By Don Quijones, Spain & Mexico, editor at Wolf Street. Originally published at Wolf Street
Project Fear — the massive PR campaign aimed at sowing and watering the seeds of dread about the potential consequences of a YES vote in the upcoming referendum on a British exit from the EU — is in full bloom. In the event of a wrong answer, all manner of biblical disasters can be expected to befall the nation, the British public is constantly being warned.
The country’s national income will shrink, hundreds of thousands if not millions of jobs will vanish, the City of London’s core industry — financial engineering — will migrate across the channel, the currency will collapse, house prices will plummet, European firms will stop selling products to Brits, the U.S. government will impose massive tariffs on British imports, and even Britain’s already dismal climate will get worse.
Project Fear’s shrillest shills include the British government and institutions of State, the UK’s most powerful business lobby group The Confederation of British Industry, the City of London Corporation (and all the too-big-to-fail financial institutions whose interests it faithfully serves), the European Union, the International Monetary Fund, and the world’s biggest fund manager BlackRock.
Another prominent prophet of Brexit doom and gloom is the Bank of England, an institution that, according to its charter at least, is supposed to be “independent” from national politics, but which has done nothing but feed the fear. In testimony to the UK government’s Treasury Select Committee earlier this month, the central bank’s Canadian and former Goldmanite Chairman Mark Carney warned that Brexit is the “biggest domestic risk to financial stability,” with potentially dire consequences for Britain’s balance of payments, its housing market, foreign investment, and its banks.
It’s a shame no one bothered to ask Carney to identify the biggest non-domestic threat to Britain financial stability — he might have admitted that it was the euro, as his predecessor as Bank of England governor, Mervyn King, recently acknowledged.
“Put bluntly, monetary union has created a conflict between a centralized elite on the one hand, and the forces of democracy at the national level on the other,” King writes in his new book, The End of Alchemy. “This is extraordinarily dangerous.”
While King hasn’t explicitly come out in favor of Brexit, he hasn’t ruled it out either, and it doesn’t take much reading between the lines of his new book to divine more or less where he stands — i.e., as far away as possible from Carney.
This glaring difference of opinion between Britain’s former and current central bank governors leaves wavering British voters with a dilemma. Should they believe the words of a former central banker who’s desperately plugging his memoirs, or those of a current central banker who before dedicating his energies to central banking — first in Canada and now in the UK — spent 13 years with Goldman Sachs, which arguably holds more sway over Europe’s financial markets than any other systemically important global financial institution?
While the British public weighs up the potential benefits and drawbacks of life outside the EU, Bank of England officials are “agonizing,” as Bloomberg put it, over “the dangers” from the vote to leave. The central bank is already drawing up contingency plans for a British exit from the EU and will offer extra liquidity to the financial system around the referendum.
British banks are about to be offered billions of pounds of extra cash, just in case the markets seize up. Here’s more from The Daily Telegraph:
The process sees banks offer the Bank of England assets such as mortgage loans, in exchange for cash. The Bank of England offers this facility to banks once per month, but will give banks four chances to take extra cash in June.
Banks can use the scheme if the market for their own assets is very illiquid, giving banks more liquidity and so enabling them to carry on lending even when markets are stressed.
Similar action was allegedly considered during the Scottish referendum, but since the scheme was never required, it was not made public until after the event. This time, officials are “offering the scheme in advance,” presumably because: a) the Bank of England actually wants the people of Britain to think that they are preparing for an “extreme crisis”; and/or b) the banks could probably do with a little extra dose of liquidity anyway.
As the banks prepare for yet another free-money picnic, the Bank of England continues to jack up the fear factor.
In a speech to the OMFIF finance industry group in London, BoE Policy Maker Kristin Forbes said that Britain’s cross-border investments should offer some respite against a jump in uncertainty, but the relief would only be partial and would be “unlikely to fully counteract the many negative effects from increased uncertainty on the broader UK economy.”
For the moment the most visible negative economic consequence of Brexit uncertainty is the acute volatility in the UK currency. As the FT reported, the implied volatility on a three-month timeline — a measure of traders’ and investors’ perceived likelihood of big shakes in the currency over the next three months — is now higher than at any other time over the last six years, suggesting that the market sees bigger risks for Sterling now than it did over the 2014 Scottish referendum, and indeed bigger risks than at any time since the darkest days of the 2008 financial crisis.
With Project Fear now in full swing, that volatility is almost certainly here to stay, at least until the referendum. What happens after that depends on the outcome of the vote, and that will ultimately depend on the ability of the British and European establishment to convince voters that the preservation of the status quo is far more preferable than the risk of the unknown — at least for the establishment!
For now just about the only thing we can be sure of is that the banks on both sides of the English Channel will continue to wet their beaks in the fountain of unlimited, virtually free money. By Don Quijones, Raging Bull-Shit.
Then there’s the dreaded Contagion Effect. Read… Brexit Panic Sets In