Zero Hedge
June 1, 2010

The bankers’ bank, the BIS.

Over the past two years, the one strategy that has elicited the greatest amount of anger in the general population has been the traditional resolution to the “lowest common denominator” strategy of fearmongering or racketeering by the financial elite, any time it was faced with a status quo extinction event. The primary example is the Fed and Clearinghouse Association’s threat that should the Fed be forced to disclose the details of its bailout of various banks (as two courts have already ordered it to do), the result would be the greatest run on US banks in history: “If the names of our member banks who borrow emergency funds are publicly disclosed, the likelihood that a borrowing bank’s customers, counterparties and other market participants will draw a negative inference is great.” This is nothing but the patronizing of the broader population by those who seek to preserve their millions in bonuses, while disguising their hypocrisy in bluster, and hoping that the topic will be promptly forgotten. Curiously one entity that has decided to take on this “fire and brimstone” head on and to warn the general population to ignore the bankers “doomsday scenarios” is the bankers’ bank, the BIS. As the FT reports, according to a soon to be released report by the bank’s Chief Economic Advisors Stephen Cecchetti, “Banks are exaggerating the economic effects of the regulations they are likely to face in the coming years.” While his focus is on the implications of the passage of the Basel III treaty, and to preempt counter lobbying by the bank themselves, his argument can be extended to ever instance in which banks present scenarios of collapse should they not get their way: as Cecchetti points out: “the banks’ “doomsday scenarios” were based on their assuming “the maximum impact of the maximum change with the minimum behavioural change.” This is a huge point, as it means that even the failure of the TBTF banks could have been mitigated in the context of a controlled (and even uncontrolled) bankruptcy, and the only reason they were bailed out was to preserve the equity interests and the existing management team, period. This also means that the Fed and Treasury are nothing but vehicles for perpetuating Wall Street’s status quo, as we have claimed from the very beginning.

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More from the FT:

Mr Cecchetti, who has been given a mandate to assess the economic effects of the “Basel III” reforms by the Basel Committee on Banking Reform and the Financial Stability Board, is adamant the transitional costs of requiring banks to hold more capital and be more robust to sudden demands for funds “aren’t huge”.

The estimates are still a work in progress, but he said that his sense was that “the net impact of the Basel committee reforms on growth will be negligible” and well within normal forecast errors. Average errors of economic forecasts for the level of global output on the relevant time horizon are lower than 0.5 per cent and far lower than industry estimates that the regulations could wipe 5 per cent from the world economy.

In the longer term, Mr Cecchetti said the result of a safer banking system would provide economic benefits rather than costs. “Our preliminary assessment is that improvements to the resilience of the financial system will not permanently affect growth – except for possibly making it higher.”

Cecchetti continues:

He gave three examples of banks over-estimating the likely effects of the new regulations, which are due to be agreed by the end of the year, with gradual implementation expected to start in 2012.

First, he said banks were claiming that new liquidity rules would force them to swap large quantities of high-yielding loans for low-yielding government bonds, which would have an impact on their profitability and lending. Instead, he said, they could comply with the rules by lengthening the maturity of their liabilities so they better matched those of their assets at much lower cost.

Second, he said, they assumed investors would demand the same returns on new tranches of equity capital when this equity would make banks more resilient, lowering risk to equity holders and the cost to banks.

And third, he said, the warnings of high costs relied on banks’ estimates that the new rules would reduce credit growth and economic growth severely. “We must always keep in mind that one of the causes of the crisis was that credit growth was too fast,” he said.

If even the expert bankers of the Central Banks’ Central Bank are saying enough to banking fearmongering, it is time our own politicians followed suit. But here is where the core problem arises: politicians are nothing but bought and paid for puppets of the financial system. And by consistently siding with the Fed and Wall Street in their baseless threat, the public’s anger should be just as focused on Congress and Senate as it is on Wall Street. And while a purge of Wall Street can not occur within the confines of our legal system, as noted keenly by “The International”, politicians can at least be voted out. Which is why we are confident there will be an incumbent bloodbath come November, as D.C. is nothing more than a lighting rid for all the pent up anger from years of patronizing (not to mention robbery) by the financial “elite” which always knows what is best for the US middle class, especially if that something involves getting even deeper in debt-facilitated slavery.

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