Six years after the Western financial system collapsed under its immeasurable greed for easy money expressed as an insatiable thirst for risk, the American and European banks and governments are 30% deeper in debt. Few of them can duly repay without major problems of the most dangerous political kind. It is even more alarming that every agent within the advanced world’s financial system increasingly depends on central bank zero cost financing. At the same time the small and medium enterprises in large parts of Europe and the US are suffocated from the lack of bank loans, the only form of credit they know. That’s why the real economy in both shores of the North Atlantic struggles to gain a sustainable growth path.
This is directly related to the fact that the major western banks are diverting the largest part of the money they get for free from central banks to their ‘shadow banking’ activities. Of course, the reason is that in this way they escape any kind of financial rules and controls. As the IMF’s Global Financial Stability Report which appeared on 8 October states it, “Although shadow banking takes vastly different forms within and across countries, some of its key drivers tend to be common to all: search for yield, regulatory circumvention, and demand by institutional investors. The contribution of shadow banks to systemic risks in the financial system is much larger in the United States than in Europe”.
How dangerous is the path?
Reality is much more dreadful than the diplomatic language that IMF puts it in. The Presidents of the US and the Eurozone central banks Janet Yellen and Mario Draghi are virtually blackmailed by major American and European banks to keep feeding them with fresh and free of charge cash, otherwise they will unleash the Armageddon they hide in their balance sheets.
Every time the Fed raises the issue of ending the stimulus of quantitative easing and start charging an interest rate, major US banks and financial firms issue direct threats that such an eventuality will have major side effects. They say that even benchmark American treasury bonds will be in danger. Bankers demand larger yields to continue investing in them. It is as if the universe has promised them easy money ‘ad perpetuam’.
Sending the market down when they want
During last week all the Atlantic stock exchanges kept falling in view of the American central bank’s difficult decision on the burning issue of whether and when to start charging an interest rate for its ample financing of the American banks. At the end Yellen didn’t dare to fix a time for this to happen. Still all financial markets kept crumbling because the IMF published its Global Financial Stability Report which focused on those issues.
The report stresses “that although economic benefits of monetary ease are becoming more evident in some economies, market and liquidity risks have increased to levels that could compromise financial stability if left unaddressed”. Translation: things have come exactly at the same point when the 2008 credit crunch broke out and nobody knows which market bubble is about to burst. According to Wall Street Journal “…top U.S. and British regulators will conduct “war games” to rehearse how they would handle the failure of a huge financial firm with operations in both countries”.
Accustomed to usurp other people’s money
The slightest reference to the possibility that the US central bank should or could start charging anything on the loans it has amply offered to the banks under its QE policy, drives the bankers mad. In reality they demand that the US central bank, the Fed, must continue supplying them with trillions without any cost being charged. To this day and after the 2008 credit crunch, the Fed has advanced to banks around $4 trillion. Fed’s balance sheet has being inflated to around $4.6tn today from $800 billion in 2008. All that money has been handed to the American banks at zero interest rate cost and the account still swells by tens of dollar billions every month. Thank God this unholy practice is supposed to stop this month.
Central bank financing has directly helped the banks to create new bubbles. In many markets – New York and London real estate skyrocketing prices are witnesses to that – investors appear ready to buy overpriced assets. The same is true for some Asian securities and other fancy financial goodies. On top of that Greece is again becoming a financial time-bomb due to the country’s climaxing political instability. In view of all that, during the past months, when the risks of a new financial crisis have become apparent, regulators and bankers are watching each other in the eyes. Until now authorities blink first.
What are the real stakes?
There are other readings of this situation though. Some analysts insist that the central banks and financial watchdogs in the West are on the same side with the major US and a few European banks. In this line of thinking, both sides aim, by using the West’s financial supremacy, at extracting an ever-increasing part of the value produced by the real economy in the rest of the world. In this logic, the West aims at controlling and absorbing an increasing part of the wealth produced by manufacturing and the exploitation of natural resources in the rest of the world.
IMF rings the bells
Indeed IMF’s latest Global Financial Stability Report is ringing the bells of escalating risks in financial markets. Printing trillions of new dollars, and to a lesser extent of euros, in the US and the Eurozone during the past six years, has hardly helped the Atlantic economy gain a sustainable growth path. Stopping the printing machines though may trigger a new and devastating recession, but again continue running them may lead directly to a new credit crunch, with new and old markets bubbles start bursting again one after the other. In conclusion, investments on overpriced assets in many global markets and the Greek question may again release the new financial Armageddon.