1 Mar 2012

Quantitiative easing is 'laying the seeds for the next crisis'

Don't take it from me. According to this morning's Guardian, Peter Sands, chief executive of Standard Chartered, one of the City's most significant banks, has warned that the huge sums of money being pumped into western economies to underpin banks and promote financial stability risk "laying the seeds for the next crisis".

The article notes the massive amounts of money that Central Banks have been throwing at the banking sector.  Ben Bernanke, head of the US Federal Reserve, has authorized $2.3 trillion of bond buying. Mervyn King, head of the Bank of England, has allowed £325 billion of quantitative easing. And following yesterday's Bazooka II, Mario Draghi has printed over €1 trillion euros that he has handed to Eurozone banks. These are all just different ways of describing effectively the same thing - printing money and handing it to commercial banks.

So, can somebody explain to me why all of these central banks throw this freshly minted money at commercial banks, rather than lending the money to governments and allowing them to use the money to pay off national debt?

No, on second thoughts, don't bother. I think I know why. If Central Banks were ever to allow governments to pay off their national debt, it would sign the death warrant on one of the most lucrative money making schemes ever devised. Namely, the system by which commercial banks have been given the right to conjure up money out of thin air, lend it to governments, and then sit back and collect the interest - courtesy of the tax-payers.

As I have pointed out in earlier posts, this racket cost Eurozone Taxpayers €4.3 trillion between 1995 and 2010. And if you add up the interest paid on sovereign debt for all 27 EU countries for 2010, the total reaches €332.2 billion - that's 2.7% of GDP.

Short circuiting the commercial banks by allowing Central Banks to provide the means for debt cancellation would cure the problem for good. The bankers would maybe have to reduce their bonuses, but I'm not sure too many people would object to that....

1 comment:

  1. Hi Simon hope you are well?
    My apologies havent had much of a chance to get back to you over the last few weeks on the MMT stuff yes that Wapo is us (that has taken a lot of my time as its really got into the mainstream, so fighting battles all over the place which is great, for me mostly over at the DT, plenty of MMTs on the guardian which i do now & again comment on but too many agree with me there unlike the DT where apparently im some communist! 3 times in 4 days I got called that!)., wrote a long long post and lost it (blamed disqus but to be fair probably had more to do with the bottle of red) had a quick look at your proposal vid and I like, only had time to look at the short version but will find time to look at the longer one.

    Ok about this post Peter Sands has it wrong, what the central banks have been doing is adding to reserves, which under the old FRB models and the money multiplier effect it would increase the money supply masively but what it misses is banks do not work like that anymore (and in fact positivemoney put up a vid the other day from one the NEF guys which agrees with MMT on these points) so yes you have am expansion in the monatary base but that would not feed though into broad money. 
    What you are missing here is the central bank relationship with treasuries. They are not seperate.
    I will quote Warren Mosler (and he should know)

    Reserve accounting uses the standard accounting identities, but the
    meaning of “liability” is not “debt.” The husband-wife analogy for
    Central Bank-Treasury accounting relationships is apt. Since a husband
    and wife are responsible for each others debts, neither can be indebted
    to the other. That is to say reserve accounting is a fiction that does
    not represent real relationships,