Banks will Fail

JPM fell 8% today, this is not the main show, but a preview of what is to come.  The financial system is entirely reliant on QE and low interest rates.  The velocity of money is the only thing that matters right now.  For the financial system to remain in tact, a continuous (not just continuous but continuously growing) stream of liquidity needs to be introduced into the market.  Banks cannot afford higher interest rates, which would simultaneously force them to tighten loaning standards and discourage them from obtaining new liquidity through loans.  Suddenly, interest on debt and toxic asset risks would actually matter... but how can anyone possibly expect to profit off loans when artificially low interest rates were set that fail to compensate the bank for the risk of default?  We forget the purpose of an interest rate in the first place.  In a free market, interest rates are based on the risk of default, and set such that banks can make a profit despite the risk of default.  We have forgotten this, but if money velocity is fast enough default risk can be lowered while increasing credit availability.  But what happens when money velocity slows???

  With the existence of the FDIC, all banks hold near the minimum 10% reserves (electronically...the actual amount of cash on hand is far less).  Thanks to fractional banking, most institutions are linked to one another such that the failure of one institution will lead to the failure of others.  Thus it will not be 1 bank that fails, it will be many.  It will not be 10 years before banks need another bailout, it will be 2, or less.  Will we bail them out? Probably, but if we do its just a matter of time (~5 years or so) until we will have to do it again.  Until the underlying problems are solved (Federal reserve, interest rates, FDIC), this cycle will repeat over and over.  The crash is not the problem, the problem is currency policies.  Crash is the solution, and we can then start anew.