by Nomi Prins
Draghi retorted that Germans were net beneficiaries of easing policies and that German banks were in trouble not because of the monetary policy but because of poor efficiency. Of Deutsche Bank he said at a closed-door session, “If a bank represents a systemic threat to the euro zone, it can’t be because of low interest rates. It has to do with other reasons.”165
By late September, the inflation rate in the Eurozone showed a sliver of an increase. That was enough to give Draghi confidence that his stimulus program was working. Consumer prices rose 0.4 percent, twice as much as in August.166 The increase was associated with recent stabilization of oil prices; the increases, if they continued, could support the ECB’s inflation targets.
At the October 8, 2016, G20 meeting, Treasury secretary Lew stated the obvious, that Europe should do more to ensure stability of its financial markets.167 Schäuble reiterated that financial disruption risks were due to “ultra-loose” monetary policy. He warned, “The danger of a new crisis has not completely vanished.”168 Draghi saw no evidence that his monetary easing led to asset price bubbles.169
At an ECB press conference two weeks later, on October 20, Draghi said his “set of measures… exploit[ed] the synergies between the different instruments and [have] been calibrated to further ease financing conditions, stimulate new credit provision and thereby reinforce the momentum of the euro area’s economic recovery and accelerate the return of inflation to levels below, but close to, 2 percent.”170 His money-conjuring arsenal had a strategy to deal with everything.
Still, he feared that after years of missing the ECB’s inflation target, investors would lose confidence in the ECB’s ability to achieve its supposed mandate. Because of that, Draghi added a proclamation of confidence that the Eurozone growth rate appeared to have stabilized in a solid trajectory.
The matter of how the United Kingdom would deal with Brexit still loomed. Mark Carney extended his five-year term as Bank of England governor until the end of June 2019—three months after the United Kingdom was expected to leave the European Union. On October 31, 2016, in a story headlined “The ‘Film Star’ Bank of England Governor,”171 the BBC reported that Carney had written to finance minister Philip Hammond accepting the extension of his “term in office beyond the expected period of the Article 50 process [for Britain to leave the EU],” noting “this should help contribute to securing an orderly transition to the UK’s new relationship with Europe.”172 The pound was the world’s worst-performing currency that month, hitting a six-and-a-half-year low against the euro.173 If the shock of Brexit was going to subside, Carney would have to continue preaching to the choir. Any pattern disruption to the central banking world could be devastating to confidence and, thus, to the bankers who relied on it.
With the United Kingdom assured consistency on the central banking front, there remained one particularly thorny private banking problem on the European continent: Deutsche Bank. Eight years after the financial crisis struck, the IMF labeled the German behemoth as posing the greatest risk to the global financial system, a risk even more pronounced for the world than just for Germany.174 The pronouncement didn’t even include the implications of the findings of the ongoing investigations.
On December 23, after years of investigations and market speculation about their results, the US Department of Justice ordered Deutsche Bank to pay $7.2 billion in fines for crimes committed during the financial crisis—a sign of all that conjured-money policy had plastered over. The bank’s shares dove on concerns about its survival. Global markets fretted about Deutsche Bank’s deep connections to other global financial institutions.175
All the cheap-money subterfuge had not addressed the prevailing and alarming codependencies among too-big-to-fail banks the world over. That meant systemic risk had not been extinguished, it had only been camouflaged. The fine was just that, a fine, not a shift to prevent any of the looming hazards the financial system could still unleash.
TRUMP ASCENDS, DRAGHI MARCHES ON
At the start of 2017, the United States installed a new president as Europe embarked upon its own set of elections, including major elections in France, Germany, Italy, and more. The threat of political polarization had washed ashore and was now a growing European problem.
Growth remained low, stock prices remained inflated, money manufacturing continued. The geopolitical environment frothed to a peak of nationalism and disdain for elites and central banks, refugees and terrorist attacks.
On January 19, the ECB announced it would continue purchasing under the asset purchase program (APP) €80 billion per month through the end of March 2017. These purchases would be curtailed to €60 billion per month through December 2017, or beyond, if necessary.
“As the recovery will firm up, rates will go up as well,” a persistent Draghi said during a Q&A session following the governing council meeting in which he reinforced his plan to continue the ECB’s bond-buying program for at least a year. Reporters prompted him about German criticism, and he responded in typical Draghi fashion, saying that “the honest answer would be: Just be patient.”176 When asked later that day for a reaction, German economic point man Schäuble said calmly, “I trust the ECB will always do the right thing.”177
Theresa May met with Donald Trump at the White House on January 27. This was the day after Mexican president Enrique Peña Nieto canceled his trip to meet with Trump.
May and Trump agreed to maintain the “special relationship” of their two nations through Brexit. There was no discussion about their central banks’ influence on their economic relationship, or mutual and resulting career paths.
As Bank of England head Mark Carney said in February 2017, “The Brexit journey is really just beginning. While the direction of travel is clear, there will be twists and turns along the way. Whatever happens, monetary policy will be set to return inflation sustainably to target while supporting the necessary adjustments in the economy.”178
Carney vowed monetary policy would remain consistent. No lessons were learned through the conjured-money decade—not by the central bankers who crafted it, not by the politicians who did nothing to stop it.
The fragmentation that was baked in to the EU experiment, exacerbated by the financial crisis and the conjured money that elevated markets, came in play. US isolationism in the age of Trump, however, provided Europe an opportunity to strengthen its currency, trade, and diplomatic alliances with other areas.
Sahra Wagenknecht, head of Die Linke (the Left party) in the Bundestag,179 noted that the deluge of money made available to multinational companies, markets, and the financial system versus extractions from the public in the form of austerity measures showed that Eurozone governments “wanted us to forget the role of deregulated financial markets and the fact that the increases in public debt after 2008 are mainly due to the enormous costs of bailing out the banks. This wasn’t just the case in Europe, but all around the world.180
“Together with the Eurozone governments,” said Wagenknecht, “the ECB is responsible for the destruction of a million jobs and a dramatic reduction of wages and pensions especially in Southern Europe. This social catastrophe is completely unnecessary given the fact that the ECB is able to finance investment and jobs on a massive scale. However, the ECB prefers to pump billions into financial markets, fueling speculation and asset price inflation.”181
By the time of the elections in France on May 7 and Germany on September 24, 2017, the anti-euro messaging abated somewhat, but this was all under a relatively stable dose of easy money from the ECB. No matter what changes governments made or how their relationships with each other shifted, there was one constant: the conjured-money policies of their central bankers, which plastered over all the problems of their financial systems.
On June 8, Draghi told reporters in Tallinn, Estonia, “The recovery is proceeding based on consumption and investment, and consumption and investment are growing because of QE also—not only, but also QE. Because interest rates are low, labour income ha
s increased; wealth, households’ wealth has also increased. Financing conditions remain extremely favourable, and this is essentially because of QE.… Regarding non-standard monetary policy measures,” he assured, “we confirm that our net asset purchases, at the current monthly pace of €60 billion, are intended to run until the end of December 2017, or beyond, if necessary.”182
Not surprisingly, one of the premier money conjurers was touting his accomplishments. However, only time and a significant amount of analysis of the period would reveal that his policies, like those of his fellow colluders, fueled another set of asset bubbles, kept flailing and fraudulent big banks solvent, and only randomly coincided with a modicum of support for the global population.
On September 24, 2017, Angela Merkel won her fourth consecutive term as Germany’s chancellor. But, in that ongoing reflection of political polarity based upon economic conditions flared by ineffective monetary policy, the far right party, Alternative for Germany, bagged 13 percent of the vote, nearly triple that of 2013.183
Three days later, Schäuble announced he was leaving his role as Germany’s finance minister. The man whom the New York Times called the Architect of Austerity would become president of the Bundestag in October 2017.184 In that role, he could more directly call out the policies of ECB head Mario Draghi. In the end, though, as the European jobless rate and despair worsened, the two might even come to support the same, ineffective monetary policy. As already noted, this game of central bank thrones and money fabrication with no personal risk to or accountability on the part of the fabricators could make friends of enemies and enemies of friends.
CONCLUSION
The End Is Just the Beginning
If we have this conversation in 10 years’ time… we might not be sitting in Washington, DC. We’ll do it in our Beijing head office.
—Christine Lagarde, managing director of the IMF, July 24, 2017
The 2007–2008 financial crisis that ravaged the global economy was ignited by a rapacious banking system in the United States. In response, herded by the Fed, the central banks of the G7 nations careened down an endless money-manufacturing trail—in broad daylight.
These central bankers launched a massive, unprecedented, coordinated effort to provide liquidity to their banking systems on a global scale, using terms like unlimited and by all means necessary along the way. But their maneuvers did not connote a finite exercise with specific goals. Indeed, central bank–mandated goals like inflation or employment targets were constantly in flux. What they said and what they did had little correlation.
The better indicator of what they achieved was market reaction. If the markets faltered, these central bankers reverted to using words that conveyed easing or uncertainty over the exact way that tightening would occur. If statements had adverse effects, they would flip-flop or cart out another member of the central bank with an alternate opinion.
Policies that conjured artificial money to deal with the crisis continued far beyond their originally stated purpose. Measures that were supposed to be temporary lingered, virtually unchecked, unquestioned, and unstoppable by any external authority. The sheer power of central bank complicity remained a dirty little secret, even to central bankers themselves.
On July 31, 2017, vice chairman of the Fed Stanley Fischer attended the sixtieth birthday celebration of Armínio Fraga, former chairman of the Central Bank of Brazil (1999–2003), in Casa das Garças, Rio de Janeiro. The event didn’t make the US news cycle, probably subverted by the latest tweet from the Trump White House that day. But, in general, central bankers fly beneath the public radar. They can make pithy pronouncements about the improved state of the global economy without acknowledging their role in providing cheap money to fuel speculation that boosts stock and bond markets with the media barely taking notice.
Yet how central bankers bat about tens of trillions of dollars and dictate the cost of money is a big deal. But it takes a fair amount of digging to pull the various strands of their story together in order to grasp the significance. The central banking elite covet reclusiveness, convening at glitzy conferences and using arcane language to keep out of sight and out of mind.
In Rio, when the Fed’s number two man emerged to address the phenomenon of globally low interest rates, he offered a glimpse into the alternative reality in which central bankers exist.1 In his speech, he indicated that factors suppressing rates were many, “some of which could fade over time, including the effects of quantitative easing in the United States and abroad and a heightened demand for safe assets affecting yields on advanced-economy government securities.” But rates were purely manufactured. Conjured. Fabricated. Adopted as emergency measures, and then normalized.
He echoed the laments of Bernanke and other major central bank leaders who complained that low rates alone weren’t enough to stimulate growth… without ever taking responsibility for the policy. Sadly, the Fed vice chair appeared unaware that a low or zero rate policy was incapable of doing what central bankers had promised it would do time and time again—stimulate growth and help people.
“However, as I have said before—and Ben Bernanke before me—‘Monetary policy is not a panacea,’” Fischer continued. “Policies to boost productivity growth and the longer-run potential of the economy are more likely to be found in effective fiscal and regulatory measures than in central bank actions.”2
The financial crisis changed everything, monetarily, geopolitically—even external perception of the elite. Central bankers colluded under the guise of promising real growth. Because they did so in a manner that fluctuated between idle speed and rapid response, it was nearly impossible to qualify or quantify the effectiveness of their actions relative to their stated goals.
During and after the 2008 financial crisis, countries exhibiting the most growth were not those that followed the Fed’s lead to zero, or the ECB and BOJ’s rush to negative rates. The most resilient were the transitioning economies, like China, that developed local infrastructure and partnered with regional and longer-distance partnerships on long-term growth projects instead of harnessing monetary collusion.
So, what happens now that the policies spawned as “emergency measures” have morphed into opioids for banks and markets? The G3 central banks (the Fed, the ECB, and the BOJ) that drove these policies have no exit plan on the other side. Among the G3 central banks there is occasional talk of “tapering” or reducing the size of their books, but it is always with an open door. There is nothing easy about letting go of the quantitative money addiction. Selling the trillions of dollars in securities banks have hoarded could very well cripple the system—again. Just as garage sale junk values are crushed when there are no buyers for the junk, associated “fire sales” could see multiple asset prices come crashing down.
Existing on a diet of artificial money and demand is anything but normal for an economic or financial system, even if it boosts markets to historic highs. If you take air out of a tire, it collapses; if you take too much QE out of the system too quickly, the system collapses. If the flow, or even the possibility, of conjured money was to stop, markets relying on it would tank.
Since the time of the global financial crisis, the Big Six US banks have benefited tremendously from access to cheap money. They profited from central bank purchases of their securities, which exaggerated the value on their books. Wall Street leveraged central banking largesse to fund buybacks of their own shares. Banks issued new shares and debt into a rising market, artificially boosting their own stock values and those of their major corporate clients. By doing so, Wall Street transformed fabricated market values into stratospheric executive bonuses. This vicious cycle of making money for the elites never ended, it just received a new supplier.
Meanwhile, governments issued record amounts of debt and passed austerity measures regardless of their impact on populations. By mid-2017, the amount of securities that the G3 central banks held on their books, about $14 trillion, was equivalent to a staggering 17 percent of glob
al GDP. In 2017, the ECB, BOJ, and BOE were still buying $200 billion worth of assets per month, injecting artisanal money into world markets atop an ever-changing array of excuses.3
Another by-product of the financial crisis and central bank collusion was the rise in economic anxiety that spawned a swing toward nationalism, from Brazil to Great Britain to the United States. The shock of Brexit in the United Kingdom reverberated around the world as voters turned away from the incumbent leadership and its failed economic policies. In the United States, the election victory of Donald Trump, the billionaire “antiestablishment” president, was another manifestation of this trend. These landmark votes were not caused by central banking policy directly but were the effects.
Because central banks operate beyond public scrutiny and government oversight, they are only occasionally called on to explain their actions. They vacillate between taking credit for what they deem are positive results in the world economy and remaining silent in the wake of catastrophic failures that result from their policies. But the mystique around them must dissipate to avoid the general public continually getting whipsawed by their policies.
CHANGE ON THE HORIZON
Because of central bankers’ predisposition to collusive meddling, money-conjuring policies are locked in for years to come, regardless of which elites head the banks.
Yet, evolution looms ahead. The addition of the Chinese renminbi to the IMF’s special drawing rights basket in October 2016—the first such significant adjustment in the SDR since its inception in 1969—marked real change in the monetary system. Similarly, the establishment of the New Development Bank (formerly known as the BRICS bank) and the Asian Infrastructure Investment Bank in 2014 indicated a significant swing away from the historically Western-Japan-dominated banking system. The IMF, by permitting China to enter its reserve currency basket, allowed a change not seen since the euro replaced the German and French national currencies in 1999. The move signaled a growing trend away from the United States and a dollar-based system.
