US banking crisis poses global threat, ex-Treasury official tells RT – RT Business News

The policies of the US Federal Reserve are responsible for the ongoing banking crisis and could lead to more failures in the sector, believes the president of the Institute of Political Economy, Paul Craig Roberts.

The official, who served in the US Treasury in the 1980s, spoke to RT about the recent high-profile bank failures that rocked the US financial system and the potential fallout from those events.

“For many years the Federal Reserve has kept rates very low, so interest on the financial assets that banks have on their balance sheets is low. When rates start to rise, the value of their portfolios goes down, but not their liabilities,” Robert explained.

“The Fed’s policy of high interest rates is pushing banks into insolvency. And this is the cause of the problem. he said, warning that “If the Fed keeps raising interest rates, there will be more failures.”

The economist pointed out that the big five US banks – the three giant banks in New York and the two giant banks in California – currently hold trillions of dollars in derivatives. Yet their capital base is only in the billions. “So they’re exposed to multi-trillion dollar risk and they don’t have the capital base to bear that risk. So if something happens again in these derivatives like it happened at the beginning of this century when we had the great crisis, these banks will be in danger.

Roberts then warned that if these banks got into trouble with their derivatives, it would spread to Europe. He noted that these banks were simply too big and there was a lot of interdependence.

“I doubt Biden or anyone in his administration, or even the Federal Reserve, has any idea of ​​the extent of the risk. To say it very [clearly], the Big Five US banks hold derivatives worth twice the GDP of the entire world. They hold $188 trillion in derivatives. So what is the risk of this? Nobody knows.”

According to Roberts, the troubles date back to 1999, when US authorities radically changed banking regulations. Before that, commercial banks could not get involved in investment banking, he explained, while investment banks took risks with their own money. However, when commercial banks were admitted, they began to gamble with depositors’ savings. This enabled huge risk-taking, which was previously not part of the system, the expert said.

He pointed out that the so-called Glass-Steagall Act had prevented panic buying and buying crises for 66 years until it was largely repealed in 1999. “When they removed that, they initiated a pattern of behavior that leads to seizures.”

The former White House official suggested that the current crisis in the US banking sector could have an impact on the rest of the world, noting that some European banks, such as Credit Suisse, are already in Danger.

“So we don’t really know the full extent of the problems in the banks… It’s like derivatives that exploded in 2007/2008, and we lost banks, we lost Wall Street companies “, Roberts, pointing out that this was the reason for very low interest rates for the next 12 years, which led to the current crisis.

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