Contagion could spread to Europe and beyond, Paul Craig Roberts warns
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The policies of the US Federal Reserve are responsible for the unfolding banking crisis and could lead to more failures in the sector, Chairman of the Institute for Political Economy Paul Craig Roberts believes.
The official, who served in the US Treasury in the 1980s, talked to RT about the recent high-profile bank failures that have rattled the US financial system and the potential fallout of those events.
“For many years, the Federal Reserve kept the rates very low, so the interest on the financial assets that the banks have on their balance sheet is low. When the rates start rising, the values of their portfolios fall, but their liabilities don’t,” Roberts explained.
“The Fed’s policy of high interest rates pushes the banks into insolvency. And this is the cause of the problem,” he said, warning that “if the Fed continues raising interest rates, there will be more failures.”
The economist pointed out that the five large US banks – the three giant New York banks and the two giant California banks – have trillions of dollars of derivatives that they are currently holding. Yet, their capital base is only in billions. “So, they are exposed to risk in the trillions of dollars and they do not have the capital base to support that risk. So, if something happens again in these derivatives as it did earlier this century when we had the big crisis, those banks will be in jeopardy.”
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Roberts proceeded to warn that, if those banks get in trouble from their derivatives, it will spread into Europe. He noted that those banks were simply too large and there’s much interrelatedness.
“I doubt if Biden or anyone in his administration, or even the Federal Reserve, has any idea of the extent of risk. To put it very [clearly], the five large US banks hold derivatives, the value of which is twice the size of the GDP of the entire world. They hold $188 trillion in derivatives. So, what is the risk of this? No one knows.”