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.

the sting Milestone

Featured Stings

Can we feed everyone without unleashing disaster? Read on

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

This Brooklyn farm company is training a new generation of urban farmers

Italian electoral results to change Eurozone climate and weight on the Cyprus issue

International partners pledge $1.2 billion to help cyclone-hit Mozambique recover, ‘build back better’

Single European Sky: for a more sustainable and resilient air traffic management

Human rights breaches in Hong Kong, Russia and at the US-Mexican border

Venezuela: Competing US, Russia resolutions fail to pass in Security Council

Nuclear non-proliferation treaty an ‘essential pillar’ of international peace, says UN chief

Does the world have strong enough institutions to handle risks like Trump and Brexit?

EU: 13 major banks may pay fines 10% of worldwide turnover

Chinese Premier Li Keqiang’s speech from World Economic Forum’s Annual Meeting of New Champions

UN-led Yemen ceasefire monitoring team gets ready to begin operations

MWC19 Wrap Up, in association with The European Sting, GSMA’s Brussels Media Partner for the 6th Consecutive Year

Can we understand how the universe was formed? A young scientist explains

If innovators can solve India’s problems, they can save the world. Here’s why

As children in Ebola-affected areas of DR Congo head back to school, UNICEF ramps up support

3 ways the coronavirus is affecting animals around the world

‘Complacency is still strong’ over stopping genocide, says top UN adviser

Guarantee of mental health’s stability in times of pandemic

The British “nonsense”, the relaxed Commissioner and the TTIP “chiaroscuro” at this week’s Council

Pakistan-India crossing is a ‘Corridor of Hope’, UN chief says, wraps up visit with call for interfaith dialogue

Eurozone: Disinflation engulfs the industrial goods sector

Europe’s richest regions actively seek investment from China’s biggest banks

Who are the winners and losers in Africa’s Continental Free Trade area?

Electronic cigarette – is it really a safer alternative to smoking?

Miguel Arias Cañete European Commission

EU should invest more in climate and not sit back on its laurels and watch

COP21 Breaking News: “We must accelerate the process”, Laurent Fabius cries out from Paris

2020’s ‘wind of madness’ indicates growing instability: UN chief

A new report outlines the shipping industry’s plans for decarbonization

Cohesion Policy: involving citizens to ensure better results

The big challenge of leadership and entrepreneurship in Europe

Budget Committee backs €2.3 million worth of aid to help 550 redundant media workers in Greece

How bad could British healthcare get for its citizens abroad post-Brexit?

Break taboo around menstruation, act to end ‘disempowering’ discrimination, say UN experts

EU Budget 2020 deal: Investing more in climate action, youth and research

Finland, Switzerland and New Zealand lead the way at teaching skills for the future

US resolution to condemn activities of Hamas voted down in General Assembly

France-Germany: Divided in Europe, USA united in…Iran

Will COVID-19 usher in a new culture of outdoor living and dining?

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

‘Many challenges to overcome’ at UN, in fight against abuse: victims’ advocate

State aid: Commission approves €3.2 billion public support by seven Member States for a pan-European research and innovation project in all segments of the battery value chain

We need a reskilling revolution. Here’s how to make it happen

More than 30 years of US trade with China, in one chart

UN aid teams scramble to reach ‘most remote places’ cut off by Cyclone Kenneth in Mozambique

UN, world leaders, condemn Sri Lanka terrorist attacks targeting churches, hotels, which leave more than 200 dead

Sacrifice of fallen ‘blue helmet’ to be honoured with UN’s highest peacekeeping award

EU Youth Conference in Amsterdam: enabling young people to engage in a diverse, connected and inclusive Europe

Why do medical students need to emigrate to become doctors in 2017?

Mergers: Commission approves acquisition of Nets’ account-to-account payment business by Mastercard, subject to conditions

Mental health in times of a pandemic: what can each individual do to lessen the burden?

Single-use plastics: New EU rules to reduce marine litter

Member states jeopardising the rule of law will risk losing EU funds

Yemen: ‘Living hell’ for all children, says UNICEF; Angelia Jolie calls for ‘lasting ceasefire’

More than just a phone: mobile’s impact on sustainable development

Some endangered languages manage to thrive. Here’s how

Europe’s moment: Repair and prepare for the next generation

Commission assesses and sets out reform priorities for the countries aiming to join the EU

Medical students: The need for emigration

Seize the opportunities of digital technology to improve well-being but also address the risks

EU approves disbursement of €500 million in macro-financial assistance to Ukraine

More Stings?

Advertising

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