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

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

Parliament approves €34m in EU aid to Greece, Poland, Lithuania and Bulgaria

What we know about the Wuhan coronavirus and urgent plans to develop a vaccine

Eurozone: Black economy loves the South

The world’s e-waste is a huge problem. It’s also a golden opportunity

The EU’s trading partners: US, China and the rest

The European Parliament x-rays the troika’s doings

Paris is building the world’s greenest business district. What can other cities learn from it?

Growing a future free of terrorism: UN News special report from Cameroon

The Fourth Industrial Revolution is about to hit the construction industry. Here’s how it can thrive

Algeria must stop arbitrary expulsion of West African migrants in desert: UN migration rights expert

Job automation risks vary widely across different regions within countries

How well you age depends on what you think of old age

18th European Forum on Eco-innovation live from Barcelona: What’s next for eco-labelling?

Mental health: the challenge of society

Investment, not debt, can kick-start an entrepreneurial Europe

World in grip of ‘high impact weather’ as US freezes, Australia sizzles, parts of South America deluged

Climate change is a security threat. We must act now

Smoking VS Vaping: is it a battle?

MEPs and European Youth Forum call on EU to Invest in Youth

EU’s tougher privacy rules: WhatsApp and Facebook set to be soon aligned with telcos

UN experts decry torture of Rakhine men and boys held incommunicado by Myanmar’s military

UN boosts humanitarian appeal to help tackle Zimbabwe’s ‘worst-ever’ hunger crisis

The Eurogroup protects Germany and blames others

Marking international day, UN experts call for urgent action to end racial discrimination, in wake of New Zealand anti-Muslim attack

Air pollution, the ‘silent killer’ that claims seven million lives a year: rights council hears

US pardons for accused war criminals, contrary to international law: UN rights office

The role of students in a migration crisis in Roraima, Brazil

EU approves disbursement of €500 million in Macro-Financial Assistance to Ukraine

Is Erdogan losing game and match within and without Turkey?

This ‘hidden killer’ is responsible for one in five deaths, and you might never have heard of it

Is blockchain overhyped? 5 challenges to getting projects off the ground

Parliament criticises Council’s rejection of money laundering blacklist

The 13th round of TTIP negotiations hits a wall of intense protests and growing concerns

Draghi tells the EU Parliament his relaxed policies are here to stay

This incredibly detailed map of Africa could help aid and development

This is how climate science went mainstream

Backed by UN agency, countries set to take on deadly livestock-killing disease

Refugee crisis update: Commission still in panic while Turkey is to be added in the equation

Cohesion Policy after 2020: preparing the future of EU investments in health

Lithuania finds the ways to maintain its energy security

More answers from Facebook ahead of Parliament hearing today

Here are 10 of Nelson Mandela’s most inspirational quotes

Syrian civilians must be protected amid ISIL executions and airstrikes: Bachelet

For the future of Europe youth remains a priority

Libya’s migrants and refugees with tuberculosis ‘left to die’ in detention centres

How to change the world at Davos

The EU Commission implicates major banks in cartel cases, threatens with devastating fines

Why the ocean holds the key to sustainable development

This plastic-free bag dissolves in water

Take care of your borders and then expand them

UN sees progress in fight against tobacco, warns more action needed to help people quit deadly product

Can collective action cure what’s ailing our food systems?

Collective action now, the only way to meet global challenges, Guterres reaffirms in annual report

Visa liberalisation: Commission reports on fulfilment of visa-free requirements by Western Balkans and Eastern Partnership countries

Siege of Syria’s eastern Ghouta ‘barbaric and medieval’, says UN Commission of Inquiry

Climate adaptation could make the world more peaceful

Food finally features in the climate debate. Now what?

We need greater protection for our oceans. We can’t let politics stand in the way

How to rebuild trust and integrity in South Africa

Sri Lanka PM: This is how I will make my country rich by 2025

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