The banks first to benefit from the new euro trillion ECB plans to print

European Parliament. 8th Parliamentary term in Brussels. Committee on Economic and Monetary Affairs meeting. Roberto Gualtieri, in the Chair (on the left). Monetary Dialogue with European Central Bank President Mario Draghi. (European Parliament Audiovisual Services, 22/09/2014).

European Parliament. 8th Parliamentary term in Brussels. Committee on Economic and Monetary Affairs meeting. Roberto Gualtieri, in the Chair (on the left). Monetary Dialogue with European Central Bank President Mario Draghi. (European Parliament Audiovisual Services, 22/09/2014).

Last week, all the major media reported a deep division in the Governing Council of the European Central Bank, over a Mario Draghi policy proposal to pump more freshly printed money into the struggling Eurozone economy. Nevertheless, the European Sting very early in the morning of Thursday 6 November, before the meeting of the Council, insisted that the euro area monetary authority appears ready to use additional non-conventional measures, including money printing.

As it turned out, the Council unanimously agreed in the afternoon of 6 October to adopt such measures, including the printing and the dispersal of more money to banks, up to one trillion euro, at almost zero interest rate cost (0.05%). In any case, it wasn’t ECB President’s magic talents that pacified the reactions against more money printing, coming mainly from the German central bank, the Bundesbank.

Draghi had in it the powerful backing of the global financial markets, aka banks, which are always thirsty for more free of charge money. In the in face of it, ECB’s President is vying to support the lethargic economy and the creation of jobs. His real problem though is that the developed world (US, EU, Japan) still faces the insatiable appetite of its own financial system for more free money.

Bankers still need more

As the bankers apparently put it, the alternative is a perpetual economic sluggishness or even recession. So the lenders clarify that they still need more zero cost financing, in order to consolidate their balance sheets by replenishing their empty capital accounts. Only then, if ever, they will be able to start again giving loans to the real economy agents and help restart the productive machine.

To this effect, the ECB unanimously decided late last Thursday, to give out one more trillion euro to banks, charging them almost zero interest rate of 0.05% (half a percentage unit), hoping that the lenders will use it to finance investments and consumption in the real sector. Of course, the banks inasmuch as they decide to do that, will charge the real economy players, businesses and consumers, with anything up to double digit rates, pocketing huge gains.

More money for what?

It’s more probable though, that the banks will use a large portion of that trillion to gamble in the derivatives markets, in the developing world government credit and other risky business, a practice which will allow their shareholders and managers to realize quick and massive gains. In short, they will continue doing now with public money, what they did with depositors’ savings some years ago and drove the world to the 2008-2010 credit crunch. Let’s take one thing at a time.

Before considering the latest developments in more depth, let’s clarify a simple fact. Banks are money merchants. They borrow and lend out dough and they gain from the interest rate difference. The largest the difference is, the bigger their gains are. Traditionally, in the developed world, they were borrowing from depositors, but given the risks of the lending business the monetary authorities after WWII imposed prudency controls and rules on bankers, in order to protect people’s savings. Banks, if let loose, can create vast amounts of money of their own, by continuous rounds of borrowing and lending or ‘investing’.

This is exactly what they did and drove the world to its knees in 2008-2010. Lehman Brothers went bankrupt when it had borrowed and ‘invested’ around 70 times its capital. The other major banks were more ‘prudent’ and borrowed ‘only’ 30 or 40 times their capital. The Eurozone banks have now inflated their balance sheets to the triple of euro area GDP. The Cypriot banking system went bankrupt when the island’s lenders had outstretched their balance sheets up to 6-7 times the country’s GDP.

Bankers let loose

This kind of financial activity started in the developed world after 1992, when all prudency rules in the banking sector were gradually abolished. To be noted, that after the 2008 financial crisis those rules have been just superficially restored. The banks then were free to ‘invest’ in all and every risky market tens of times many their capital, usurping their depositors’ money, a practice that led six years ago to the credit crunch. In view of that, governments and central banks in the US and Europe in order to avoid a complete catastrophe of the real economy, pumped trillions into the banking system in the form of public subsidies (capital participation) and zero cost central banks financing.

This policy reached its climax in the US, where the central bank, the Fed, had no restrictions in refinancing the banks through money printing. Under the ‘quantitative easing’ policy, the Fed handed out to banks $4 trillion at zero interest rate cost. The arrangement mainly permitted to US banks to realise huge profits in a few years and quickly recapitalise themselves to the expense of everybody else.

There is an end to everything

But all things have an end. The Fed decided last month to terminate this dangerous policy of free money printing, having inflated its balance sheet to risky levels. Nevertheless, the developed world banking system (US, Europe, Japan) still needs more injections of free of charge trillions. Therefore, the Bank of Japan took the relay and ECB is obviously expected to participate, in order to adequately cover the gap left by the withdrawal of the Fed. At that point, Draghi enters the picture. Under his guidance the central bank of Eurozone is now expected to contribute one more trillion euro, on top of the other two it has already spread out and inflate its balance sheet to €3tn.

As things turned out, the Bundesbank bowed to pressures coming even from the Belin government which has to cater for the problematic German banks. The unholy umbilical cord between banks and the political elite functioned perfectly once more. Jens Weidmann, the Governor of the German central bank, who has been opposing all the Draghi ideas involving money printing, was forced to swallow his objections. Last Friday, when asked about this extra trillion of euro the ECB is ready to print, he said that “it is an expectation, not a target”.

The last bastion of orthodoxy

In reality, Bundesbank was the last impediment in the developed world, opposing the free supply of money to banks. If this policy is going to revive the real economy in Europe, it remains to be seen. In any case, it will perpetuate the supremacy of the banks over real economy. In the US the resumption of activities and the reduction of unemployment were based mainly on technological innovation and the structural efficacy of the economy, not the services of banks. Eurozone needs to do a lot more than printing money, to restart its economy.

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