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By Rigging the Cost of Money, Central Banks Contributed to Inequality

Nomi Prins discusses solutions to the financial threat we face.

Pedestrians pass a Wells Fargo bank branch in lower Manhattan on April 15, 2016 in New York City. Markets and commercial banks rely on the monetary policies of central banks.

Part of the Series

Nomi Prins’ cogent new book Collusion is not about the accusations against Trump and Russia. Instead, it is about how the central banks of the world, beginning with the Federal Reserve Board, are ginning up the markets with “conjured money” — and how world central banks and markets are responding.

Mark Karlin: Given the contemporary association of the word “collusion,” can you can you summarize what your book, Collusion: How Central Bankers Rigged the World, is about?

Nomi Prins: The word “collusion” has come to be associated with Russia, Trump and the US election. My book is about something entirely different, much more global: the collusion (or coordination) that the US central bank (the Federal Reserve) forged with other major countries to fabricate an abundance of money in the wake of the 2008 financial crisis to support the US financial system at first, and banks and select companies and markets worldwide, as well, since.

The Fed conjured up this money to provide liquidity for Wall Street banks. The policy was then exported to the major central banks who acted as a lender and supplier of last resort to the world. Some of the most notable central banks include the European Central Bank (ECB), the Bank of Japan and the Bank of England.

Collusion is about these powerful institutions’ relationships with each other. The book dives into how central banks rigged the cost of money and the state of the markets, and ultimately created more inequality and instability as a result. They did all of this in order to subsidize private banks at the expense of people everywhere. The book reveals the people in charge of these strategies, their elite gatherings and public and private communications. It uncovers how their policies rerouted economies, geopolitics, trade wars and elections.

How do central banks relate to the world’s markets?

Central banks have several functions from an official standpoint. The first is to regulate the smooth and orderly operation of private banks or public banks within a particular country or region (the ECB is responsible for many countries in Europe).

The other function they are tasked with is setting interest rates (the cost of borrowing money) so that there’s adequate economic balance between full employment and a select inflation rate. The idea is that if the cost of money is cheap enough, private banks will lend to the general population and businesses. The ultimate goal is that the money can be used to expand enterprise, hire people and develop a strong economic posture.

In an environment where the cost of money is too cheap, it could cause inflation. When inflation rises, central banks are expected to lower the cost of money in order to keep it under wraps.

While those basic functions should be relatively simple, what has unfolded is anything but. The reality is, central banks have provided money as cheaply as possible to banks in order to keep the private banking system operating.

Why did you choose to concentrate your research and book on four nations and Europe in the current unfolding of the explosive saga of banking around the world?

When looking at the world since the financial crisis, it was clear that there was a “pivot” between regions. Countries, and their respective central banks, were either forced to participate in, or caught up in, in the collusion started by the Fed. Each country, and each central bank, has a different story to tell — whether it was how they interacted with the US central bank, the manner they colluded to keep the global markets high or how they went their own way.

Nomi Prins.
Nomi Prins.

I set out to visit as many central banks as possible. I wanted to speak with former and current central bank officials. I also wanted to meet with small business owners, students, community leaders and ordinary people who were not invested in the markets but knew the reality of these policies from the ground.

I wanted to get a sense for how a relatively simple economic policy and the financial and market data that went with it was being met with the reality on the ground. I was also fortunate to have a stellar group of international researchers to be my eyes and ears. Their work on the ground analyzing documents and news articles in native languages, and the local culture and sentiment in behind them, removed much of the lens that foreign media can sometimes place. The idea was to draw as much raw information as possible.

The five geopolitical areas included Mexico, Brazil, China, Japan, Europe and the US. They were the places that played the most integral roles in reshaping the global economy since the financial crisis. The actions of their central bank leaders were as connected as I had imagined.

Leaders of Banco de México tried to navigate Mexico’s complicated relationship with the US and its powerful Federal Reserve. The Mexican central bank did so through an exertion of independence that had significant domestic economic and political ramifications. These come into play more so following the election of Donald Trump and his ensuing trade wars.

Then, in Brazil, I saw how Brazil’s central bank had led the charge as the leader of the BRICS countries in order to challenge the US dollar’s hegemony in the wake of the financial crisis. But the country would soon find itself mired in domestic scandal and caught in the middle of the economic war between the US and China.

China strategically deployed its own version of fabricated money — outside the Fed’s purview — to buck the supremacy of the US Federal Reserve. The Chinese central bank looked to push the yuan’s rise as an alternative currency to the dollar. By using its central bank funds, China turbo-boosted its ascent as a global superpower.

Japan also saw opportunity in the world of rigged central banks. The Japanese central bank has been leveraging the rivalry between the US and China to its advantage. The country has actively embarked on the most ambitious money-conjuring scheme of all over the past five years.

Finally, Europe’s response to the financial crisis took central banking operations to the next level. The European Central Bank heightened tension between the EU’s central bank and Germany’s. It fueled widespread instability that led to the compounding problems we see currently plaguing Europe. Those issues have surfaced in political squabbles, disputes over refugees and even the shock of Brexit.

Each region covered plays a role. Every central bank tells a story. The shift in the global economy and financial system is very real. It has been largely carried out at the hands of the Fed at the expense of the rest of the world.

Tell us about “conjured money” policies and their impact on the world’s economies.

Since the financial crisis, the Fed has been unleashed. The US central bank has quite literally fabricated nearly $4.5 trillion in funds to buy bonds (assets) from the major private banks. It should be noted that those private banking institutions are members of the Fed system. The Fed then provides that money to the banks and the institution can then hold the funds in reserve, or choose to sell their Treasury or mortgage bonds back to the Fed.

The Fed’s playbook was then deployed across the world by other central banks. In particular, the G7 collectively fabricated $21 trillion worth of money. They took the liberty then to buy government bonds, corporate bonds, mortgage bonds and, in the case of Japan, ETFs (exchange-traded funds). Other banks, like Switzerland, went so far as to create money and directly purchase stocks.

What this meant was that an external supply of money was injected into the world’s markets, in a nearly limitless amount. These actions pushed markets higher, and the bond markets were inflated with this excess money, causing a new round of debt bubbles.

These “conjured money” efforts did nothing to alter the fundamental values of companies. Companies could borrow money and buy their own stocks on the cheap, increasing the size of corporate debt and the level of the stock market to record highs. Because money was so cheap and interest rates so low, no other investment opportunities could offer the same high returns, so speculators piled into the stock markets, further elevating their levels.

Why does a banking collapse “larger than the 2008 financial crisis” loom?

Because we have built up corporate debt and the markets to such great highs that the potential for a fall would be at an unprecedented level. To further complicate the matter, we have seen record buybacks occurring in the markets, but such landmark moves are not connected to organic growth and are detached from the foundation of any economy. To visualize this, imagine pulling the rug out from under a table full of dishes. The higher you stack the dishes, the greater the crash when they fall.

Today’s global debt to GDP ratio stands at a record of 224 percent, according to the IMF’s latest calculations, amidst record debt of $164 trillion. Much of that debt was created because the central banks offered up money at such cheap levels to borrow.

To add to the complexity, certain central banks are starting to realize that reversing their course could present its own problems. If those cheap money rates do rise, and currencies like the dollar appreciate in value, developing countries that took on debts over the past decade will be cornered into a difficult position to repay it. That debt trap itself could be a catalyst for economic shock and job losses. Such moves would likely begin in lesser-developed economies, and eventually grow outward.

There is also considerable reason to believe that any major banking collapse could have similar characteristics. Banks will either lock down the money they lent, or restrict the funds available for withdrawal to depositors, depending on the severity level of collapse. Historically, governments have tried to respond to such conditions with government-led bailouts (augmented by corresponding central bank bailouts), but they are not usually enough to forestall stock markets crashing, pensions tanking and life-insurance funds being gutted.

Perhaps most alarming, we have seen virtually no real steps to reform the financial system. Despite some cosmetic regulations to curtail certain risky behaviors, since the repeal of the Glass-Steagall Act in 1999, there is still no division between depositors’ funds and those used by banks for speculation. The big banks continue to make massive trading bets, and corporations are still focused on buying back stock for short-term shareholder gains rather than reinvestment in their businesses.

Since the financial crisis, not a single bank CEO has been jailed, despite multiple infractions, frauds and felonies committed by the biggest US banks. If a person steals a car, they get charged with a felony and likely go to prison. If a big bank, like Wells Fargo recently, scams millions of dollars of phony fees from its customers, its CEO gets a raise. Meanwhile, the government regulator in charge gets a promotion to a top spot in the Federal Reserve system.

What do you offer as some solutions to this threat?

By bringing back legislation like the Glass-Steagall Act that divides those two elements of banking, so as to separate them into different institutions, we could keep banks from having greater influence on government and due to their possession of everyday citizens’ money.

Meanwhile, we could limit the amount of money central banks can fabricate to artificially elevate these banks and the markets — markets in which the majority of people have no stake. In fact, just 10 percent of the population owns 84 percent of the stock market. At the very least, we could have an independent audit of these central banks to allow voters and leaders to better understand where their money goes and what is used for.

We should also call out and alter the austerity measures enacted throughout the world that are punitive to people, while in the backdrop so much money has been conjured to help the banks and financial system.

By doing so we could potentially shift central banks’ roles as well as private banks’ incentives to building long-term infrastructure and to financing small and local businesses. In this way, we could assist the less wealthy and enable upward mobility for all. Globally, the $21 trillion conjured by these central banks that still remains, if diverted into the foundational — or real — economy could provide regular citizens of the world (to whom I dedicate this book) a fighting chance.

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