Capital markets selloff: The financial moguls send messages to monetary authorities

The financial district of the City of London. Practically all the “too big to fail’ banks are present there. Council of the European Union – European Council Audiovisual Service. Shoot date: 15/10/2015, Location: London, United Kingdom.

The wild selloff in the major capital markets of the world that culminated last Monday, the first working day of the New Year and continued on Wednesday for a fifth day in row was not just an overreaction to the anticipated slowdown of the Chinese economy, as almost all chief analysts assumed in mainstream media. Some of them added the predictable rises of the dollar interest rates this year by the American central bank, the Fed, as an additional factor negatively affecting the capital markets. Even fewer commentators referred to the geopolitical risks brewing in the Middle East and the South China Sea as threats not only to the world economy but to world peace.

However, none of them bothered to tell us why the trillions that all the main central banks of the world from Beijing to Washington and from Tokyo to Frankfort have injected to the banking giants are not enough to keep the capital markets going. Unfortunately, in our brave new world something like a long-term equilibrium is inconceivable in the capital markets. They are always going up or down and lately they keep losing billions every day. Despite this, the ‘too big to fail’ banks having received trillions for free from the Fed, don’t mind shedding some billions in order to send their message. After all, it’s not their own money. And their message is that they don’t like it at all to start paying even some decimal points of a percentage unit as interest rate for the money they got for nothing.

What happens now in the markets?

This is exactly what is happening now, and that’s why the Fed delayed its interest rates increase for at least one year, announcing the first one last December. Mind you it’s exactly the same thing in the ‘capitalist’ and the ‘communist’ world with the Fed, the European Central Bank and the People’s Bank of China feeding the mammoth banking conglomerates with trillions. In reality, all those central banks are charging negative real interest rates, after taking account of inflation.

But the ‘too big to fail’ banks are not happy with that. They want zero nominal interest rates as the Fed offered them for six years now, a demand which means that they want to continue usurping all those trillions and at the end of the day get a bonus for that. For years now, after the meltdown of 2008-2010, the major central banks of the world keep offering trillions to the banking industry at zero or close to zero nominal interest rates. In reality, the merchants of money receive object of their trade for free.

The New Year selloff

Last Monday’s wild selloff, on the first business day of 2016, started in the Shanghai Stock Exchange and the Chinese authorities were forced to close the market down when the Composite Index incurred losses of 7%. All the major world markets in Asia, the US and Europe followed suit and closed with significant losses of several percentage units. On Tuesday and Wednesday the efforts to recuperate a part of the damage led to the opposite direction with further fall of the main indexes.

The depth of the stock price plunge in the first business days of 2016 is only comparable with the losses at the beginning of the doom year 2008, when the financial fallout broke out. The timing and the size of this week’s fall have been interpreted by major analysts as a warning by ‘investors’ about the risks that plague the economic horizon of the New Year. No need to say that those investors are the ‘too big to fail banks’ and their various financial subsidiaries in both the straight and gray parts of the markets. Undoubtedly, they can lead the capital markets the way they want. It’s rather certain then that the New Year’s selloff is a warning that the banks do not want to pay anything for the money they receive from the monetary authorities.

Asking for more free trillions

What the financial moguls want became apparent already on Monday, when the People’s Bank of China injected $ 20 billion in a bid to stabilize the markets but in vain. This is not the kind of money the ‘investors’ have in mind. Even the generous extension of ECB’s relaxed monetary policy recently announced in December doesn’t seem enough to counterbalance the all too mild restrictive monetary plan of the Fed. In December the ECB increased its quantitative easing measures (meaning money for banks) by a round sum of €300bn to €1.44 trillion, but this doesn’t seem enough for the ‘investors’. The major banks want more and they showed us all what may happen if they don’t get it. They don’t mind if it is in dollars, euros or renminbis as far as it is free of charge and comes in trillions.

It’s obvious by now that the financial world is kind of captive to the will of the ‘too big to fail banks’. This fact must have become obvious to the majority of the hard working or the unemployed people all over the world. The proof of that is that Bernie Sanders, the US Democratic presidential candidate, has made the containment of the Wall- Street financial moguls as the main issue of his campaign. He stated to the astonishment of many that the big banks are “destroying the fabric of our nation” and presented a plan to break-up the big lenders within the first year of his presidency.

The US politics still matter

According to Reuters, Sanders reasoned that “If a bank is too big to fail, it is too big to exist; when it comes to Wall Street reform that must be our bottom line”. Sanders’ idea is nothing more than what every decent economist has been whispering in the last ten years and no first rate European politician dared to underwrite. That is to bar the ‘too big to fail’ banks from being active in the markets for their own account, more plainly ‘prohibiting them from engaging in investment activities’.

This means to break the very big into regular banks and investment firms. The latter companies would then have no access to people’s bank deposits nor any free money from central banks. Unfortunately, Bernie Sanders is the first Western politician in the central political scene of his country who has posed the most important economic problem of our brave new world so plainly.

Beyond reasonable doubt

It’s beyond reasonable doubt that the selloff on the first business days of the New Year 2016 in all the major stock markets of the world is the work of the major banks. Some may say that this is how the markets work, but Sanders is here to remind us all that this is not always the case and there more ways to regulate the banking industry.

If, however, the banks have it again their own way, the increases of the dollar interest rates by the Fed will be certainly reduced to some decimals of a percentage unit this year. By the same token, the stock markets may be refrained this year from creating so much more new wealth as in 2015 and 2014. In any case, this wealth exists only on paper or even worse it only shows in the digital universe. Nevertheless, it can cause a crisis which will hurt us all. During the last six years we learned how this can be done and who is to pay the dearest price.