Yesterday we pondered the beginning of the end of central bank control… over everything.
Stockmarkets, corporate bond markets, house prices, exchange-traded funds (ETFs), mortgage lending and mortgage buying, bank regulation, but most of all government bonds, are in the hands of unelected, unaccountable, frequently foreign, and unknown academics with an infinite supply of funds.
But they’ve suddenly gone quiet.
Central bankers seem to be signalling “It’s over to you, politicians.” That’s because money printing only buys time to fix the deeper problems. At least that’s the conclusion we’ve reached after many years of trying to solve everything with monetary policy.
And so today we examine the government front.
The absence of pressure on reform
The irony is that central bankers have done away with any pressure to solve problems at the government level. If the money printers stand at the ready to cover for them, politicians can promise anything.
Deficits really don’t matter if new money can finance them and keep interest rates low. The destruction of the economy by regulation and taxation doesn’t matter if the central bankers stand ready to support it.
Government doesn’t reform unless it feels fiscal pressure. In Greece, that pressure needs to be so high there’s rioting in the streets. In Ireland, the pressure was handled a lot better. The British needed the humiliation of George Soros and the International Monetary Fund to get their act together.
But without pressure, nothing will change.
And so the central bankers have not done anyone a favour by removing that pressure. Instead, they’ve raised the stakes by allowing governments to go further down the path of fiscal unsustainability. The same goes for overindebted companies, investors and consumers.
Central banks have done the opposite of what Mario Draghi claimed when he said their policies made economies more resilient. They’ve made economies more reliant on quantitative easing (QE), dragging that policy into “normalcy” by necessity. They can’t raise rates now and must keep supporting the markets and governments.
That addiction was exposed by Citigroup’s Matt King:
At an investor breakfast in Stockholm this week, when asked how many subscribed to what we call the “central bankers’ and economists’ view” that fundamentals were now strong enough to permit a very modest dialling back of central bank QE, not a single one of the 25 present raised their hand.
All subscribed to our view that it was instead likely to prove surprisingly disruptive for markets.
Markets are incredibly fragile thanks to central bank policy. They have become the market itself, not a stabilising influence. As Nicholas Smith from CLSA said, they have nationalised the market.
That’s why nothing has changed since QE began
With central bankers financing politicians, it’s not really surprising how little has changed on the government policy level. Politicians were so determined to change things in 2008 – back when the crisis applied fiscal pressure on governments around the world. Only some of the PIIGS have improved things.
But now the banks are bigger, the government involvement in financial markets is stronger, deficit projections are worse, reliance on central bankers and bailouts is bigger, and the list goes on. Government-supported Fannie Mae and Freddie Mac made 54% of the US’s loans for apartment purchases in 2016.
Even the people in charge are much the same. In 2008 the number of Goldman Sachs alumni reached absurd proportions in policy-making roles.
Former Federal Reserve insider Danielle DiMartino pointed out in her recent book that, “In 2017, four out of the five District Bank presidents eligible to vote on the FOMC will be Goldman alums. And let’s not forget Bank of England governor Mark Carney and Mario Draghi, head of the ECB, just two of the many former Goldman Sachsonites now in overseas central banking posts.”
You’ll never guess where the favourite contender to replace Janet Yellen used to work…
Until next time,
Nick Hubble
Capital & Conflict
Category: Central Banks