In June, in a move that rated only a brief in the local newspaper, one California county found a way to express this frustration:

At the urging of Supervisor Ryan Coonerty, the Santa Cruz County Board of Supervisors voted Tuesday not to invest for five years with the five banks that recently agreed to plead guilty to felony charges.

 

The Department of Justice announced in May that four major banks — Citigroup, JP Morgan Chase, Barclays and the Royal Bank of Scotland — have agreed to plead guilty to felony charges of conspiring to manipulate the price of U.S. dollars and euros exchanged in the foreign currency exchange spot market. In addition, a fifth bank, UBS, has agreed to plead guilty to manipulating the London Interbank Offered Rate and other bench mark interest rates.

 

While the action of Santa Cruz County alone may not have a major impact on Wall Street, Coonerty will be contacting other local jurisdictions across the country to urge them to consider taking similar action in order to send a message to Wall Street.

That’s the entire item in the Santa Cruz Sentinel. Scroll down; it isn’t the lead item in that day’s news briefs.

Former secretary of labor offers praise

But if this gesture wasn’t seen as very important in Santa Cruz, former Clinton administration Labor Secretary Robert Reich, a UC Berkeley public policy professor, disagreed later in June on his personal blog. Here’s part of the lengthy post:

A strong case can be made that employers shouldn’t pay attention to criminal convictions of real people who need a fresh start, especially a job.

 

But giant banks that have committed felonies are something different. Why shouldn’t depositors and investors consider their past convictions?

 

Which brings us to Santa Cruz County.

 

The county’s board of supervisors just voted not to do business for five years with any of the five banks felons.

 

The county won’t use the banks’ investment services or buy their commercial paper, and will pull its money out of the banks to the extent it can.

 

“We have a sacred obligation to protect the public’s tax dollars and these banks can’t be trusted. Santa Cruz County should not be involved with those who rigged the world’s biggest financial markets,” says supervisor Ryan Coonerty.

 

The banks will hardly notice. Santa Cruz County’s portfolio is valued at about $650 million.

 

But what if every county, city, and state in America followed Santa Cruz County’s example, and held the big banks accountable for their felonies?

 

What if all of us taxpayers said, in effect, we’re not going to hire these convicted felons to handle our public finances? We don’t trust them.

 

That would hit these banks directly. They’d lose our business. Which might even cause them to clean up their acts.

Coonerty hopes that other government bodies follow suit. The reprinting of Reich’s commentary on some prominent left-wing sites gives him  hope. He’s also now getting more favorable coverage of his plan from his hometown paper.

Whether or not it becomes a national cause, in California, it could possibly become a ballot initiative to help get out the liberal vote in the 2016 election. As this Southern California Public Radio story notes, ballot measures on “hot-button” issues are just another tool in the voter-turnout playbook in the Golden State for liberals and conservatives alike.

By Chriss Street

If there was an Academy of Motion Picture Arts and Sciences award for the best acting performance by a CEO, Jamie Dimon of J.P. Morgan Bank would surely win the Oscar for his dismissal of a $2 billion off-shore derivative loss as “a complete tempest in a teapot.”  Dimon tried to use all his theatrical skills to distract the American public from discovering that the U.S. Federal Reserve’s policy of loaning money to banks at zero-interest-rates has made derivative trading wildly profitable, but made lending to American businesses less profitable.

As fallout from the J.P. Morgan fiasco exposes the bloated derivative activities of major banks, the Federal Reserve will be forced to terminate the zero interest rate policy and let rates rise to retard bank speculative actions.  Higher interest rates will stimulate banks to make more commercial and industrial loans, resulting in higher U.S. economic growth.

Achilles Macris, J.P. Morgan’s CIO in their London office, began using the bank’s access to cheap capital from the Fed to amass a huge over-the-counter derivative gamble that high yield and sovereign debt interest rates would fall, after MF Global suffered a $1.2 billion loss on similar bets and was forced to file for bankruptcy last October 30.

Morgan’s gamble became very profitable after December 21 when the European Central Bank began making $640 billion off three year loans at 1 percent interest, referred to as “Long Term Refinancing Operations” — LTROs — available to the banks of Portugal, Ireland, Italy Greece and Spain — the PIIG countries.  By the end of December, J.P. Morgan’s total derivative exposure was $70.2 trillion on just $1.8 trillion of bank assets, according to the U. S. Controller of the Currency.  Morgan is reported to have continued heavy derivative buying in January and February.  Its profits soared again when the ECB announced LTRO2 as another $714 billion in three year low-interest loans to PIIGS banks.

The stock of J.P. Morgan vaulted from $29 per share in December to $45 a share in March as rumors swirled that Achilles Macris and his London team of six had already made $2-3 billion as high yield and sovereign debt interest rates continued to fall.  A jubilant Jamie Dimon announced that J.P. Morgan would increase its dividend and buy back $15 billion of its stock.

France and Greece

Everything seemed rainbows and unicorns for J.P. Morgan until two weeks ago, when France and Greece elected hardcore leftist candidates who want to abandon austerity spending cuts and increase social welfare spending.  Interest rates on the PIIGS sovereign debt shot back up and J.P. Morgan appears to have suffered a $4-5 billion loss.  It also appears the bank has been unable to limit its losses to $2 billion by selling out of their enormous derivative positions.

Jamie Dimon tried to dismiss the losses by promising heads will roll. But congressional hearings will soon illuminate to American taxpayers that the Fed has provided the capital that has allowed America’s three largest banks to engage in $173 trillion in leveraged derivative speculation:

The derivative exposure of these three banks alone exceeds 11 times the American economy and 2.7 times the economies of all the nations on earth.  On December 30, the derivatives leverage ratio of these three banks stood at 37 times.  Menacingly, this leverage ratio exceeds the average leverage ratio of 32 times assets for Lehman Brothers, Bear Stearns and Merrill Lynch, shortly before the shock of their collapse instigated the start of the Great Recession in 2008.

Federal Reserve Policy

After five years of miserable unemployment numbers and virtually no growth, it seems clear the Federal Reserve’s $2 trillion increase in bank lending at zero interest rates has been better at expanding the international derivatives markets than expanding the American economy.  The Federal Reserve owns much of the blame for this phenomenon.  By keeping interest rates so low, banks were unable to make a rate of return above their cost of capital on traditional lending.

Kansas City Federal Reserve Bank President Thomas Hoenig in a recent interview warned that an extended period of ultra-low interest rates invites speculative behavior:

“When you have zero rates that go on indefinitely, you are inviting future problems.”

The recent J.P. Morgan derivatives fiasco has demonstrated that the Fed’s zero interest rate policy has encouraged risky financial speculation that is highly dangerous and potentially destructive.  It’s time for the Fed to let interest rates rise, so banks can get back to the business of financing America’s real-economy.

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Chriss Street’s latest book: “The Third Way,” now available on   www.amazon.com