Nomi Prins: Big Bank Concentration and Counterparty Risk Expands


by Craig Wilson, Daily Reckoning:

Nomi Prins joined Sprott Money News for its Ask the Expert segment that covered the Federal Reserve system, Glass-Steagall reform and even the recent activity from the U.S Treasury.

Beginning the conversation she highlighted U.S debt and the position of U.S treasury bonds. Prins remarks, “One of the reasons in general that government debt is considered an asset is that it can be traded and holds enough liquidity to either raise money or post as collateral for other forms of capital. They have an intrinsic benefit in the financial system between central banks, large multinational institutions and banks, etc.”

“U.S Treasury bonds also have the idea behind them that they have this implicit guarantee by their respective government that they will not default. Even though, right now, these bonds barely have any interest from a return perspective and are not particularly lucrative, it does have the idea behind them that it is not going to lose its value.”

Nomi Prins is a former Wall Street insider where she worked as a Managing Director at Goldman Sachs among other major financial outlets. She is also a best-selling author who wrote All the Presidents’ Bankers, a book that examines the hidden alliances between Wall Street and Washington.

Switching gears, she was pressed on whether the U.S treasury bonds could face a replacement Nomi Prins noted, “In the current international monetary system we have where the U.S dollar is the major reserve currency there is a necessity for central banks and private banks to use and have the U.S treasury bonds. The bonds are used to balance payments and used for potential liquidity emergency mechanisms and any other financial circumstances.”

She went on to elaborate on the U.S treasury bonds and their use in the global financial system that, “In general, global governments around the world happen to use the treasury bond system to finance the discrepancy between their own domestic balance of payments. That is the revenues that come in from taxes, versus the payments that the U.S government might need to run the country.”

“From a two prong perspective, first look at the debt, because we don’t have a balance of payments that is positive, it needs to be issued to make up that gap in the U.S. Second, the dollar is the prevalent currency and U.S treasury bonds are the most liquid form of moving central bank policy around that currency relationship they do not seem to be going away anytime soon. In the last ten years we’ve had an extraordinary increase in U.S treasury debt to the extent that we are well over 100{5f621241b214ad2ec6cd4f506191303eb2f57539ef282de243c880c2b328a528} relative to GDP.”

The interview then transitioned to talk about Federal Reserve reform and whether it can be reformed? Prin’s notes, “As we learned from the global financial crisis, the Federal Reserve has done a lousy job at regulating the risks that were coming into the financial system from the major private banks.”

“Not only did it do a bad job at detecting risks, it did the opposite and deflected concerns from those highlighting the risks. From the standpoint of monetary policy, looking ten years out, its pursuit of policy with absolutely no limitation from the outside (printing money, buying securities) was a failure.”

“If the Federal Reserve policies were able to make a real impact, we wouldn’t have needed them to go on for ten years following the financial crisis. What we are seeing right now is that there is no particular end in sight.  The fact that there is no jurisdiction that can instruct the Fed what to do, where it is currently working under unconventional policy for artificial markets, has created more risk instead of less.”

“If we were to create an external benchmark that at the very least pulls them into some coordinated approach, that would be a better way of maintaining stability. Whether that is a standard currency approach or whatever that might be.”

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