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Friday, 17 April 2015 00:00

2010 Contrarian Prediction of the Disastrous Consequences of ZIRP & Free Money Policy In the Banking System, Year 5 Featured

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Listen to this video to hear my opinion of ZIRP starving the banks in 2010 when nearly every single economist analyst and pundit swore that ZIRP would be free money and unlimited profits for said industry. If you don't want to hear my opinion on derivative daisy chain risk afterward, fast forward to the 6:18 marker to see how the contrarian opinion panned out the following year.

Fast forward again, by three years, and we're not only still flirting with ZIRP (despite proclamations to the contrary) but European NIRP. Those that read my analysis know how I feel that will turn out for European banks. After all, if zero is bad, less than zero is probably...

 

See this article from American Banker, the banking industry's pre-eminent trade rag (subscription may be required, so I'll excerpt a pertinent portion): U.S. Bancorp, PNC Lack Options to Counter Low Rates

The latest quarterly results from U.S. Bancorp and PNC Financial Services Group illustrate the same hard truths: earnings are going to be lackluster until rates go up, and regional banks and their investors will have to keep toughing it out.

Why? Margins are continuing to erode, offsetting low yields with volume is proving tougher than expected, fee businesses are not enough of a supplement, and most cost-cutting efforts have been exhausted.

... PNC in Pittsburgh is no different from other institutions in how it is being affected by low interest rates— they are killing its spread income.

Now, go to the 0:55 marker in this video and listen for a minute or two, then continue reading.

Chairman and Chief Executive Bill Demchak forecasted that rates will not rise as soon, or at a fast enough clip, as he would prefer.

"It's also clear given the most recent jobs data and some data out this morning on manufacturing that we are likely to see interest rates rise later and slower than previously anticipated," Demchak said Wednesday. "If correct, it will have an impact on our net interest income for the remainder of the year and out years. We can't ignore the realities of the current environment."

If the Federal Reserve postpones raising rates until the fall, it will keep a lid on revenue growth, Rob Reilly, PNC's chief financial officer, said during the conference call.

Richard Davis, chairman and CEO of U.S. Bancorp, also acknowledged the burning question as to when and how rates will rise: will there be four hikes starting in June, or two hikes starting in September? However, Davis returned to his often-cited theory that a rate increase is going to cause a "tsunami" of activity as borrowers scurry to lock in rates before they tick up higher.

"What's most important is it starts at all," Davis said. "I've got to tell you, that is way more important than the number of times that it occurs."

Keep hope alive, my friend. Keep hope alive. Oh yeah! This just in from the Wall Street Journal - It looks increasingly likely that the Federal Reserve won't be raising interest rates in June, amid a rash of negative economic news. Surprise. Surprise! You know things are getting worse when you see more bailouts coming before we finish ending the last bailout program (ZIRP) - The Federal Reserve has decided to let U.S. banks make limited use of municipal bonds to meet liquidity requirements

The solution? Financial services companies (ie. banks) as software in the fortified cloud (the blockchain).

No balance sheet exposure, ex. no Lehman Brothers.

No rehypthoceation, ex. no MF Global.

No excess leverage, ex. no Bear Stearns

No incentive for fraud, ex. no, well... That list takes longer than time I have to type, but you get the message.

 

 

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