhere.
Oil exporters in the Arab states were depositing their windfall "petrodollars" into big U.S. banks, who were in turn lending the money out as fast as they could.
By far, the largest recipients of the flood of money looking to be lent out were Latin American and South American countries. Thus, the new tens of billions of dollars banks had to lend were showered on sovereign states with glaring credit quality blemishes.
In the meantime, banks were lending hand over fist to the energy patch. Small banks were getting into the oil lending game, too - sometimes in spectacular ways.
By 1982, tiny Penn Square Bank, located in the Penn Square Mall in Oklahoma City, Okla., had made over $1 billion dollars of energy loans and resold them to money-center bank Continental Illinois National Bank and Trust Company of Chicago.
The loans went bad, quickly.
What You Absolutely Need to Know About Money (Part 7)
By the start of the 1960s, banking in America was in a state of flux.
Boundaries were being blurred - especially those separating "commercial banks" and "investment banks" under Depression-era Glass-Steagall parameters. The banking landscape was shifting. In fact, it was about to go volcanic.
The Truman Administration had championed the break-up of bank cartel arrangements, whereby a powerful coterie of commercial-bank bond underwriters controlled how corporations financed debt and who got to distribute bond offerings. Subsequent regulatory changes (requiring bidding for underwriting assignments) broke up the "Gentleman Bankers Code," which had been code for cartel.
A more competitive landscape drove banks to expand. Branch banking spread through shopping malls and onto prime locations on America's Main Streets.
The hunt for deposits was on.
And it got ugly fast...
The New Crisis Warning Just Issued to the Federal Reserve
Before the housing market crash, economists warned that record low-interest and mortgage rates were fueling a housing bubble.
Unfortunately, those fears were both overlooked and underestimated.
Now, an advisory council to the U.S. Federal Reserve is warning the Fed that its record $85 billon-a-month stimulus and ultra-low interest rates are fueling new bubbles in student loans and farmland.
"Recent growth in student-loan debt, to nearly $1 trillion, now exceeds credit-card outstandings and has parallels to the housing crisis," according to minutes of the council's Feb. 8 meeting.
In addition, "agricultural land prices are veering further from what makes sense," the council said. "Members believe the run-up in agriculture land prices is a bubble resulting from persistently low interest rates."
These warnings come from the Federal Advisory Council, a panel of 12 bankers chosen by the 12 Federal Reserve banks, which consults with and advises the Fed. Members of the council include the CEOs of Morgan Stanley (NYSE: MS), State Street Corp. (NYSE: SST), BB&T Corp. (NYSE: BBT), Bank of Montreal (NYSE: BMO), Capital One Financial Corp. (NYSE: COF) , U.S. Bancorp (NYSE: USB) and the former CEO of PNC Financial Services (NYSE: PNC).
What's more, the council warned the Fed in September that QE3 and its plan to buy bonds indefinitely would distort bond prices and have a limited impact on the economy and that "uncertain effects" will arise from the eventual unwinding of the balance sheet, including "risks to price and financial stability."
So while Uncle Ben likes to remind us that the Fed will step in and take appropriate fiscal measures when necessary, the central bank's own council believes the Fed's actions are doing more harm than good.
What You Absolutely Need to Know About Money (Part 6)
Our last chapter was about how the U.S. Federal Reserve was created and why. But it ended with an extreme example of how the universal central banking model works today.
As another domino threatened the house of cards holding up European banks, more money had to be pumped into Cypriot banks so their doors didn't close and rapid contagion wouldn't implode all of Europe, and then the world.
Only this time was different.
The European Central Bank (ECB) reached straight into Cypriot bank depositors' pockets and stole about $6 billion from them. The "how" isn't important. It's a simple equation, as revealed in Part V. Governments are the backstoppers of central banks; that's where their authority ultimately comes from.
Why did the ECB steal depositors' money? So they could turn around and lend that and more to the insolvent banks to keep them alive. It's the latest twist in the old "extend and pretend" game.
The big question is, how did banks get so big and so dangerous in the first place?
Or, how did stodgy traditional banking morph into "casino banking" on a global scale?
Here's how it started...
5 Things the Federal Reserve Hopes You'll Never Find Out
Most Americans assume the U.S. Federal Reserve is a powerful government institution that seeks only to safeguard the dollar, boost the economy and drive employment higher.
That's what the Fed wants you to think.
The illusion of the Fed as a stabilizing, positive government entity has more or less existed since its creation under dubious circumstances in 1913.
"It not only avoided the word bank, it cleverly implied federal, or government, control over the establishment of a pool of reserves that would backstop the new banking 'system,'" said Money Morning Capital Wave Strategist Shah Gilani.
FOMC Meeting Message: Don't Blame Us for Sluggish Economy
The Federal Open Market Committee (FOMC) meeting concluded today (Wednesday) with one clear message to Washington: Thanks for the lousy economy.
Central bank members cited only "moderate" expansion in economic activity and a slow improvement in the stubbornly high unemployment level.
Acknowledging the economy is moving at an unhurried pace, the FOMC members pointed an accusing finger at Capitol Hill.
"Fiscal policy is restraining economic growth," the statement read. That remark was in direct reference to a deadlocked Congress, sequestration and its far-reaching impact.
A spate of fresh economic reports back that sentiment:
David Stockman: Thanks to the Fed, We're in "Monetary Fantasyland"
David Stockman, who served as budget director under President Ronald Reagan, is taking aim at a favorite target: the U.S. Federal Reserve.
Stockman minced no words in a Monday interview on FOX Business' "Varney & Co."
Speaking of the Fed, he told host Stuart Varney, "They have violated every rule of sound money that's ever existed. They've got the money market rates at zero. They have managed and rigged the entire yield curve so nothing is real out there. It's all trading against the Fed."
He said speculators will continue to invest as long as the Fed can hold the bond price up and the yield down "and keep shoveling out free overnight money."
"We're in a monetary fantasyland," Stockman said.
Why Crime Pays for "Too-Big-To-Fail" Banks
There's a reason why the first few installments of my What Everyone Absolutely Needs to Know About Money series have been about banks.
You need to know the truth about banks.
Why? Because they rob you.
Why? Because they can.
It's the Willie Sutton bank robber quote in reverse. Willie was asked, "Why do you rob banks?"
He famously answered, while in handcuffs, "Because that's where the money is."
But, banks can't keep robbing the public if they keep shooting themselves in their feet. That's where central banks come in.
Why We Can't Avoid Ben Bernanke's "Monetary Cliff"
When it comes to the Federal Reserve, an accurate "reading of the tea leaves" means paying attention to all of the fine print.
And while the markets cheered last week's FOMC meeting with yet another rally, a deeper look at Ben Bernanke's press conference left me with a slightly different take.
Sifting through the Fedspeak, it became obvious that the Fed is now lining up a "monetary cliff" that's bigger than the fiscal one we spent the last half of 2012 worrying about.
Let me explain...
Here's Where the Fine Print Gets InterestingAccording to the release from last week's meeting, the Fed will continue to purchase $85 billion of Treasury and agency bonds every month. Doing so, Bernanke explained that at some point he does expect to reduce that amount. However, he also explained that the recent string of good unemployment data (five months above 200,000 new jobs) wasn't enough yet for him to make the change.
The Fed also stated that it expects a "considerable period" to elapse between the conclusion of the purchase program and raising rates.
Interestingly, that matched with the intentions of the 19 Federal Open Market Committee members. Only a few expect to raise rates before the end of 2014, compatible with the current Fed outlook.
But here's where the fine print gets really interesting: All but one of the members now expects to raise rates in 2015.
What's more, they said once they start, they won't be shy. In fact, the average opinion would put rates at 1.35% by the end of 2015. It may not seem like much at first glance but that's actually quite a big move from six-plus years at zero. And further on into the future, the consensus long-term goal was for rates to hit 4%.
Of course, with inflation around 2%, my goal for the Fed funds rate would be higher than 4% and a lot higher than 1.35% by the end of 2015. But alas, I'm not the Fed chief.
The point is that with the Fed expecting the economy to grow steadily between now and then, and no immediate sign of even a slackening in bond purchases, the turn by the Fed supertanker in late 2014 and 2015 is going to be pretty abrupt.
In fact, chances are it will cause a big wake, and drown quite a few people who have become used to current policies.
What You Absolutely Need to Know About Money (Part 5)
Chapter Four ended as a cartel of powerful bankers gathered on Jekyll Island to develop a plan for creating a central banking system which would work for their interests.
John Pierpont Morgan was no stranger to how central banks worked. He had witnessed their power firsthand.
Junius S. Morgan, Pierpont's father, became a partner at George Peabody and Company in 1854 and moved to London - where the American-born Peabody had been bankrolled by Baron Nathan Mayer Rothschild. At the time, the rich and powerful Rothschilds exerted extraordinary control over the Bank of England.
George Peabody and Company rode the mania for railroad shares, whose prices in 1857 were benefiting from the Crimean War's impact on rising grain prices, which Western railroads transported in huge quantities.
But the good times didn't last.