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Peter Schiff Podcast: Fed Bigger Threat to Depositors than Wells Fargo

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In his latest podcast, Peter runs down the real threats of prosecuting and over-regulating financial institutions like Wells Fargo. Last week, Wells Fargo CEO John Stumpf was lambasted by members of the House Financial Services Committee over the unauthorized accounts scandal. Members called for Strumpf’s resignation and a breakup of the company.

members of congress at a hearing

Aside from the heated exchanges echoing the congressional chambers, the hypocrisy of the situation left a foul odor on the proceedings. For congress members to fault an executive for facilitating theft of customer deposits takes a lot of chutzpah. Peter explains:

“Congress has stolen more from Wells Fargo customers in the last month than Wells Fargo has in its 160-year history. What should really upset Wells Fargo customers is the fact that they’re getting zero percent interest rates on their accounts … The real losses are coming from the zero percent interest rates. They’re coming from inflation, which is eroding the value of their deposits. Where is that inflation coming from? It’s coming from the big deficits Congress is voting for and the fact that the Fed is now monetizing those deficits. That’s where depositors are getting robbed blind, it’s from Congress and the Fed, not from some of these overly-jealous Wells Fargo employees who wanted to earn a little bit more money so they cut some corners.”

Under congressional pressure, Wells Fargo now says they’re suspending their commissioned-based revenue model. The announcement may signal a change in the financial system to some, but others see this congressional over-reach as precipitating an outcome that, in the end, will be worse for businesses and consumers.

Litigation and over-regulation raise unemployment levels and consumer prices. Removal of any incentive-based sales strategy takes away the human element. What’s left is a job that can, and will, be automated and given to a robot instead. Businesses spend money and resources to meet government regulations. Those resources are no longer available for hiring workers and investing. The ultimate cost is passed on to the consumer. In the end, the result is higher unemployment and consumer prices. Politicians don’t care because they now have a chance to be the champion of David Q. Public who’s fighting the Goliath of business.

Highlights from the show:

It looks like the U.S. stock market is going to close out the third quarter on a positive note. The catalyst for the rally today is the big rally in Deutsche Bank; shares are up better than 14%. They were in danger of going below $10 yesterday. They were nervous about maintaining accounts with Deutsche Bank.

People were re-living memories of Lehman Brothers all over again. I think the Obama Administration was beginning to get concerned. The Dow was off about 200 points on the close yesterday. When worries about contagion spilling over from European banks into U.S. Banks.

It wasn’t good with these Wells Fargo Congressional hearings. I am going to chime in on that later in today’s podcast. I think the Obama administration was getting nervous about precipitating another financial crisis before the election.

I think they gave a nudge to the Department of Justice which had been talking about a $14 billion fine on Deutsche Bank. The rumors this morning are that they are nearing a settlement with Deutsche Bank for a much lower number; maybe around $5.5 billion. Which is below the amount that Deutsche Bank had set aside to settle this.

So from $14 billion down to about $5.5 billion – this is causing a big rally in the shares of Deutsche Bank and in fact that is returning confidence to the entire sector. I don’t think that this means that the European banks or the American banks, for that matter, are out of the woods.

I still think there are a lot of problems in the financials, because as I said in a previous podcast. They’re damned if the Fed raises and they’re damned if they don’t. Negative rates are bad for the banks but rate hikes are also bad for the banks, based on their balance sheets. I think there are still a lot of problems percolating beneath the surface for the financials.

As far as the Obama Administration is concerned, the key is to get everything through the next election without a crisis.

You know that $14 billion fine was very close to what the Europeans were looking to fine Apple. But I think the Department of Justice is more concerned about elections than the symbolism regarding Apple’s fine. So coming to an agreeable solution with Deutsche Bank that was lower than the markets had feared serves the Administration’s purpose right now.

So that’s where the rally is coming from today and of course, the traders like to paint the tape a little bit going into the end of the quarter. It’s not just the markets that had a strong quarter – crude oil ended the day about $48. We have some kind of agreement among OPEC nations for production cuts.

And while that might be good for oil stocks, it’s not going to be good for the U.S. consumer, who is already struggling. In fact, we did get a mixed bag on economic numbers out today. The disappointing number was consumer spending, which for the month of August was flat; the anticipation was for an increase of 0.2%.

Personal income did manage to meet expectations with a 0.2% increase. But that was about half the increase we got in the prior month. Spending went down from up +0.4 (which was upwardly revised from the original +0.3) to flat. Higher energy prices, gas prices at the pump are simply going to eat into that consumer spending number.

Higher energy prices are simply going to eat into that consumer spending number. I think it’s also going to make the inflation numbers worse. For some reason, people think this is good news because they think higher inflation is what the Fed wants. Remember, I’ve said that’s the last thing the Fed wants because the low “official” inflation numbers are providing cover for the Fed to keep rates low, which keeps the financial bubbles inflated and keeps the government in the borrowing and spending game.

Hillary Clinton represents a vote for the status quo, and clearly, the status quo wants to maintain the “official” illusion of some kind of recovery between now and the election in November. They surely want to maintain the illusion of GDP growth and don’t want to come out with any downward revisions until after the election. I don’t believe the Fed has got rate hikes up their sleeves. I think if anything they’re ready to cut rates and actually bring them negative as soon as Obama is out of office and playing golf. Regardless of who wins the next election, the Fed is going to drop the pretense of recovery and therefore they no longer have a reason not to do what they want to do anything, which is more stimulus.

I wish we got Congress completely out of the banking system. Let’s get rid of the guaranteed deposits. Let’s get rid of the FDIC so that Wells Fargo can no longer rely on a government guarantee. Let’s make Wells Fargo compete for customers based on the credit quality of their bank, not based on the crutch of a government guarantee. Let’s let banks compete for deposits based on how safe the institutions are.

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