Central bank apocalypse?
There was a time when apart from those in finance and economics most people didn’t know who their central bankers were. They were bureaucrats who were rarely seen, even less heard and largely irrelevant to the average person. I doubt if you asked people in the UK or any other Western country to name the former heads of their central banks they would get one. I would bet a large majority would be able to tell you who has been in charge for the last 10 years.
What that demonstrates is the increasingly active role that central banks have taken over this period and it is one that has next to no democratic accountability. Once appointed these people are largely left alone to do what they want and being honest they have largely been catastrophic.
So what have they been doing?
Increased systemic risk
Central banks via Quantitative Easing (QE) have bought sovereign debt bonds which has suppressed their yield. This has crowded out investors and pushed them into ever more risky types of bonds in a quest for a return on investment. This has been a global phenomenon and has led to the crazy situation where countries like Greece who are broke by any stretch of the imagination can now borrow at around 1.50% over 10 years and in 2017 Austria sold a 100 year bond, which would mean an investor would need to calculate risk based on forecasting events until 2117. Put that in perspective it was only 101 years ago since the Austrian Hungarian Empire broke up! This has led to a massive build up in risk in the financial system which will be part of the next crisis.
Ruined the pension funds
If you are lucky enough to have a pension it probably has a huge portion of its investments in your sovereign debt bonds. This is normally a legal requirement because they provide the most secure foundation and income for a fund. Sadly not any longer due to QE and the suppression of yields which means that sovereign bonds provide little income from the interest and are actually negative in real terms in most cases which means they lose the investor money. This means that pensions are losing money each year on an asset they are legally required to hold! To counter this pension funds have been forced to increase their exposure to risky investments in order to make up the shortfall. This sounds good until the whole system goes bang and then a lot of people will lose more than their job - they will lose their future.
Blown inequality out of control
QE was supposed to provide the commercial banks with liquidity (cash) to allow them to start lending again. But why lend for an actual investment in a business which can be risky or low return when you can simply lend it or spend it on the stock market - Boom. So markets have skyrocketed from freshly printed cash and record low interest rates. The outcome of this has been ever new record highs on the markets. Great if you had money invested but as most people don’t it has simply meant inequality has widened aggressively with absolutely no benefit to the real economy. The rich have got richer and everyone else got left behind. The public's rage at the widening divide between the have's and the have not's is now being played out in the electoral system in many countries.
Blown out house prices
Banks will always lend for mortgages especially when given cheap loans by the central banks to help fund them. Why - because mortgages are nearly always repaid - it is the very last thing people will walk away from. So money has poured into the housing market which when combined with ever decreasing interest rates and people looking for somewhere to put their cash has meant that house prices in prime locations like major cities have exploded. What does that mean in reality - my house in South Norwood in London doubled in value over 5 years and it is not even a great area. Great for those with a house (maybe) but it has kicked the ladder away from the young who have zero chance of owning a house now.
Interest rate cuts for the rich
It’s next to impossible to get any return on your money because central banks have cut rates so aggressively. The average person pours money into their 1.25% a year savings account but with inflation running higher they lose money year after year. But any time a financial market so much as sneezes central banks are out cutting interest rates to try and pump the markets higher. This is sold as an effort to help the real economy but this is nonsense. No investor is going to be swayed by tiny interest rates changes especially when they are at record lows. This is welfare for the financial sector and the rich.
Negative rates for the suckers
But central banks are not finished there. The European Central Bank (ECB) being a pioneer in stupidity brought in negative rates in 2014. This is the process whereby banks will charge you to deposit money with them. They are holding steady now but no doubt will push them much more negative in the near future, probably with the rest of the central banking fraternity following shortly after. The rich of course won’t feel it as they are able to move and invest their money elsewhere but the average person will get shafted as will their pensions again. Ironically even the banks hate negative rates as it is toxic for their profitability but no doubt central banks will find a way to bail out the banks but not the average person.
Democratic damage
But central banks have done the most damage to democracy. This has been seen in the UK where Mark Carney the current governor of the BOE has repeatedly popped up to comment on political issues which are outside of his remit. This has happened most notably with the Scottish and EU referendums where he informed the population of what the bank thought in a clear effort to skew the vote. In the US the former NY Fed chair Dudley wrote extensively about how the Fed should perhaps attempt to influence the 2020 election by refusing to cut rates in order to push Trump out of office - all to protect the Fed’s independence of course. I doubt this was done without the knowledge of senior people with the Fed. But this is nothing when compared to the sinister and undemocratic efforts of the European Central Bank.
The ECB wrote a letter to the Italian PM Silvio Berlusconi threatening to bankrupt Italy by allowing bond yields to keep rising unless he resigned. Once he did they along with the EU imposed an unelected government on Italy which pushed through a series of structural reforms against the wishes of much of the population. In Greece the ECB’s efforts were even more outrageous and illegal where it pushed the Greek PM George Papandreou out of office and then later following a referendum which rejected the troika’s bailout terms simply froze the Greece banking system which brought the economy to its knees forcing the Greek government accept the bailout terms.
Gonna fix global warming
More recently we have had central banks discussing what they should do about global warming. This is demonstrates how far we have come that central bankers who are unelected bureaucrats would even discuss something that has zero to do with the monetary system and their defined mandate. It shows that they are now willing on whim to move into new areas of policy. I am not judging whether we should do something about it but the decision should be made via the democratic system. This should involve the public who can weigh the costs etc. It should and could be then electorally tested. Instead we have central bankers deciding that they have the right and responsibility to get involved even though no one has asked them, updated their mandate or are democratically overseeing them.
To conclude I supported many of the special measures that were introduced to pull the world through the 2008 crisis. But these monetary measures have long since become the norm rather than the exception and they are now having very damaging effects on society. These effects are largely driven by the way the interventions have been designed and the fact that there are no democratic controls. I don't know it it was their intention to help the rich and powerful but that has been the end result.
Regardless I think we have long since moved beyond the point where central banks can be left to do their ‘thing’. They either need to return to very narrow operating parameters which are policed by the political system or we need to accept that they can’t be independent and they need to be folded into the government - either way they need to be held accountable to the public. Their decisions should be openly discussed, debated and criticised as part of normal democratic discourse. This is vital because they are are rapidly becoming a shadow government with zero democratic accountability or oversight.
My concern is without this we are likely to see ever increasing central bank involvement which will drive increasing anger and disenchantment with the political system. This will give rise to increasing political extremism - you are already starting to see this in Europe with the rise of AfD in Germany, Lega Nord in Italy and the True Finns in Finland etc. Politicians around the world need to stop relying on monetary policy to resolve our many economic issues and take ownership. They have many tools to use but have refused to use them to date. It is no longer acceptable for them to shirk their responsibility.
It is time to step up.
What that demonstrates is the increasingly active role that central banks have taken over this period and it is one that has next to no democratic accountability. Once appointed these people are largely left alone to do what they want and being honest they have largely been catastrophic.
So what have they been doing?
Increased systemic risk
Central banks via Quantitative Easing (QE) have bought sovereign debt bonds which has suppressed their yield. This has crowded out investors and pushed them into ever more risky types of bonds in a quest for a return on investment. This has been a global phenomenon and has led to the crazy situation where countries like Greece who are broke by any stretch of the imagination can now borrow at around 1.50% over 10 years and in 2017 Austria sold a 100 year bond, which would mean an investor would need to calculate risk based on forecasting events until 2117. Put that in perspective it was only 101 years ago since the Austrian Hungarian Empire broke up! This has led to a massive build up in risk in the financial system which will be part of the next crisis.
Ruined the pension funds
If you are lucky enough to have a pension it probably has a huge portion of its investments in your sovereign debt bonds. This is normally a legal requirement because they provide the most secure foundation and income for a fund. Sadly not any longer due to QE and the suppression of yields which means that sovereign bonds provide little income from the interest and are actually negative in real terms in most cases which means they lose the investor money. This means that pensions are losing money each year on an asset they are legally required to hold! To counter this pension funds have been forced to increase their exposure to risky investments in order to make up the shortfall. This sounds good until the whole system goes bang and then a lot of people will lose more than their job - they will lose their future.
Blown inequality out of control
QE was supposed to provide the commercial banks with liquidity (cash) to allow them to start lending again. But why lend for an actual investment in a business which can be risky or low return when you can simply lend it or spend it on the stock market - Boom. So markets have skyrocketed from freshly printed cash and record low interest rates. The outcome of this has been ever new record highs on the markets. Great if you had money invested but as most people don’t it has simply meant inequality has widened aggressively with absolutely no benefit to the real economy. The rich have got richer and everyone else got left behind. The public's rage at the widening divide between the have's and the have not's is now being played out in the electoral system in many countries.
Blown out house prices
Banks will always lend for mortgages especially when given cheap loans by the central banks to help fund them. Why - because mortgages are nearly always repaid - it is the very last thing people will walk away from. So money has poured into the housing market which when combined with ever decreasing interest rates and people looking for somewhere to put their cash has meant that house prices in prime locations like major cities have exploded. What does that mean in reality - my house in South Norwood in London doubled in value over 5 years and it is not even a great area. Great for those with a house (maybe) but it has kicked the ladder away from the young who have zero chance of owning a house now.
Interest rate cuts for the rich
It’s next to impossible to get any return on your money because central banks have cut rates so aggressively. The average person pours money into their 1.25% a year savings account but with inflation running higher they lose money year after year. But any time a financial market so much as sneezes central banks are out cutting interest rates to try and pump the markets higher. This is sold as an effort to help the real economy but this is nonsense. No investor is going to be swayed by tiny interest rates changes especially when they are at record lows. This is welfare for the financial sector and the rich.
Negative rates for the suckers
But central banks are not finished there. The European Central Bank (ECB) being a pioneer in stupidity brought in negative rates in 2014. This is the process whereby banks will charge you to deposit money with them. They are holding steady now but no doubt will push them much more negative in the near future, probably with the rest of the central banking fraternity following shortly after. The rich of course won’t feel it as they are able to move and invest their money elsewhere but the average person will get shafted as will their pensions again. Ironically even the banks hate negative rates as it is toxic for their profitability but no doubt central banks will find a way to bail out the banks but not the average person.
Democratic damage
But central banks have done the most damage to democracy. This has been seen in the UK where Mark Carney the current governor of the BOE has repeatedly popped up to comment on political issues which are outside of his remit. This has happened most notably with the Scottish and EU referendums where he informed the population of what the bank thought in a clear effort to skew the vote. In the US the former NY Fed chair Dudley wrote extensively about how the Fed should perhaps attempt to influence the 2020 election by refusing to cut rates in order to push Trump out of office - all to protect the Fed’s independence of course. I doubt this was done without the knowledge of senior people with the Fed. But this is nothing when compared to the sinister and undemocratic efforts of the European Central Bank.
The ECB wrote a letter to the Italian PM Silvio Berlusconi threatening to bankrupt Italy by allowing bond yields to keep rising unless he resigned. Once he did they along with the EU imposed an unelected government on Italy which pushed through a series of structural reforms against the wishes of much of the population. In Greece the ECB’s efforts were even more outrageous and illegal where it pushed the Greek PM George Papandreou out of office and then later following a referendum which rejected the troika’s bailout terms simply froze the Greece banking system which brought the economy to its knees forcing the Greek government accept the bailout terms.
Gonna fix global warming
More recently we have had central banks discussing what they should do about global warming. This is demonstrates how far we have come that central bankers who are unelected bureaucrats would even discuss something that has zero to do with the monetary system and their defined mandate. It shows that they are now willing on whim to move into new areas of policy. I am not judging whether we should do something about it but the decision should be made via the democratic system. This should involve the public who can weigh the costs etc. It should and could be then electorally tested. Instead we have central bankers deciding that they have the right and responsibility to get involved even though no one has asked them, updated their mandate or are democratically overseeing them.
To conclude I supported many of the special measures that were introduced to pull the world through the 2008 crisis. But these monetary measures have long since become the norm rather than the exception and they are now having very damaging effects on society. These effects are largely driven by the way the interventions have been designed and the fact that there are no democratic controls. I don't know it it was their intention to help the rich and powerful but that has been the end result.
Regardless I think we have long since moved beyond the point where central banks can be left to do their ‘thing’. They either need to return to very narrow operating parameters which are policed by the political system or we need to accept that they can’t be independent and they need to be folded into the government - either way they need to be held accountable to the public. Their decisions should be openly discussed, debated and criticised as part of normal democratic discourse. This is vital because they are are rapidly becoming a shadow government with zero democratic accountability or oversight.
My concern is without this we are likely to see ever increasing central bank involvement which will drive increasing anger and disenchantment with the political system. This will give rise to increasing political extremism - you are already starting to see this in Europe with the rise of AfD in Germany, Lega Nord in Italy and the True Finns in Finland etc. Politicians around the world need to stop relying on monetary policy to resolve our many economic issues and take ownership. They have many tools to use but have refused to use them to date. It is no longer acceptable for them to shirk their responsibility.
It is time to step up.
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