IMF’s Lagarde to Peoples of the world: You have to work more for the banks!

  Christine Lagarde, Managing Director of the International Monetary Fund, delivered a speech recently during this year’s Jackson Hole Symposium, praising the Unconventional Monetary Policies (UMP) followed by the central banks to save the world from a great depression, similar to the one of 1929. The risk was real as Lagarde noted but she didn’t bother to elaborate on the causes. She didn’t spent not one minute to inform us who were responsible for the credit crunch in the US and the sovereign debt crisis in Eurozone. She didn’t care either to assess who gained and who lost from the UMPs applied by the major western central banks in North America and Europe. The Managing Director of IMF stated the obvious by saying that “Early in the crisis, UMP helped prevent a collapse of the financial system and a collapse of activity. This was the case with Quantitative Easing in the United States and Large Scale Assets Purchases in the U.K. Later, the ECB’s Long-Term Refinancing Operations and Outright Monetary Transactions significantly reduced the tail risk of a Euro area breakup”. The fact is that all those trillions of dollars and euros were spent to either recapitalise the banks or restore their liquidity in the US and Europe at zero cost to them. Lagarde said that this kind of central bank policies saved the world from a collapse, in both its financial and real economy facets. Again she didn’t say which part of the world was saved. The European unemployed and the impoverished 30% of the Americans are not saved at all. Who is responsible It was not the developing world that brought about the risk of a total collapse in 2008 or the working people all over the earth. It was the western financial system fully controlled by a small number of banks that pushed the global economy to its knees. Lagarde didn’t care to note that the banks are now in a good shape, at least in the US, while workers in Europe are still looking for a job and 22% of the American look around for food. She also forgot to say that all those trillions were handed over to banks either as recapitalisation funds or as liquidity injections at zero cost, without any auditing imposed on them or a strict recovery programme designed to avoid any such fall out in the future. Compare that with the severe austerity programmes imposed on south European countries, like Greece, for the same kind of bail-outs. Before going further to what Lagarde had to say about our future it’s important to see how the UMPs worked. This is not difficult at all to disentangle. Very simply the banks received the recapitalisation and the liquidity replenishment money for free and ‘invested’ it in risky placements like the Turkish government bonds. They also used it to finance even riskier bets in every possible and impossible market like CDSs, commodity, interest rates and money parity derivatives. Only a very limited, if any, part of all those trillions the banks received under UMPs for free found its way to the real economy, financing real business development plans. Still even in this case the banks are making a hefty profit pocketing the totality of interest payments, since the money cost them nothing at all. This was the real function of UMPs. Free money for the banks However this is a high risk arrangement not only because the banks are playing again risky games, like the real estate financing some years ago in the US and the sovereign debt rivers in Europe. If their current placements for example in Turkey or in all kinds of derivatives turn sour, the world will face again the same dead ends as in 2008. It’s not only that though. The ample and zero cost financing the banks received under the UMPs was not directed to the real economy, which either recedes as in Europe during the last three years or is resuming its activities very painfully as in the US. This creates an increasing social burden with unemployment reaching unseen before levels and threatening key economies like Italy, Spain, France, Greece and Britain with unrest and political accidents. All those countries are now running grave social and political dangers, with emergence of strong extreme political formations. The question now that torments the IMF and almost all think tanks in the western world is how to exit from this vicious cycle. Lagarde said “Let me say it up front: I do not suggest a rush to exit. UMP is still needed in all places it is being used, albeit longer for some than for others. In Europe, for example, there is a good deal more mileage to be gained from UMP. In Japan too, exit is very likely some way off…One thing we can say for certain: the path to exit will and should depend on the pace of recovery, the latter mitigating the potential downsides of the former”. A careful reading of the above quote may be revealing. What the head of IMF says here is that UMPs should stay in place for as long as they are needed. For how long? She didn’t say. As for the prospects of real economy recovery that may show the way to the exit path from the UMPs, the paradigm of the US is very enlightening. The American economy has entered in a growth path albeit slow but when Ben Bernanke, the head of the Fed (US central bank), started talking about an exit from UMPs, the world fell on his head. The American banks have obviously become addicted to this bonanza of zero cost money under the UMP and rejoice their emancipation from the painful task of attracting deposits. Seemingly those banks would do whatever they can to postpone the exit and even ask for the incorporation of UMPs into the regular central bank policies. Exit is not a problem for them. Who cares for an exit Policy makers like Lagarde however have a basic obligation to avoid a new credit and real economy crisis that may have unimaginable social and political consequences. They cannot accept the way of the banks all the way. Someone has to pay though for this exit from UMPs and start sweating more in order to create new wealth in the western economy. Who? But the many stupid! In this line of thinking Lagarde discovered the only way out from the UMPs like that, “While we will not know the precise counterfactual, I would say this: UMP is providing the space for more reforms. We should use that space wisely. UMP should not be code for Ultimately More Procrastination! For UMP countries, getting the mix right means two things. First, push ahead with deeper reforms to lay the foundation for durable and lasting growth. Do not waste the space provided by UMP. We need this broader spectrum of policies to sustain growth over the longer term, to ensure fiscal sustainability, and to repair ailing banking systems”. No need to think too much to understand what Lagarde means by “deeper reforms to lay the foundation for durable and lasting growth”. It’s simply more work for less pay, less social protection, less unemployment benefits and less of all the good things the post WW II era brought to Europe and North America. There comes the true globalisation of wages, salaries, working conditions and social protection. This is the only exit Lagarde has to propose from the era of free money for the banks. In her mind the West has to start producing new real wealth to replace the paper riches the banks kept producing for themselves during the last twenty years. Seemingly the current arrangement is not any more sustainable and according to Lagarde, the Peoples of the developed world have to step in with their sweat and a new austere life style to secure a new source of profits for the western banking system. That’s Lagarde’s way to a safe future.