By Nomi Prins, a former investment banker, now a journalist, best-selling author, and speaker. Her latest book is All the President’s Bankers, which examines the relationships of presidents to key bankers over the past century and how they impacted domestic and foreign policy. Originally published at her website
The battle between the ‘haves’ and ‘have-nots’ of global financial policy is escalating to the point where the ‘haves’ might start to sweat – a tiny little. This phase of heightened volatility in the markets is a harbinger of the inevitable meltdown that will follow the grand plastering-over of a systemically fraudulent global financial system. It’s like a sputtering gas tank signaling an approach to ‘empty’.
Obscene amounts of central bank liquidity applauded by government leaders that have protected the political-financial establishment with failed oversight and lack of foresight, have coalesced to form one of the most unequal, unstable economic environments in modern history. The ongoing availability of cheap capital for big bank solvency, growth and leverage purposes, as well as stock and bond market propulsion has fostered a false sense of economic security that bares little resemblance to most personal realities.
We are entering the seventh year of US initiated zero-interest-rate policy. Biblically, Joseph only gathered wheat for seven years before seven years of famine. Quantitative easing, or central bank bond buying from banks and the governments that sustain them, has enjoyed its longest period of existence ever. If these policies were about fortifying economic conditions from the ground up, fostering equality as a force for future stability, they would have worked by now. We would have moved on from them sooner.
But they aren’t. Never were. Never will be. They were designed to aid big banks and capital markets, to provide cover to feeble leadership. They are policies of capital creation, dispersion and global reallocation. The markets have acted accordingly.
What began with the US Federal Reserve became a global phenomenon of subsidizing the financial system and its largest players. Most real people – that don’t run hedge funds or big banks or leverage other peoples’ money in esoteric derivatives trades – have their own meager fortunes at risk. They don’t have the power of ECB head, Mario Draghi to issue the ‘buy’ order from atop the ECB mountain. Nor do they reap the benefits.
Retail sales are down because people have no extra money and can’t take on excess debt through credit cards forever. They aren’t governments or central banks that can print when they want to, or big private banks that can summon such assistance at will.
Federal Reserve Chair, Janet Yellen recently chastised these bankers. This, while the Fed has become their largest client and the world’s biggest hedge fund. While she wags her finger, the Fed is paying JPM Chase to manage the $1.7 trillion portfolio of mortgage related assets that it purchased from the largest banks. In other words, somewhere along the line, the public is both paying to buy nefarious assets from the big banks at full value, thereby supporting an artificially higher price and demand for these and similar assets, and paying the nation’s largest bank for managing them on behalf of the Fed. Yellen says things like “poor values may undermine bank safety” and all of a sudden she’s on an anti-bank rampage? What about the fact that just six banks control 97% of all trading assets in the US banking system and 95% of derivatives? Or that 30 banks control 40% of lending and 52% of assets worldwide?
Think about the twilight zone squared logic of this. Yellen’s predecessors, Alan Greenspan and Ben Bernanke, enabled the path of the US banking system to become more concentrated in the hands the Big Six banks, which have legacy connections to the Big Six banks that drove the country to disaster during the 1929 Crash, and have been at the forefront of the nexus of political-financial power polices for more than a century. Yellen had a seat at the Clinton administration banking deregulation table when Glass-Steagall was summarily dismantled thereby enabling big banks to become bigger and more complex and risky. Those commercial banks that didn’t hook up with investment banks back then, got their chance in the wake of the financial crisis of 2008. They also concocted 75% of the toxic assets that were spread globally and the associated leverage behind them in the lead up to 2008.
Rather than show meaningful initiative to engender safety in the financial system (which if she had, or wanted to, would have rendered her a non-viable candidate for her position), she reprimanded the banks while providing them cheap capital. That’s like egging people with a tendency toward excess on as they gorge on multi-course gourmet dinners, making disparaging comments about their girth, and being dubbed their coach for The Biggest Loser while serving them the next course. Political theatre is its own end.
This latest rise of market volatility, however, is foreshadowing the real end of global QE as a proxy bond investor packaged for political purposes as necessary to combat deflation, increase liquidity, or whatever the reason-du-jour providing the QE program legitimacy beyond its true function of providing cheap capital to the private banking system, is.
The reason that the artificial resuscitation of the entire global financial system has worked as long as it has is due to the collaboration of major governments, central banks, and powerful private banks behind it. These three pillars of power have been mutually reinforcing. Since early 2009, the bond and stock market have soared on the back of external capital from the central banks supported by the elite government leaders of the countries with the largest banks.
Just this year, 23 central banks have cut rates due to ‘sluggish growth’ – as if this cheap money has helped main populations anywhere. In the process their currencies will weaken. The US may have a strong dollar on the back of having had the largest and first QE / ZIRP program which is why (behind the banks’ need) there’s no particular reason – yet – for the Fed to raise rates. Plus, the labor situation is barely improving even if the headline unemployment figures based on low job-market participation and poorly paying jobs appears better. Also, the ‘lower demand’ amidst higher oil production (and some big commodity trading desks) slamming oil prices and blaming Saudi Arabia, has made inflation (outside of the cost of living and the stock market) look tame enough to make rates hikes unnecessary. But the big market players think (or say, anyway) that rate hikes could happen soon. This uncertainty begets higher volatility.
Meanwhile, the Euro is tanking against the dollar because Mario Draghi’s ECB is on a QE roll, buying covered bonds from the likes of Deutschebank, ING, and BNP while pummeling Greece for not wanting to further crucify its population in order to repay funds that had egregious terms to begin with. Their ‘bailout’ had nothing to do with helping Greece attain a stronger economy and everything to do with validating speculators and the banks that sold them bonds. The IMF even sort of admitted this. But the Troika has made plutocratic finance a blood sport.
All this is fodder for triple digit market swings. Somewhere in the madness, lies the notion that this particular policy of speculation subsidization for the upper banking class can’t last forever. There are only so many entities that can buy so many bonds and filter so much cheap capital into the system for so long. At some point the ECB program will run its stated course. Rates around the world will head to zero or somewhat negative. And then what? There will be no more powder in the QE / ZIRP global keg. That’s when it gets really bad.
Meanwhile, the rising volatility we will face this year (to the downside) in the financial markets, will be a forbearer of this unraveling. The best course for mere individuals is to reduce their exposure to the insanity. “Know when to hold ‘em, know when to fold ‘em, know when to walk away” as the lyrics to the old gambling song go. Because rest assured, the big boys are going to be on the financial life rafts first…economic Titanic style. That volatility – it’s the iceberg finally looming.