Yellen and Draghi tell Trump and markets not to expedite the next crisis

The disappointment of financial markets with the lack of hints about monetary policy from the Jackson Hole gathering of central bankers is understandable. Both Janet Yellen, US Federal Reserve System Chair and Mario Draghi, the European Central Bank President while keeping their policy guidelines unchanged, choose to forcibly attack the demands of bankers – supported by neoliberal politicians – for deregulation and risky reforms in the financial markets. Ten years after the financial meltdown of 2007-2008 and the ‘lenders’ again seem ready to resume their treacherous practices. Even the limited controls and checks introduced by the Dodd-Frank legislation in the US to strengthen the resilience of the financial system, and the banking Leviathans want to regain full free hand on other people’s money and drive the world to a new crisis. The slightest reform of the financial rules in force will automatically make the bankers richer and the rest of the economy more insecure. The Trump administration and many American politicians appear ready, on the one hand to satisfy the bankers and on the other to question the rules, which during the past few years kept the global economy regaining strength from the last Armageddon. What the bankers want The New York banks have reconciled with the fact that since last November they have to pay a symbolic interest rate for the money the Fed was giving them for free. It’s questionable though if the banks will accept the reduction of the Fed ‘gift’ of $4.5 trillion. The lenders want Trump and the Republicans to take special care of them, by again completely deregulating the financial system and thus boost up their profits, but at the same time increase the risks and bring a new crisis nearer. The Washington political elites, the Democrats included, are not negative about supporting the lenders’ demands. It seems then, central bankers, by opposing this eventuality, care more for society as a whole than the politicians. The head of Fed clarified it, by informing the US President about her decisiveness to resist deregulation, in case he decides to reappoint her. Yellen warns Trump Yellen at Jackson Hole, while defending last weekend the current legislation, which has strengthen the financial system, said loudly that “Moreover, I expect that the evolution of the financial system in response to global economic forces, technology, and, yes, regulation will result sooner or later in the all-too-familiar risks of excessive optimism, leverage, and maturity transformation reemerging in new ways that require policy responses. We relearned this lesson through the pain inflicted by the crisis. We can never be sure that new crises will not occur, but if we keep this lesson fresh in our memories–along with the painful cost that was exacted by the recent crisis–and act accordingly, we have reason to hope that the financial system and economy will experience fewer crises and recover from any future crisis more quickly, sparing households and businesses some of the pain they endured during the crisis that struck a decade ago”. The next crisis is visible What the head of Fed says here is more or less an announcement of the next financial crisis. This is because the ‘system’ is bound to “result sooner or later in the all-too-familiar risks of excessive optimism, leverage, and maturity transformation”. In other words, if the bankers are left again loose, Yellen believes, they will once more lead our world to a new crisis rather sooner than later. Never in the past, the American central banker has so clearly predicted the next financial Armageddon. Not to forget that the previous two Fed chairs, Ben Bernanke and Alan Greenspan either ‘prepared’ or refused to recognize the financial meltdown of 2007-2008, while in the making. Both of them did what they could, to let the bankers free to exploit the entire real economy. Draghi’s turn Last weekend at Jackson Hole, the ECB head Mario Draghi joined the loud warnings of central bankers. Draghi has repeatedly asked the European politicians to do their bit, in order the economy to definitively overcome the extremely low inflation conjuncture it’s in, by backing for example the demands for higher wages. This time he chose to attack the Trump administration about the ‘promises’ for trade protectionism and more deregulation of financial markets. He said, “Thus a turn towards protectionism would pose a serious risk for continued productivity growth and potential growth in the global economy. And this risk is particularly acute in the light of the structural challenges facing advanced economies”. No need to think hard who is the recipient of this warning. Draghi had more to say though. He also stressed “By contrast, the stronger regulatory regime that we have now, has enabled economies to endure a long period of low interest rates without any significant side-effects on financial stability, which has been crucial for stabilizing demand and inflation worldwide. With monetary policy globally very expansionary, regulators should be wary of rekindling the incentives that led to the (last) crisis”. This is a direct accusation that the New York bankers, the Trump administration and some parts of the American political elites vie to relinquish once more the necessary minimum of checks and controls in the financial universe, not minding about increasing the risks of a new and worse crisis. God save the central bankers? One may hate the central bankers for helping the financial monsters survive, but one has also to accept that ten years ago the alternative was ‘Blood, Toil, Tears and Sweat”. Now Yellen and Draghi press the politicians to avoid creating the same conditions, which led to the last meltdown. Unlike their predecessors in the Fed and the ECB, they both warn about the coming next crisis and propose ways to make it less destructive and more controllable.