We’re bashing the wrong bankers
By
Tim Price Feb 10, 2012
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Few sights in British cultural life are more unpalatable than watching our politicians siding with the coarser elements of Fleet Street in criticising bankers.
Admittedly, when it comes to a rather public knife fight between members of parliament and financiers, this is a struggle that you really want both sides to lose. Thomas Macaulay, himself a politician, nailed the issue when he observed that “we know no spectacle so ridiculous as the British public in one of its periodical fits of morality”.
Notwithstanding the righteous indignation of the many, it will be a tragedy if the limits of reform to our financial system end with just a few chastened commercial bankers (now working for the state) declining a few million pounds’ worth of bonuses.
The banks and their balance sheets were allowed to swell beyond all reasonable compass during the credit boom. Loans were extended to all who sought them and to many who could never afford them. Plenty of toxic products were distributed throughout the global banking infrastructure, as if a giant muck-spreader had mated with a perpetual motion machine.
Now that the economies and politicians of the West are belatedly discovering austerity, there is an opportunity to point the finger at the facilitators of all of this mess. They are not commercial or even investment bankers. They are central bankers.
Who was tasked with regulation of the banks in the first place, and with prudential oversight of the broader financial system? Who has been given monopoly powers over money-printing, managing interest rates, suppressing inflation (a particularly sick joke) and currency control? Who, over the past decade, has inflated their own balance sheets by anything from 300% (in the case of the European Central Bank), to roughly 400% (the Bank of England), to roughly 700% (Germany’s Bundesbank)?
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Politicians of late have been pathetically struggling to display their free-market credentials. Why do those same free-market credentials not extend to the single most important facets of the modern economy: interest rates, the money supply, the act of unreserved money-creation itself?
Probably because politicians secretly nurse a huge appreciation of their ‘independent’ friends at the central banks. Without them, politicians would be unable to spend vast sums of public money that they don’t have on projects they could otherwise never afford, all paid for by mortgaging the futures of us, our children and grandchildren, through the medium of the national debt.
For 40 years, ever since Nixon took the US dollar off gold in 1971 and ensured that no currency anywhere would be backed by anything of tangible value, politicians (aided and abetted by central bankers) have gleefully promised the world to voters, and paid them back in ever more devalued currency.
But the credit-fuelled, debt-fuelled, easy money expansion of our time has run into a wall. In underwriting insolvent banks, governments – through the agencies of the central banks under their implicit control – have effectively bankrupted themselves.
As the managers at QB Asset Management point out, the global monetary system is based on debt. The money we use is lent into being by banks. When it is repaid through deleveraging, the money supply contracts. But frustratingly for politicians and central bankers, while base money may disappear, all that government debt built up over years of economic denial and wishful thinking remains.
If government debt is not allowed to deteriorate, it must be deleveraged through the ongoing creation of base money. This is exactly what is now happening. Faced with the equally awful choice between debt deflation and monetary inflation, central banks have voted explicitly for the latter. We may live in a democracy, but nobody thought to ask the real voters, the taxpayers who pay for it all, what they might think.
Explicit inflationism keeps the show on the road a while longer. We can all play the game called ‘there are no problems in the banking system’ even as we double-check the extent of the government’s Financial Services Compensation Scheme, which guarantees our bank deposits. But the genie of inflation, once released from the bottle, may be grotesquely difficult to hammer back in.
James Bianco of Bianco Research points out that the balance sheets of the world’s largest central banks ($15trn) now account for roughly one third of global stockmarket capitalisation ($48trn). Central banks, he says, are now ruling markets to an extent that none of us has ever seen. Collectively, “they are printing money to a degree never seen in human history”.
In an increasingly poisonous environment of mud slinging and point scoring between members of the media, our political ‘leaders’, and our besieged commercial bankers, one interest group of uniquely influential policy makers has remained strangely absent from the fray.
Central bankers float mysteriously and invulnerably above the rest of us, neither well known nor remotely understood. Will central banks and their chiefs be able to withdraw trillions of dollars, pounds and euros from our monetary system before inflation or market confidence spiral out of control? We are about to find out.
• Tim Price is director of investment at PFP Wealth Management. He also writes The Price Report newsletter .
• This article was originally published in MoneyWeek magazine issue number 575 on 10 February 2011, and was available exclusively to magazine subscribers. To read all our subscriber-only articles right away, sign up for a three-week free trial now.
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