ERP Blogstorm Part 3: Banking

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Part three of our series of charts from the Economic Report of the President is all about banking. Mostly, it’s a trip down memory lane. Here’s a look at the worldwide market in derivatives over the past couple of decades:

The volume of derivatives went from $10 trillion to $35 trillion in two years starting right before the market crashed. Here’s another perspective on that:

In 1990, shadow banking was about the same size as the traditional banking sector. By 2007 it was more than twice as big. Just before the crash, shadow banking comprised two-thirds of the entire banking industry and it was almost entirely unregulated. This is why I was happy that Hillary Clinton at least mentioned shadow banking during the campaign.

Here’s how all this affected traditional banks:

In 2007, losses from trading amounted to about $30 billion. By 2009 that had skyrocketed to about $100 billion—and that’s in addition to about $40 billion in traditional loan losses. This is what happens when you start with a housing market that’s already in bubble territory and then egg it on with insane levels of rocket science derivatives, most of them unregulated bastard offspring of the shadow banking sector.

So what’s happened since then? We had a huge crash, the Fed instituted higher capital ratios for “systemically important financial institutions,” and we passed the Dodd-Frank reforms. Here’s what banks look like now:

Before the Great Recession, the biggest banks (green line) had Tier 1 equity ratios of about 7 percent. That’s why they couldn’t weather the crash. Today they’re above 12 percent. Is that enough? Maybe not. But it’s a helluva lot better than it used to be.

Finally, here’s an intriguing chart that shows one of the specific consequences of Dodd-Frank:

Most single-name derivatives are now cleared through a central clearinghouse, which makes it easy for traders to cancel out mirror-image positions they hold. This is called “compression,” and it reduces the total volume of derivatives and increases the safety of the financial system. Today, derivatives worth $200 trillion (notional) are compressed out of existence each year.

Needless to say, Republicans are hellbent on repealing Dodd-Frank. Sure, it makes the banking system safer and helps protect consumers, but big banks don’t like it, so that’s that. The party of Donald Trump, the working man’s president, will do whatever Wall Street tells them to do. Funny how that works, isn’t it?

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WHO DOESN’T LOVE A POSITIVE STORY—OR TWO?

“Great journalism really does make a difference in this world: it can even save kids.”

That’s what a civil rights lawyer wrote to Julia Lurie, the day after her major investigation into a psychiatric hospital chain that uses foster children as “cash cows” published, letting her know he was using her findings that same day in a hearing to keep a child out of one of the facilities we investigated.

That’s awesome. As is the fact that Julia, who spent a full year reporting this challenging story, promptly heard from a Senate committee that will use her work in their own investigation of Universal Health Services. There’s no doubt her revelations will continue to have a big impact in the months and years to come.

Like another story about Mother Jones’ real-world impact.

This one, a multiyear investigation, published in 2021, exposed conditions in sugar work camps in the Dominican Republic owned by Central Romana—the conglomerate behind brands like C&H and Domino, whose product ends up in our Hershey bars and other sweets. A year ago, the Biden administration banned sugar imports from Central Romana. And just recently, we learned of a previously undisclosed investigation from the Department of Homeland Security, looking into working conditions at Central Romana. How big of a deal is this?

“This could be the first time a corporation would be held criminally liable for forced labor in their own supply chains,” according to a retired special agent we talked to.

Wow.

And it is only because Mother Jones is funded primarily by donations from readers that we can mount ambitious, yearlong—or more—investigations like these two stories that are making waves.

About that: It’s unfathomably hard in the news business right now, and we came up about $28,000 short during our recent fall fundraising campaign. We simply have to make that up soon to avoid falling further behind than can be made up for, or needing to somehow trim $1 million from our budget, like happened last year.

If you can, please support the reporting you get from Mother Jones—that exists to make a difference, not a profit—with a donation of any amount today. We need more donations than normal to come in from this specific blurb to help close our funding gap before it gets any bigger.

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