The “Our Capital Levels Are Adequate” Dance

“Our capital levels are adequate.”  Perhaps it’s just me but It seems like every time the market sells off more than 10%, we end up hearing that phrase a lot.  Hmm, perhaps it has something to do with the huge amount of leverage still sitting on the balance sheets of the TBTF banks and their exposure to the global derivatives market?  We need banks in our society, but do we really need these banks?  Until the world finally realizes that the concentration of leverage that currently sits on the balance sheets of the world’s largest 15-20 banks is the source of our global instability and protecting these same banks is literally cutting off our nose to spite our face, we will continue to suffer huge bouts of “risk-on/risk-off” madness.

Systemic risk will continue to grow and government instability will only increase once the final shoe, rising rates, finally drops.  In 2008, the market was not concerned about Greece.  And then rates rose.  Now they are a walking default and a threat to the TBTFs.  Look at Italy and Spain as well.  Italy especially is Too-Big-To-Bailout but with low rates, they can scrape by.  Hike rates by a few hundred basis points, however, and the endgame starts to unfold.  The same fate awaits the US.  Eventually.  We can get in front of the problem, take our pain now by nationalizing and breaking up the big banks, or we can wait until the crisis spirals out of control and threatens something much worse.

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