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.

Advertising

Advertising

Advertising

Advertising

Advertising

Advertising

Advertising

Advertising

Advertising

Advertising

Advertising

Advertising

Advertising

the European Sting Milestones

Featured Stings

These campaigners want to give a quarter of the UK back to nature

How to build a more resilient and inclusive global system

Stopping antimicrobial resistance would cost just USD 2 per person a year

UN General Assembly President defends ‘landmark’ migration compact

No end to Deutsche Bank’s problems: new litigations in the US and frailty in EU stress test

A day in the life of a Rohingya refugee

Better protection against non-cash payment fraud

Preparing for developing countries the ‘Greek cure’

DR Congo Ebola centre attacks could force retreat against the deadly disease, warns UN health chief

Global Talent – Professional Internships

In dreams and in love there are no impossibilities

Junior Enterprises as a solution for Youth Entrepreneurship

Canada has high levels of well-being and solid growth but trade tensions and housing market pose risks while inclusiveness could be improved

Libya: Thousands seek shelter in health clinics from Tripoli fighting, UN warns

Security: better access to data for border control and migration management

MEPs propose more transparent legislative drafting and use of allowances

The relationship between Dengue and the rainfall in Boa Vista, Brazil

Tackle ‘tsunami of hatred’ across the world urges Guterres, to counter anti-Semitism, racism and intolerance

The strong version of the EU banking union gains momentum

‘Shared responsibility’ to stop 420,000 needless deaths from tainted food each year, UN, world leaders warn

Here are 3 lessons Europe can learn from China’s flourishing start-ups

UK: Customs Union with EU or a longer delay of Brexit

Europe’s top court hears Intel and sends € 1.06 bn antitrust fine to review

Scientists have a new suggestion to create more climate-friendly cows

It’s time for global businesses to accept local responsibility

This is how Copenhagen plans to go carbon-neutral by 2025

Canada grants asylum for Saudi teen who fled family: UNHCR

Migration has set EU’s political clock ticking; the stagnating economy cannot help it and Turkey doesn’t cooperate

Joint advocacy letter template to sign and ratify the Treaty on the Prohibition of Nuclear Weapons

With millions of girls ‘at risk’ today of genital mutilation, UN chief calls for zero tolerance

5 surprising ways to reuse coffee grounds

Mergers: Commission fines Canon €28 million for partially implementing its acquisition of Toshiba Medical Systems Corporation before notification and merger control approval

Why saving our forests should be a global priority

Fears for food security and the future of farming families, as Fall Armyworm spreads to Asia

Climate change is destroying a barrier that protects the US from hurricanes

Humanitarian visas would reduce refugees’ death toll

Snowden is the “EU nomination” for this year’s Oscars

4 key ways countries can finance their SDG ambitions

South Sudan: ‘Outraged’ UN experts say ongoing widespread human rights violations may amount to war crimes

The racial wealth gap in the US is affecting its citizens and its economy – this is how

MWC 2016 LIVE: Under Armour learns from “robust community of data”

Restore land to save the planet, boost the economy, says head of UN body combating desertification

Trump and Brexit: After the social whys the political whereto

Food system failures in our age of abundance

UK must make clear what it wants, MEPs say in Brexit debate

‘Stay together and step up’ action to meet Global Goals, ECOSOC President tells development forum

Campaign kicks off with High-level Event on #FairInternships

Generalist practicing: is it worth it?

How to make primary healthcare a favourable career choice for medical students: Strategies and reflections

Worldwide UN family celebrates enduring universal values of human rights

Tuesday’s Daily Brief: sexual violence in conflict, a malaria vaccine trial, updates on Libya, Ebola in DR Congo, Sri Lanka and Mali

Finland must focus on integrating migrant women and their children to boost their contribution to the economy and society

Why did Cameron gain absolute majority? What will he do now? Will he vote ‘yes’ in Britain’s in – out EU referendum?

ITU Telecom World 2017: exploring smart digital transformation

How Finland is fighting fake news – in the classroom

Peace dividend palpable in South Sudan, but ‘grassroots’ are moving faster than elites, says Shearer

E-Governance: A powerful tool to combat, mitigate and sustainably manage disaster risks

“One Belt One Road”: Its relevance to the European Companies

Khashoggi trial in Saudi Arabia falls short of independent, international probe needed: UN rights chief

The future of crypto-assets, from opportunities to policy implications

ECB’s unconventional monetary measures give first tangible results

Inspiring young doctors: the beginning of the change

Davos: Why the global elites couldn’t find answers this year?

More Stings?

Speak your Mind Here

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out /  Change )

Google photo

You are commenting using your Google account. Log Out /  Change )

Twitter picture

You are commenting using your Twitter account. Log Out /  Change )

Facebook photo

You are commenting using your Facebook account. Log Out /  Change )

Connecting to %s