by Nomi Prins
Shortly after, the entire country was shattered by the events of 9/11. We each have our stories from those days, where we were, what went through our minds, how it changed us as people, as a nation. For me, those tense moments walking up Broadway away from Wall Street with the acrid, debris-filled smoke of the Twin Towers in the air, was a last straw. I left Goldman Sachs. Partly because life was too short. Partly out of disgust at how citizens everywhere had become collateral damage, and later hostages, to the banking system. Since then, I’ve dedicated my life to exposing the intersections of money and power and deciphering the impact of the relationships between governments and central and private bankers on the citizens of the world.
In 2004, I explored those post-1970s alliances in my first book, Other People’s Money: The Corporate Mugging of America. In that thesis, I warned of the calamities that would ensue as a result of credit derivatives, then a tiny blip on the banking and business media radar. Although other analysts eventually reached similar conclusions, I was one of the first “insiders” who explained when, why, and how this crisis would unfold. What happened following the repeal of the bipartisan-passed 1933 Glass-Steagall Act in 1999 was unavoidable. As long as people’s deposits remained fodder for reckless speculation, I wrote, the world was at risk. Indeed, a few years later, the US economy collapsed, taking down markets and economies around the globe. Some people said banks weren’t to blame, people who couldn’t afford their mortgages were. But that’s not a logical conclusion if you do the math and know how banks create and sell mortgages.
The financial crisis began three years after my book came out and escalated through 2008. Those events led to my next book, It Takes a Pillage: Behind the Bonuses, Bailouts, and Backroom Deals from Washington to Wall Street. The book tapped into the psyche of Wall Street, revealing how the very structure of the financial system hinged on traders flocking to the next big bet, regardless of the stakes. In addition, the same people and families kept popping up, cycling through Wall Street and Washington. They influenced the economy beneath them from their loftier heights of status, private money, and public office, dismantling laws that stood in their way and finding loopholes in others. Private banks normalized market manipulation. Central banks made it an art form, with no limits.
The big banks, with their strong personal and legacy connections to the government and the backing of central banks, particularly the Fed in the United States, thrived through economic and geopolitical conflict. Their bloodlines and family connections spanned a century. In my book All the Presidents’ Bankers: The Hidden Alliances that Drive American Power, I dug deeper. The project took me to presidential libraries across the country. I perused documents untouched for decades—or ever—that supported one conclusion: relationships matter.
Whether central bankers proclaim to support or oppose each other matters. In Collusion, I expose these international relationships and the power grab of central bankers at the Fed, European Central Bank, Bank of Japan, and other central banks that have fabricated or “conjured” money to fund banking activities at the people’s expense. Since the financial crisis, these illusionists have created money, altered the nature of the financial system, and orchestrated a de facto heist that enables the most powerful banks and central bankers to run the world.
The concept for Collusion cohered in my mind after I was invited to address the Federal Reserve, the International Monetary Fund (IMF), and the World Bank in June 2015. Because I had been vocal about labeling recent central bank policies “insane,” at first I thought the invitation was a mistake; I even asked as much of the Fed office that invited me. Their response was, “We are looking forward to what you have to say.”
In the well-appointed and historic boardroom where the Federal Open Market Committee (FOMC) sets monetary policy, I was to address a roomful of international central bankers in the morning kick-off session of the three-day global conference. The boardroom was situated upstairs from the portrait of Carter Glass, who helped steer President Woodrow Wilson’s proposal for the Federal Reserve System that culminated in the Federal Reserve Act of 1913 through Washington. In 1919, Glass became Wilson’s Treasury secretary, succeeding William G. McAdoo in the role.2 Glass in memoriam watched over the atrium where we had our group photograph taken that morning to commemorate the occasion. The central bankers hailed from the same institutions that routinely met at G7 and G20 and other multinational central bank gatherings around the world. My host placed me at the front of the room.
Chair of the Federal Reserve Janet Yellen opened the event, indicating the banking system was better but some instability still lurked. She was followed by an assistant Treasury secretary who touted the accomplishments of the Obama administration in combatting financial risk with the Dodd-Frank Act (which didn’t actually break up the banks). Cardinal Theodore McCarrick, fresh from a meeting with the pope, reminded everyone of their responsibility to help the poor.
Then it was my turn. I explained why years of supporting a private banking system of recidivist felons with no strings attached couldn’t possibly lend itself as a panacea for financial or economic stability. “You have the power to do better,” I told the central bankers. But the real question is, “Do you have the will?” For what began as an “emergency” monetary policy had morphed into an ongoing norm and provoked a shake-up of the world economic order.
Over the days of that conference and ever since, multiple global central bankers (including from the Fed and IMF) have thanked me privately for my honesty. Yet their policies have barely changed at all. No significant regulations have been introduced to fix the structural problems behind the last financial crisis. Banks and the markets have been subsidized by quantitative easing and conjured-money policy. Central banks have colluded to provide global artificial money and subsidies as they see fit rather than to actualize authentic, long-term, tangible growth and stability or require anything in return from the big banks they helped the most.
Whether the broad population knows it or not, this collusion among the most elite central banks has run rampant and deep. Worse, central bankers have no exit strategy for their policies, no great unwind plan, despite repeatedly throwing out words that indicate they do. It’s like pushing a huge snowball to the edge of a cliff and hoping the cliff will morph into a valley before the snowball plunges and destroys whatever is in its way below.
Which means we are headed for another epic fall. The question is not if, but when.
INTRODUCTION
It is not the responsibility of the Federal Reserve—nor would it be appropriate—to protect lenders and investors from the consequences of their decisions.
—Ben Bernanke, Federal Reserve chairman, 2007
The 2007–2008 US financial crisis was the consequence of a loosely regulated banking system in which power was concentrated in the hands of too limited a cast of speculators. Since the crisis, G7 central banks have pumped money into private banks through an unconventional monetary policy process called quantitative easing (QE). QE is an overtly complex term that entails a central bank manufacturing electronic money and then injecting it into banks and financial markets in return for purchasing bonds or securities (or stocks). The result of this maneuver is to lift the money supply within the financial system, reduce interest rates (or the cost of borrowing money, disproportionally in favor of the bigger banks and corporations), and boost the value of those securities. The whole codependent cycle is what I call a “conjured-money” scheme, wherein the cost of money is rendered abnormally cheap.
Speculation raged in the wake of this abundant cheap capital much as a global casino would be abuzz if everyone gambled using someone else’s money. Yet bank lending did not grow, nor did wages or prosperity, for most of the world’s population. Instead, central bankers created asset bubbles through their artificial stimulation of banks and markets. When these bubbles pop, the fragile financial system and economic world underlying them could be thrown into an economic depression. That’s why cent
ral banks are so desperate to collude.
Enabling certain banks to become “too big to fail” was the catastrophic mistake of the very body supposed to keep this from happening, the Federal Reserve. The Fed happens to be the arbiter of bank mergers—and it has never seen a merger it didn’t like. Legislation to deter “too big to fail” had been in existence since 1933. In the wake of the Great Crash of 1929, a popular bipartisan act called the Glass-Steagall Act restricted banks from using federally insured customer deposits as collateral for large-scale speculation and asset creation. Banks that were engaged in both of these types of practices, or commercial banking and investment banking, were required to pick a side. Either service deposits and loans, or create securities and merge companies and speculate. By virtue of having to choose, they became smaller. Big bank bailouts became unnecessary. But that act was repealed in 1999 under President Clinton. As a result, banks went on a buying spree. The larger ones gobbled up the smaller ones. Along the way, their size and loose regulations gave them the confidence and impetus to engage in riskier practices. Ultimately, they became so big and complex that they could create toxic assets and provide financing to their customers to buy them, all at once.
That’s how the subprime mortgage problem became a decade-long financial crisis that required multiple central banks to contain it. Big banks could buy up mortgages, turn them into more complex securities, and either sell them to global customers, including pension funds, localities, and insurance companies, or lend substantive money to investment banks and hedge funds that engaged in trading these securities. The Fed allowed all of this to happen.
Massive leveraging (or betting with huge sums of borrowed money) within the securities those big banks created and sold exacerbated the risk to which they exposed the world. Eight years after the crisis began, the Big Six US banks—JPMorgan Chase, Citigroup, Wells Fargo, Bank of America, Goldman Sachs, and Morgan Stanley—collectively held 43 percent more deposits, 84 percent more assets, and triple the amount of cash they held before. The Fed has allowed the biggest banks on Wall Street to essentially double the risk that devastated the system in 2008.
But in the banks’ moment of peril, the Fed unleashed a global policy of injecting fabricated money into the worldwide financial system. This flood of cheap money resulted in the subsequent issuance of trillions of dollars of debt, pushing the global level of debt to $325 trillion, more than three times global GDP.1 By mid-2017, the total assets held by the G3 central banks—the US Fed, the European Central Bank (ECB), and the Bank of Japan (BOJ)—through conjured-money QE programs had hit more than $13.5 trillion.2 The figure was equivalent to 17 percent of currency-adjusted global GDP.
To garner support for their multi-trillion-dollar QE strategies, the G3 central bank leaders peddled the notion that they were helping the general economy. That couldn’t have been further from the truth. There was no direct channel, no law, no requirement to divert the Fed’s cheap money into helping real people. This was because borrowing and subsequent investing in the real economy required funds from private banks, and not from central banks directly. That’s how the monetary system was set up. And private banks were under no obligation to do anything with this cheap money they didn’t want to do.
Central bank money crafters realized early on that simply adjusting benchmark interest rates in their countries was no longer effective without quantitative easing. They had to wax unconventional with monetary policy. And then they had to collude to spread their programs globally. They concocted and plowed cash into their respective banking systems.
Specifically, the largest private banks, including JPMorgan Chase, Deutsche Bank, and HSBC, that inhaled this cheap money were not required to increase their lending to the Main Street economy as a condition of the availability of that money. Instead, the banks hoarded the cash. US banks colluded with the Fed to get that cash by stashing their bonds as “excess reserves” (more reserves for emergencies than regulations required) on the Fed’s books. And, because of the Emergency Economic Stabilization Act of 2008, they received 0.25 percent interest per year from the Fed on those reserves, too. Wall Street used its easy access to cheap money to increase speculation in derivatives and other complex securities. They used it to buy back their own shares, thus effectively manipulating their own stock—in broad daylight and with explicit approval from the Fed. In turn these banks dialed back their lending to small and midsized businesses, which hampered their growth potential.
The danger with having a system rely on so much conjured capital is that when central bankers stop manifesting it, it could go into shock; markets could plunge, credit seize, and a new crisis emerge. That’s why central banks are walking the tightrope between altering their policies and doing nothing to alter them, thereby continuing them by default, with no exit plan.
Sir Isaac Newton’s third law of motion states: for every action there is an equal and opposite reaction. This principle doesn’t hold linearly at the intersection of money and politics, but it’s illuminating when cross-examined. Relationships must be untangled, geography collapsed, and time compacted to grasp the true causes and effects of money in politics.
After the monetary system faces the sober reality of a real shock, the truth is that it may never truly return to its prior state. The system morphs into something new. Collusion chronicles the ascent and interaction of the world’s elite central bankers, who accumulated unprecedented power and influence over the world economy following the financial crisis of 2007–2008. It tells the tale of how these undemocratically selected officials have irrevocably transformed the very system they are sworn to protect.
At the onset of the crisis, the Fed colluded with other central banks to decrease the cost of money. Their fabricated money didn’t come from taxes, revenues, profits, or growth. The Fed did so by exercising its emergency powers under the Federal Reserve Act of 1913 to do whatever it deemed necessary to contain the crisis. Or so it said.
The Fed was established through legislation passed in December 1913 under Democratic president Woodrow Wilson, following a series of bipartisan negotiations orchestrated by Virginia congressman Carter Glass. Development of a US central banking system had begun several years earlier, with the efforts of former Senate banking committee leader Nelson Aldrich, the Republican senator from Rhode Island who convened a select team of private bankers in secret at a club designed by and for the wealthiest members of US society, at Jekyll Island, Georgia. They proposed a central bank that would back private banks in the event of a financial crisis such as the Panic of 1907. The Fed that emerged became the last resort for private US banks that needed liquidity3 or, later, fabricated “money” to operate when credit was tight or unavailable. Secondarily, the Fed was tasked with maintaining stability, low inflation, and full employment through setting monetary policy, or the level of rates—and by whatever means necessary.
Fast-forward about a century. By late 2008, the Fed had gone into overdrive carving out a role as America’s sub-superpower. The central bank adopted an imperial position in the global central bank hierarchy, unleashing a series of power plays among other central banks.
The Fed pushed its strategies globally. It saw no other option. So entangled and codependent were the big US and global banks that the only way to keep the money flowing into the banking system was to enlist the help of allies the world over. The international monetary system of interest rates, currency movements, and debt creation had become so intertwined with the US banking system that “saving” the latter meant co-opting the former. The major G7 central banks followed the Fed for two reasons: geopolitics and fear. They feared a deeper and more prolonged liquidity crisis if they didn’t do the Fed’s bidding.
Central bankers determine the value of money by setting interest rate levels directly and make additional adjustments by purchasing bonds. The more bonds they purchase, the lower they can keep interest rates because they manufacture demand, which pushes up bond prices, which, by the nature of bond
math, pushes down interest rates. They influence, or try to influence, the worth of currencies by buying and selling them locally and internationally. These bankers tend to cycle through various public and private posts domestically and on the world stage of the global monetary system network.
SHIFTING MONETARY SYSTEMS: DEVELOPED TO DEVELOPING NATIONS
Emerging from the ravages of the financial crisis, developing countries challenged the status quo of US-and European-led money policies. They developed new economic, trade, and diplomatic alliances to seek refuge from the Fed and the US dollar. That was in stark contrast to prevailing monetary policy history.
The World Wars of the twentieth century had spawned a US-led monetary structure that came to dominate markets and geopolitics. In 1944, self-interested financial leaders convened at Bretton Woods to craft a monetary system centered on US and European currencies and interests. While Europe rebuilt its war-torn cities, the United States capitalized on its superpower role, and developing countries were overshadowed.
