by Nomi Prins
He flaunted his policies while noting that, given the severity of the crisis, any monetary measures would take time to have an impact. “For two years, the economy in the euro area has been growing month by month, banks are lending and unemployment is steadily falling. Meanwhile, euro area countries are now able to buy more German exports again, which, for German companies, is partly making up for the decline in trade with China. But it is a slow process because the crisis was more severe than anything we’d had since the Second World War.”127
The problem with his historical argument, however, was that it implied that his policies were fine, that they just needed a longer horizon to achieve the desire effect, whereas his policies’ ability to attain real economic growth should have been questioned to begin with.
On May 2, in a panel speech at the annual meeting of the Asian Development Bank in Frankfurt, Draghi further drew battle lines against his German critics by saying that the German current account surplus—not low interest rates—was one of the greatest obstacles to the Eurozone’s low growth. He said, “Our largest economy, Germany, has had a [current account] surplus above 5 percent of GDP for almost a decade.… Those advocating a lesser role for monetary policy or a shorter period of monetary expansion necessarily imply a larger role for fiscal policy.”128
Draghi had a point. Germany was a more reluctant participant in the consolidation of the Eurozone than was Greece, for example, which was blamed for the area’s problems. Low rates combined with Germany’s surplus harmed the rest of the European economy. By the end of 2016, Germany’s account surplus hit a record of $297 billion, topping China’s as the world’s largest.129 During the economic crisis, Germany’s push for austerity contradicted ECB monetary policy—which was actually quite generous, just not to citizens.
Germany feared losing its biggest prize: maximization of the current account surplus, which was boosted by a monetary union that reduced transaction costs. Germany’s posture reflected its political position and political aims in sustaining the European Union, which contrasted with the idea of an independent central bank.
On May 25, in an interview with El País, ECB governing council member François Villeroy defended Draghi from criticism he characterized as “personal,” “excessive and dangerous.” According to Villeroy, “It seems to me to be excessive to talk of politicization of the ECB, that it is under the control of this country or another, or that it has been the reason for the growth of a certain party in Germany. It’s false.”130
With a referendum vote scheduled on the matter for June 23, Villeroy also emphasized the risks of Brexit. He said British banks would face strong financial turbulence and the monetary union in Europe would be affected. “It can’t expect to leave Europe and at the same time think it can participate in the financial market union or that the role of the City will be the same.”131 Worries about Brexit and the chaos it could cause moved to center stage.
Two days later, the final statement of the G7 meeting in Japan warned that Brexit would harm global trade, investment, and job creation. BOJ governor Haruhiko Kuroda said, “It would have a significant and serious impact on the global economy.”132 He emphasized the role of central banks in promoting dynamism in the global economy and their lack of boundaries for doing so. He said, “I don’t think for Japan, or the ECB, at this stage that monetary policy has reached the limit. We still have enough room to further these monetary conditions.”133
Promoting growth was also a topic of animated discussion. The G7 participants diverged on which policies to pursue to do it. Japan defended the continuity of monetary policy as a tool to promote liquidity and stimulate growth. In contrast, Germany and the United Kingdom believed austerity and fiscal discipline were better ways and strongly criticized “cheap money.”
Domestic banks’ losses and their complaints had become a cornerstone of ECB-Germany strife. In Germany, the banks and insurers were negatively affected by low interest rates. Nominal yields on ten-year German bonds had fallen from 4 percent in 2008 to less than 0.2 percent in 2016. One bank said low rates had deprived German households of €200 billion since 2010.134 As that situation intensified, Schäuble’s attacks on the ECB widened to blaming it for the overall social collapse in Germany that resulted in the rise of the right wing.
On June 8, the ECB announced that it would enter the corporate bond market to buy the debt of some of Europe’s biggest companies.135 It was an unexpected and risky decision, because the ECB could be buying bonds with lower ratings.
The Eurozone had grown only 1.6 percent in 2015. That didn’t bode well for securing citizens’ confidence. But Draghi held firm. As he told the Brussels Economic Forum, “Given the harm that has already occurred to potential growth during the crisis, it also means [a need for] acting decisively to raise potential.”136
The looming fear was that a Brexit vote could alter the currency and trading relationship of the United Kingdom with the EU. Among central bankers, worries about disruption to monetary policy collusion grew. By June 15, 2016, the BOJ was in constant contact with its European counterparts to prepare for a possible Brexit. It stood ready to offer dollar funds to domestic banks to avoid a Lehman-type credit freeze.137
For her part, Yellen kept rates unchanged,138 though the decision to do so was not unanimous; Kansas City Fed president Esther George disagreed. Yellen argued that a rate hike would happen when solid signs of economic strength appeared. She was unclear on when that would be: “I’m not comfortable to say it’s in the next meeting or two, but it could be.” She acknowledged the Brexit issue was one factor leading the Fed to be more cautious, noting that the referendum may bring “consequences for economic and financial conditions in global financial markets.”139
BREXIT: A RESULT OF CONJURED-MONEY POLICY
Then it happened. The Brexit vote for the United Kingdom to leave the EU was won by 51.9 percent versus 48.1 percent on June 23, 2016. Voter turnout was 71.8 percent, with more than thirty million people casting a ballot. British working-class citizens embraced the result; the business community did not expect it. The pound shed 10 percent in response, dropping to its weakest level in thirty-one years.140
London’s Daily Mail’s front page blared in all caps “Take a Bow, Britain!,” noting that the vote was in part a rise against an “arrogant, out-of-touch political class and a contemptuous Brussels elite.”141 Whereas the anger might have missed targeting the institutions those elites represented, such as the big private banks and central banks, it symbolized gross disenchantment with a status quo. The prevailing sentiment was that politicians and elite bureaucrats put the needs of core Europe over those of the United Kingdom. Refugee, immigrant, and associated security fears over anything from job loss to terrorism also came into play. Economic instability would leave the voting population seeking an outlet for their frustrations—a group to blame.
A few hours after the Brexit results, the Fed said that it stood ready to provide dollars to other central banks via swap lines set up during the 2008 financial crisis. The Fed worried about “pressures in global funding markets, which could have adverse implications for the US economy.” It was time for more “co-operation with other central banks.”142 Or more collusion.
In a separate statement, Jack Lew said, “The UK and other policymakers have the tools necessary to support financial stability, which is key to economic growth.”143 The G7 confirmed that central banks were ready to use their “established liquidity instruments” if needed.144
On June 28, at a EU summit, Draghi warned EU leaders that Brexit could reduce Eurozone growth over the next three years by a cumulative 0.3–0.5 percent.145 Before the vote, the ECB had estimated that the Eurozone would show annual growth of 1.6 percent in 2016 and 1.7 percent in 2017 and 2018. Draghi urged national governments to address those complications with joint efforts and to deal with vulnerabilities in their banking sectors in response. Brexit could ruin his already ineffective policy results.
An uncharacteristically
shaken Schäuble demanded quick responses from European governments to restore trust in the EU. He told the newspaper Welt am Sonntag, “If the [European] Commission does not act jointly, then we’ll take the matter into our hands and just solve the problems between governments.” He added, “What we can’t do ourselves must be done at European level,” even if facing “growing demagogy and deeper Euroscepticism.”146
In an interview with the Financial Times, Christine Lagarde called attention to another issue budding from establishment skepticism. Politicians, such as US presidential candidate Donald Trump, increasingly advocated antitrade policies embraced by voters. According to Lagarde, these policies could spark protectionism movements that could harm the global economy. She said Brexit was already stoking concerns about growth. In regard to antitrade policies, she said, “I think it would be quite disastrous, actually… it would certainly have a negative impact on global growth.”147 Indeed, renegade politics could render the IMF, its special drawing rights basket, and the significant influence of central banking power impotent.
The spread between the return on assets and liabilities in domestic business hovered near all-time lows. It signaled that the cheap-money policy that was supposed to raise inflation or help growth or induce bank generosity in lending had failed on every single account.
None of that mattered. The ECB announced that the 80 billion euro asset purchases would continue until March 2017—or “beyond if necessary.”148 Draghi highlighted his “readiness, willingness and ability” to add more stimulus. He believed that the reduced impact of monetary stimulus left the euro more vulnerable to trade flows and geopolitics.
On July 8, the IMF’s Independent Evaluation Office (IEO) released a report admitting its top staff made many misjudgments in dealing with the entire European debt crisis, especially Greece’s economic situation. The staff’s “culture of complacency” and a tendency toward “superficial and mechanistic” analysis brought up questions about who was ultimately in charge of the IMF. The report also admitted that internal investigators were unable to obtain key records or delve further into the activities of secretive “ad-hoc task forces.”
It was a largely ignored bombshell. Christine Lagarde was not accused of obstruction. The report cited the approach to the Eurozone as characterized by “groupthink” and intellectual capture. There were no alternative plans on how to deal with a systemic crisis in the Eurozone or a multinational currency union.149
On August 4, in the aftermath of the Brexit vote, the Bank of England announced a cut in rates (the first since March 2009) to 0.25 percent. That was a record low in the BOE’s 322-year history. It also announced a QE program of £60 billion to buy government bonds (which would drive down yields and force investors into riskier assets, like it had everywhere else). Measures included a £100 billion scheme to encourage lending from UK banks to UK companies and a pledge to buy £10 billion of corporate debt issued by UK companies that contributed to the UK economy.150
BOE governor Mark Carney chastised the banks. He said they had no excuse for not passing on lower official borrowing costs to customers. He presented a range of measures to limit job losses and support growth in the UK economy as it went through “regime change” following the decision to leave the EU. He strongly opposed negative interest rates, but meeting minutes revealed that a majority of BOE members supported lowering rates if necessary. The minutes also indicated that policymakers did not agree unanimously on the stimulus package.151
Three weeks later, at the Jackson Hole symposium, Yellen shifted again and said the Fed would take a gradual approach in raising rates.152 Minutes from the FOMC’s July meeting showed that New York Fed president William Dudley and San Francisco Fed president John Williams indicated a rate increase could come by the end of the year.153
Not only were they telling Wall Street to prepare but also they were ensuring their central bank allies knew what was ahead. These money crafters had to sell their policies in tiny soundbites before anything could really be digested with confidence.
According to the Guardian, on August 26: “The Federal Open Market Committee (FOMC), the policy-setting branch of the Fed, has met five times this year; each time, its members voted to hold off on raising interest rates.”154 That made Europe anxious. Would its collusive partner in the Fed still keep playing by the same rules in the central banking game?
On September 1, Draghi finally admitted, “Monetary policy has inevitably created destabilizing spillovers” and “large exchange rate fluctuations between major currencies… are testament to that.” It was the furthest he had gone toward suggesting these unprecedented policies could have negative impacts. He said competitive devaluations of this kind, or currency wars, were a “lose-lose for the global economy” that “lead to greater market volatility, to which other central banks are then forced to react.”155 His position cast central banks as reluctant heroes.
That didn’t change his actions. A week later, on September 8, the ECB continued its monthly €80 billion bond purchases but advised this could come to an end in six months.
Reuters cited, “Facing anemic growth and inflation, the ECB is buying 1.74 trillion euros worth of bonds, holding rates deep in negative territory and giving banks free loans, hoping to end the bloc’s nearly decade-long economic malaise with an infusion of cheap credit.”156
Draghi urged governments to assume responsibility in restoring the economy and conveniently characterized uncertainty concerning Europe markets anxious from Brexit’s immediate impact. He reaffirmed the ECB’s readiness to pump more stimulus if needed to reach the 2 percent inflation target. He called his QE program “effective” and dismissed any expectations about “helicopter money” or other alternative easing schemes.157
In the wake of Brexit turmoil, British prime minister David Cameron stepped down from his leadership post immediately and, on September 12, 2016, also vacated his MP seat.158 “The country made a decision,” he later said, “a decision I advised against, but nonetheless the decision has been made and I want the government to successfully pursue that decision and get it right. As a result, not being a backbencher but leaving parliament is the right thing to do.”
Theresa May, the fifty-nine-year-old home secretary and member of the Conservative Party and seventeen-year veteran of Parliament, became the second female prime minister, taking his place. May was not about to invite lack of continuity in the central banking arena while on a mission to prove her mettle navigating the best Brexit. In a statement following the vote, Bank of England governor Mark Carney proclaimed, “We have taken all the necessary steps to prepare for today’s events. In the future we will not hesitate to take any additional measures required to meet our responsibilities as the United Kingdom moves forward.”159
Six days later, on September 18, Claudio Borio, head of the Monetary and Economic Department of the BIS, empathized with the central bank money conjurers, to an extent, at a media briefing: “It is becoming increasingly evident that central banks have been overburdened for far too long.” According to the Financial Times, the BIS had “warned about the risk that central banks’ asset purchases boost asset prices without necessarily boosting economic activity.”160 This was the entire crux of conjured-money policy: it stoked asset bubbles, with no way to manage how or when they would inevitably pop.
This coddling of the oppressors depicted the illogic of a situation that hurt all those involved to some degree—except the central bankers themselves. It was the central banking establishment that had no real allegiance to voters and that remained virtually untouchable.
Borio made it clear that “the prospect of lower rates for longer has had a dual effect… has fueled a familiar shift into equities and a broader search for yield, leading to the usual signs of exuberance [and] it has raised serious concerns about banks’ profitability, as ultra-low rates and flat yield curves tend to erode their net interest margins and to reduce the cost of carrying non-performing loans, in turn delaying the neces
sary clean-up of banks’ balance sheets.”161
That jargon meant that artificially stimulated markets, fueled by fabricated funds, hid the true condition of banks. It was a chilling and implicit condemnation of conjured-money policy. The BIS, for all of its discretion, and despite being a composite of elite memberships from within the central bank community itself, could see the writing on the wall.
DRAGHI VS. THE GERMANS: FALL 2016
Four years after he last addressed German lower house members, Draghi returned to a closed session at the German parliament on September 26, 2016. The tussle lasted nearly two hours as Draghi played defense and asked for help beyond his mandate and policies. According to Draghi, “For the euro area to thrive, actions by national governments are needed to unleash growth, reduce unemployment and empower individuals, while offering essential protections for the most vulnerable.”162 He faced opposition from surplus countries such as Germany and the Netherlands about the effects of the ECB’s negative rates on bank and pension fund profits.
Draghi had to acknowledge that “the locality of these concerns is definitely higher in Germany,” while trying to assure the body that “we are also aware that it is only in reaching our objective of price stability that these concerns can be addressed forever.”163
Corralled by Schäuble, other politicians accused ECB policies of triggering right-wing populism and damaging the whole EU project.164 Some blamed Draghi for major problems with German banks, especially Deutsche Bank, whose shares by the end of September 2016 had fallen more than 65 percent from their July 2015 peak, erasing more than half the firm’s market value.
