Champagne socialists in the banking sector reaping millions from public money

It’s Wednesday, and before we get to the music segment, I document some developments in the banking system which are not receiving much press at the moment. I refer to the fact that the rate hikes now being implemented by most central banks are not just allowing the commercial banks to widen spreads between deposit and lending rates which will generate significant windfall profits for the banks and their shareholders. The increasing interest rates are also delivering massive cash injections to the banks who hold reserve accounts at the central banks. Why? Because the quantitative easing programs from the past have resulted in a massive buildup of excess reserves which are liabilities for the central banks. They are paying support returns on those reserve, which are scaled against the rising policy target rates. So the payments have escalated significantly and delivering a massive corporate welfare boost to the banks while the same interest rate rises are causing hardship to borrowers, especially those on low incomes. And amazing redistribution of income towards the ‘champagne socialists’ all via our central banks.

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Central bank priorities are not the priorities of working people

I remember a conversation I had when I was picked up hitch hiking to Melbourne from where I was living down the coast. It was during the 1970s inflationary period, which had morphed into stagflation as a result of deliberate government policy to create unemployment and discipline the wage-price spiral. The driver was a manual worker and during a conversation about the state of the economy (I was studying economics at the time) he said “the government should care about employment because at least then everyone has a job even if prices are rising”. That conversation stuck with me because it summed up what research shows in more sophisticated ways – the costs of inflation are minimal when compared to the devastating costs of unemployment. At present, our policy makers are unwilling to recognise that reality because it is not them that bear the costs.

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Unaccountable central bankers once again out of controls

On August 27, 2020, the US Federal Reserve Chairman, Jerome Powell made a path breaking speech – New Economic Challenges and the Fed’s Monetary Policy Review. On the same day, the Federal Reserve Bank released a statement – Federal Open Market Committee announces approval of updates to its Statement on Longer-Run Goals and Monetary Policy Strategy. I analysed that shift in this blog post – US Federal Reserve statement signals a new phase in the paradigm shift in macroeconomics (August 31, 2020). It appeared at the time, that a major shift in the way central banking policy was to be conducted in the future was underway. A Reuters’ report (August 28, 2020) – With new monetary policy approach, Fed lays Phillips curve to rest – reported that “One of the fundamental theories of modern economics may have finally been put to rest”. At the time, I didn’t place enough emphasis on the ‘may’ and now realise that nothing really has changed after a few years of teetering on the precipice of change. The old guard is back and threatening the livelihoods of workers in their usual way.

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Central bank writes off government currency transfer

Today, I am treating as Wednesday, given I wrote an extended treatment of the Australian government’s fiscal statement yesterday and I reserve Wednesday’s for other writing commitments. So just a few things today but including a really interesting piece of news. Some music to follow for those who seem to like what I come up with on Wednesdays. But the interesting snippet is from a tiny island in the middle of the Indian Ocean that might just be showing the world how central banks and treasuries should interact.

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Britain banking regulation to tighten as a consequence of leaving the neoliberal EU

It is Wednesday and so just a short blog day. I note that the British Remainer Left fall over themselves to signal whenever there is any bad news about Britain that it must be because of Brexit – “see, we told you so sort of stuff”. And with the pandemic and government incompetence there have been lots of opportunities for this lot to do that. I guess it makes them feel better as the Labour Party designs its comeback based on the ‘flag’ and ‘patriotism’ and expunging any relics of Jeremy Corbyn. Good luck with that, it is bound to work! But the future of Britain will actually be determined by a range of factors now in the control of the authorities and how they handle the transition away from EU law will be a significant element in that ensuring that future works for the people rather than just isolates Britain as a neoliberal hell-hole. We received our first sign of how things might work out last week when the Bank of England’s Prudential Regulation Authority released their latest Consultation Paper (CP5/21, (February 12, 2021) – Implementation of Basel standards – which marked a sharp shift away from the lax EU banking standards. The Remainers were silent on this.

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Bond investors see through central bank lies and expose the fallacies of mainstream macroeconomics

It’s Wednesday and I usually try to write less blog material. But given the holiday on Monday and a couple of interesting developments, I thought I would write a bit more today. And after that, you still get some great piano playing to make wading through central bank discussions worth while. The Financial Times article (January 4, 2021) – Investors believe BoE’s QE programme is designed to finance UK deficit – is interesting because it provides one more piece of evidence that exposes the claims of mainstream macroeconomists operating in the dominant New Keynesian tradition. The facts that emerge are that the major bond market players do not believe the Bank of England statements about its bond-buying program which have tried to deny the reality that the central bank is essentially buying up all the debt issued by the Treasury as it expands its fiscal deficits. This disbelief undermines many key propositions that students get rammed down their throats in macroeconomics courses. It also provides further credence to the approach taken by Modern Monetary Theory (MMT).

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An old central banker trying to come to terms with MMT – not quite getting there

Last week (July 14, 2020), a former deputy governor of the Reserve Bank of Australia (RBA), Stephen Grenville wrote an article – Modern Monetary Theory and mainstream economics converging. The title suggests a gathering of minds between two paradigms – the degenerative mainstream macroeconomics and the emerging Modern Monetary Theory (MMT). I wouldn’t represent what is happening in that way. Convergence implies a harmonious process. The reality is that some of the mainstream economists have realised that their approach is deeply flawed and events over many years have demonstrated those flaws, while ratifying the empirical content of central MMT propositions. Our position has been consistent over 25 years. Now, the mainstream is fracturing and economists are trying to save face and remain relevant by suggesting, in various ways, that they knew all of the MMT insights all along, or variants on that theme. They didn’t. They were deeply opposed and hostile to key MMT insights that are now becoming widely acknowledged as correct. In trying to maintain this image of convergence, Stephen Grenville’s article, while quite insightful in many ways, misleads his readership and mispresents key MMT elements.

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The central bank independence myth continues

One of the enduring myths that mainstream macroeconomists and the politicians that rely on their lies to depoliticise their own unpopular actions continue to propagate is that of ‘central bank independence’. This is the claim that macroeconomic policy making improved in the ‘neoliberal’ era following the emergence of Monetarism because monetary policy was firmly in the hands of technocratic bankers who were not part of the political cycle. As such, they could make decisions based on fundamentals rather than the requirements of the political cycle. The corollary was that vote-greedy politicians, who operate on short-term political cycles, would be willing to compromise the ‘longer-term’ health of the economy to splurge on populist programs that might increase their chances of re-election. As a result of the mismatch between the political cycle and the, longer, economic cycle, the neoliberal solution was to make monetary policy independent of the political cycle. Except, of course, it didn’t and cannot. The latest scaremongering about the ‘loss’ of central bank independence was published in the UK Guardian last week (February 28, 2020) – From the Fed to Bank of England, central banks must up their game. The author is a former deputy governor of the Bank of England Board and former director general of the CBI. The interesting point about the article was not the further elaboration of the myth, but, rather, his assessment that the chances of reforming the European Union treaties in any direction “are vanishingly small”. Read: zero. From the mouth of the elites. I hope our Europhile Left colleagues absorbed that bit, at least.

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Inflation hysteria as central bankers discuss yield curve control

I am in London today (Monday) and have two events. First, I am doing a ‘Train the Trainers’ workshop for – The Gower Initiative for Modern Monetary Studies – where we will work through some techniques and concepts to help activists educate others about Modern Monetary Theory (MMT). Second, I am meeting with some Labour Party Members of Parliament who are keen to learn more about MMT and incorporate its insights into their political work. Get the drift? People wanting to learn and setting up pathways where that learning can occur. Which means they take advantage of access to one of the founders of MMT to find out what it is about, rather than adopt a superficial version of our work, which they might have heard about when Joe told Aalia, who had picked it up from Eddie, who had been having a conversation with Robyn about something that Abdul had told Amelia, who had read it in some Tweet that was reporting an article written by Kenneth ‘Mr False Spreadsheet’ Rogoff criticising MMT. That is the way to learn.

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Japan still to slip in the sea under its central bank debt burden

President Trump banned a CNN reporter only to find his position overturned by the judicial system. Well CNN is guilty of at least one thing – publishing misleading and alarmist economic reports about Japan. In a CNN Business article last week (November 13, 2018) – Japan’s economy has a $5 trillion problem – readers were told that the Bank of Japan has no “dwindling options to juice growth if a new crisis hits” because “it’s now sitting on assets worth more than the country’s entire economy”. The real story should have been that the Bank of Japan continues to demonstrate the categorical failure of mainstream macroeconomics and, conversely, ratify the core principles of Modern Monetary Theory (MMT). That is what the Japanese experience since the early 1990s tells us. And all the stories about special cases; cultural peculiarities, closed markets, etc that the mainstream economists wheel out when another one of their predictions about how Japan is about to sink into the sea as a result of its public debt levels, or that interest rates are about to go through the roof because of the on-going and substantial fiscal deficits; or that inflation is about to accelerate because of the massive monetary injections; and more, are just smokescreens to divert our attention from the poverty of their analytical framework. The Japanese 10-year bond trade is called the ‘widow maker’ because hedge funds who try to short it lose big. The Japanese monetary system is my real-time, non-linear economic laboratory which allows all the key macroeconomic propositions to play out live. And MMT is never very far off the mark. Try juxtaposing New Keynesian theory against Japan – total dissonance.

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Central banks still funding government deficits and the sky remains firmly above

There was an article in the Financial Times last week (August 16, 2017) – Central banks hold a fifth of their governments’ debt – which seemed to think there was a “challenge” facing policymakers in “unwinding assets after decade of stimulus”. The article shows how central banks around the world have been buying huge quantities of government (and private) bonds and holding them on their balance sheets. Apparently, these asset holdings are likely to cause the banks headaches. I don’t see it that way. The central banks, in question, could write the debt off any time they chose with no significant consequence. Why they don’t is the question rather than whether they will become insolvent if the values crash (they won’t) or whether the yields will skyrocket if they sell them back into the non-government sector (they won’t). Last week (August 15, 2017), the US Department of Treasury and the Federal Reserve Board put out their updated data on Foreign Holders of US Treasury Securities. Other relevant data was also published which helps us trace the US Federal Reserve holdings of US government debt. Overall, the US government holds about 40 per cent of its own total outstanding debt – split between the intergovernmental agencies (27.6 per cent) and the US Federal Reserve Bank (12.4 per cent). In some quarters, the US central bank has been known to purchase nearly all the change in total debt. That folks, is what we might call Overt Monetary Financing and the sky hasn’t fallen in yet as a consequence.

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Australia’s new central bank governor chooses to dissemble on fiscal issues

The new governor of the Reserve Bank of Australia (our central bank) gave a speech in Melbourne yesterday (November 15, 2016) – Buffers and Options to the annual dinner of the Committee for Economic Development of Australia (CEDA). CEDA is a seedy type of organisation that typically advances the neo-liberal agenda. Please read my blog – The CEDA Report – one of the worst ever – for more discussion on this point. But that is not the topic today. The new governor has already began his tenure in disappointing fashion. I discussed his first foray into public life in this role in the blog – First appearance by Australia’s new central bank governor disappointing. His latest public intervention suggests he is hardening this stance – perpetuating the myths that a currency-issuing government is dependent on bond markets for its spending capacity and that public borrowing puts a burden on future generations. While today’s blog is about Australia, the principles elucidated are universal.

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Trump might do us a favour – expose the myth of central bank independence

Prior to the ‘surprise’ victory of Donald Trump in last week’s US Presidential poll, there was an article (September 28, 2016) in the Financial Times – Trump is right to take aim at the ‘political’ Fed – arguing that Trump had “broken a cardinal rule in US presidential campaigning by openly questioning the effectiveness of the Federal Reserve”. In the Presidential debates, Trump had claimed that the US Federal Reserve banks had been “doing political things” as a result of their low interest rate policy and creating a “false economy”. The central bank governor responded by saying the bank did not take politics into account when changing monetary policy. Apparently, Trump was echoing conservative economists who think the low interest rates have pushed investors into riskier financial investments, which will crash if rates rise. It has to be said that history tells us that Republican party politicians regularly lambast the US central bank along conspiratorial lines (for example, 2011 Rick Perry’s “treasonous” allegations against Bernanke; George W Bush, Richard Nixon). What does it all mean? There was an interesting article in the Financial Times today (November 14, 2016) by Wolfgang Münchau – The end of the era of central bank independence – that claims the tide is shifting and more political interference in monetary policy is to be expected. My conclusion: if so, good. Democracy requires the elected polity takes responsibility for economic policy rather than an unelected, largely unaccountable, group of ‘economists’. But, I also add, the idea of central bank ‘independence’ is one of those neo-liberal myths that allow the elected polity to disassociate themselves from bad economic policy.

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Central bank propaganda from Minneapolis

My blog in the next week or so will be possibly rather holiday-like given the time of the year and the fact that I have rather a lot of travel and related commitments to fulfil over that period. So I will be pacing myself to fit it all in. Today, a brief comment on an article that appeared in the December 2015 issue of The Region, a publication of the Federal Reserve Bank of Minneapolis – Should We Worry About Excess Reserves (December 17, 2015). It is that one of those articles that suggests the author hasn’t really been able to see beyond his intermediate macroeconomics textbook and understand what is really been going on over the last several years.

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Why banks are pushing the US central bank to increase interest rates

A few weeks ago I wrote – US Federal Reserve decision correct – there is no ‘normal’ – and suggested that the reason Wall Street and other well-to-dos were busily invading the media at every opportunity berating the US central bank for not increasing interest rates was because they had a vested interest in rates rising. They massage their call for higher interest rates in terms of global concerns for inflation (mostly) but just below the surface (they are mostly pretty crude in their advocacy) is the real reason – their own profit bottom line improves. On October 1, 2015, the Bank for International Settlements published its Working Paper no. 514 – The influence of monetary policy on bank profitability. The research demonstrates my very point. They find that when the short-term interest rate rise (that is, the policy rate set by the central bank) “bank profitability – return on assets” also rises. They also find that this “effect is stronger when the interest rate level is lower”. The overall conclusion is that “unusually low interest rates … erode bank profitability”. So forget all the spurious arguments about inflation risk etc that the financial media (who are really just ghost writers for the top-end-of-town) write ad nauseum. The real reason the Wall Street lobby keeps pushing for rate hikes is because they want more profit.

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A central bank can always prevent government default

I have received a lot of E-mails over the weekend about a paper released by the CEPR Policy Portal VOX (June 20, 2015) – Can central banks avoid sovereign debt crises? – which purports to provide “new evidence” to support the conclusion that “the ability of the central bank to avert a debt self-fulfilling debt crisis is limited”. It is another one of those mainstream attempts to brush away reality and draw logical conclusions from a flawed analytical framework. When one digs a bit the conclusion withers on the vine of a stylised economic model that leaves out significant features of the monetary system – such as for starters, a currency-issuing government can never go broke in terms of the liabilities its issues in its own currency. All the smoke and mirrors of stylised New Keynesian mathematical models cannot render that reality false.In other words, the paper and the lineage of papers it draws upon should be disregarded by anyone who desires to understand how the monetary system operates and the capacity and opportunities that the currency-issuing government (including its central bank) has within that system.

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Central bank politicians who evade democratic scrutiny and election

Last month, the Schweizerische Nationalbank (SNB), the nation’s central bank recorded some large ‘book’ losses after it had abandoned its attempt to stop the Swiss franc (CHF) from appreciating against the euro. It started trying … as a way of protecting its manufacturing sector but abandoned the strategy on January 15, 2015. It had been buying euro in large quantities with francs and on April 30, 2015 the SNB released the – Interim results of the Swiss National Bank as at 31 March 2015 – which showed that its first-quarter 2015 losses were 30 billion CHF or around 29 billion euros. They lost CHF 29.3 billion on its “foreign currency positions” and CHF 1 billion on its gold holdings. This has raised the question, once again, whether central bank losses matter. The answer is always that they do not matter at all given the central bank can never become illiquid as it issues the currency (under some arrangement or another). So the commentators who whip up a lather about impending doom arising from central bank bankruptcies are to be ignored. But central bank officials also publicly express concern about their capital holdings. Why would they introduce that concern into the public domain when they know full well that they cannot go broke. The answer is that they are politicians themselves except they evade democratic scrutiny and election.

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Friday lay day – central bank governor disgraces himself

Its the Friday lay day blog. I could write a lot on the next story but consistent with my plan to not write much blog text on a Friday I will refrain. But the Governor of the Reserve Bank of Australia disgraced himself yesterday by claiming that the unemployment and underemployment rate were about “where the central bank expected them to be” and that there was no case to be made for easing monetary policy. I wonder where that leaves the bank in relation to its legislative charter as outlined in the – Reserve Bank Act 1959. Further, under the so-called charter of central bank independence, since when has it been appropriate for the Governor of the RBA to lecture the Treasury on the state of fiscal policy? Of course, the so-called independence is just a sham.

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Direct central bank purchases of government debt

There was a recently published Federal Reserve Bank of New York Staff Report – Direct Purchases of U.S. Treasury Securities by Federal Reserve Banks – by Kenneth D. Garbade, which recounts the way the central bank in the US could purchase unlimited amounts of treasury debt by creating funds out of thin air and how that capacity was eventually constrained. The Report is an understated account of the way in which the conservative ideological forces eventually prohibited this capacity and forced the US government to only issue debt to the private sector. He shows that between 1917 and 1935, this capacity was used often “without incident” but as the conservative antagonism grew it was limited (in 1935) and then abandoned altogether in the early 1980s. The Report demonstrates there were no intrinsic financial reasons for abandoning this capacity.

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Single banking union doomed to fail

I have been travelling today a lot and so haven’t had much time to write. I have been reading early (1970s and 1980s) documents in recent days relating to the debate that preceded the establishment of the Eurozone. I have read them before, at the time they were released in many cases, but they provide a salutary reminder of how the political and economic reality in Europe diverged with catastrophic consequences for millions of people that live there. There was ample analysis and supporting evidence in the late 1970s to tell us that the creation of a common monetary union in the form that was eventually agreed in the 1990s would fail. But even now, with that failure for all to see, the same dynamics that predicate against any reforms that might create a strong federal fiscal capacity, are present in the discussions surrounding the creation of a Single Supervisory Mechanism to regulate banks and protect their depositors. The Germans, exhibiting all their irrational paranoia about inflation, are using their political weight to influence the design of the banking policy and the likely outcomes are looking decidedly deficient. They are doomed to fail if subjected to a stern test.

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