Central Banking

What does a Central Bank do?

Plots with plutocrats. Plutoplots. Especially in the USA, where major plutocrats are Central Banks directors (and also private bank directors).

Seriously, Central Banks regulate the financial system and, thus, a large part of the broader economy. That means that the financial system is a public system masquerading as a private system (privateering system?)

Think of a financial system as an engine. The Central Bank (“Fed” in the USA, ECB in Europe) controls how much fuel there is, by manipulating its price. The Central Bank is also supposed to dictate the permissible uses of fuel. That latter mission has been completely forgotten under Clinton, the great demoncrat, that’s why plutocrats lov him.

Historically the Fed’s mandate was made very precise in 1979: “to maintain long run growth of the monetary and credit aggregates commensurate with the economy’s long run potential to increase production, so as to promote effectively the goals of maximum employment, stable prices and moderate long-term interest rates.”

What are interest rates in this engine?

The fuel of the financial system is money (generally under the form of credit). Central bank control interest rates, and those fix the price of money. The central bank raises and lowers the interest rates it charges banks when giving them money. When the central bank wants to slow down economic activity, it raises those interest rates, increasing the cost of borrowing money. Banks pass the augmentation to individuals and businesses: the latter borrow less and spend less, and economic activity slows down. When the central bank wants to stimulate the economy, it lowers interest rates.

So what happened under Fed Chair Greenspan?

In 1996, Greenspan said there was a bubble (some indicators were as bad as in 1929). However he refused to increase interest rates, because he claimed bubbles were self correcting (he read it in Ayn Rand). Yet when a fund of his friends crashed in 1998, Long Term Capital Management, he intervened (by giving enough money to friends in big banks to save his friends at LTCM and those in business with LTCM).

So Greenspan kept on piling up the fuel?

Worse than that. Under Rubin, Greenspan, Summers, in the 1990s, their boy Clinton allowed fuel to be freely used by the biggest banks to do things having nothing to do with the Fed’s mandate. Like setting fire to the entire economy and society, and then cashing in on the insurance.

Why did they allow this?

Because  the sums engaged, about ten times world GDP, or more, allowed outsize profits. They, their friends, families, and acquaintances, all made like bandits. Still do: dark pools are bigger than ever, and increase ever more every year.

After he retired, president Truman lived nearly at the poverty level. When asked why he would not cash in, he replied that he did not want to soil the office of the presidency. Compare with Clinton.

What’s your remedy?

I will come back to that. Outlaw all and any financial investment that does not benefit the economy directly (except for insurance, and some very restricted commercial derivatives, with sharp distinction between commercial operators and casino players).

Why hasn’t the Fed made larger cuts to consumer interest rates?

Because the financial system is run for profit. Lots of profits. and the financial, for profit system, is supposed to run the economies of the USA, and the EU.

That’s why some European Commissioners (Otto Rehn) are blue in the face at France for running an important socialist, not for profit economy. I mean, they are paid to be upset. When they come out of their stint at the European Commission, they expect a job at the like of Goldman Sachs.

Even Krugman has finally understood what they were up to, and condemned Rehn vigorously for the hypocrite he is; France is being attacked because it’s too much of a Republic, not enough of a plutocracy! (Basically Krugman dared to say this.)

Is the Fed powerless to reduce those consumer rates further?

There is what the central banks say they can do, and the reality that some of what they can do, they don’t even want to talk about. The Fed and the ECB have tried to distract us by a pair of novel strategies to drag consumer and business rates down. So they say.

One strategy is called Quantitative Easing (QE). The Fed has purchased more than $4 trillion in Treasury securities and mortgage-backed securities since 2008, driving up prices as investors compete for the diminished pool of available securities.

When investors pay a higher price for a bond, they accept a lower interest rate from the borrower. So the Fed’s purchases have helped to reduce the interest rates paid by the government and by home buyers. The Fed claims other interest rates are driven down, but that’s controversial.

Another campaign is called forward guidance. One reason for higher interest rates on long-term loans is uncertainty about the future level of short-term rates. The Fed has sought to decrease this uncertainty by declaring it intends to keep short-term rates near zero as long as the U2 unemployment rate remains above 6.5 percent.

Experts sing that these efforts have helped (at least a little). But, of course, this is all a sick joke.

Before you explain why it’s a joke, shouldn’t the Fed be worried about inflation?

Right now the problem is threatening deflation. All over.

Fed officials think they’ve got a clever new tool to prevent inflation. The money spent on bond purchases is credited to banks, but it is kept in accounts held by the Fed. The Fed recently started to pay interest on those accounts, giving banks an incentive to leave the money with the Fed. If the economy started to inflate, Fed officials say they can keep a lid by paying the banks higher interest rates to leave the money at the Fed.

In other words the fat cats of the biggest banks will keep on making ever more money.

President Obama said he wants no more asset bubbles like the housing bubble that caused the financial crisis. How?

Before the lamentable Greenspan, and since the bubble of the 1920s, that led to the 1929 crash, preventing bubbles used to be the Fed’s main job. As a Fed chief said generations ago, “by taking out the punch bowl when the party gets going“. This is done by rising interest rates. Volcker, named by Carter, brought interest rates up to 23.5%. That killed inflation (and the economy).

Under Clinton, the corruptocrats connected to the plutocracy claimed that there were no bubbles, on the grounds that the price of an open-market transaction is perfect by definition. If they had eyes to see, they could have observed there is no free market, just a rigged market. Others simply denied that the Fed could identify or pop bubbles. Both imbecile statements.

Why did you say that the ways presently used by central banks to decrease interest rates were a joke?

The Greater Depression started in 2007-2008 has been triggered by a crisis of banking caused by the unsupervised power of the abusers of the fractional reserve system: central banks give money to private bankers, and the latter lend 30 times that to… their friends. This happened in several ways: USA subprime, derivatives (especially swaps), European investment in continent size corruption, etc.

For example those banks could be British, French, German, and the corrupt friends could be Southern Europeans, and other Irish. When the whole castle of speculation crashed, European governments were asked to save the banks on the front lines, crashing their own governmental finances.

The rest of society was left holding the bag, while the plutocrats are dining on caviar in their castles. Instead the plutocrats ought to have been expropriated, and the castles put for sale.

A beautiful example is Greece. All the aid programs to Greece, as I have said forever, were mostly aid programs to big Northern European banks. Said programs were paid by the Public (all over Europe). The International Monetary Fund just recognized this was debated secretly inside the IMF (October 2013!).

Most of the  money created by QE goes into the derivatives business and other shadow banking and associated dark pools. It does not go to the real economy.

Thus not enough money is available to the real economy, that’s why interest rates are still high, and part of the reason QE ends up just as a subsidy to the worst financial pirates. The financial fuel goes into burning the house down, not the cooking stove.

Hence the importance of nominating Janet Yellen chief of the Fed. If she is nominated, I will explain why.

***

Patrice Ayme

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8 Responses to “Central Banking”

  1. Paul Handover Says:

    And, according to the BBC News, Yellen has been nominated.

    However what staggers me is how one and same person can write this essay AND the previous one!

    My approaching headache is compounded by a feeling of significant inferiority! 😦

    • Patrice Ayme Says:

      Dear Paul: I have been thinking about this. The feeling that comes to me is that superiority can be a real inferiority. And an irrelevance. We do what we do. But, away from a tribe, things get so esoteric, normal human categories do not apply anymore. Recently a young and bright research mathematician I know told me he would look at my ideas in… 50 years!
      (Does that mean one has to be senile first? ;-)!)

      Another problem is that some people do take umbrage, so, when they are finished stealing ideas (I was the first, very long ago, to point at loopholes in Black Hole theoriesy and some in the audience published stuff related to that, much later…), they are full of resentment, because of the superiority/inferiority/authority thing.

      To real thinkers, all what matters are real ideas, and how true .

      Although there are highly technical fields, or problems, or solutions in academia, there are also glaring loopholes, and those are often of greater epistemological depth… And intellectual public participation could help… even in physics (some physicists may scoff, but they would be foolish to do so).
      PA

  2. EugenR Says:

    Dear Patrice, let me add my opinion and prediction to what will happen unless…..

    While the Fed is purchasing government securities, in parallel it is pouring cash money into the monetary system. Since the banks have deposits excess to the Minimum Reserve Rate Requirement (MRRR), this cash could be potentially used to give new credit. It does not happens since the potential borrowers are over exposed to old loans, backed with reduced asset values (mainly real estate). So the banks don’t have clients to whom they would like to give new loans, and the potential borrowers feeling unsecured also reduced their readiness to be exposed to new loans. The result is to liquid banks.
    Yet this situation will not exist for ever. The aggregated old loans are in process of reduction. For example; (*) the mortgage loans went down from 10.5 trillion US$ at 2008 to 9.3 trillion US$ in Q2 of 2013, while the real estate value jumped since the beginning of 2013 to 21.1 trillion US$, from less than 20 trillion US$ at end of 2012. At 2006 the real estate value was about 25 trillion US$, while the mortgages values were about 10 trillion US$. If the banks feel comfortable with this ration of 2.5 US$ real-estate value to one US$ mortgage value, it means, if this trend of real estate value increase continue while the mortgage value is declining, the banks will find the house owners again credible for new loans very soon.
    And now comes the big thing. The commercial banks have excess deposits in the Fed of more than 2 trillion US$. Theoretically the banks could use these excess deposits for new credits in ration of 1 to 9, but to be practical it never exceeded the ratio of 1 to 3.5. Still we are talking about potential of new credit of several trillion US$. This is a perfect scene for a new credit explosion and real estate bubble.
    (*) Reference; Federal Reserve statistic release, B.100 Balance Sheet of Households and Nonprofit Organizations

    • EugenR Says:

      But the bubble can be prevented if the banks are going to be more regulated.The interest rate paid to the bank deposits in the fed seems to me a very weak tool while its rate is 0.25%. On the other hand if increased, it will increase the interest rate but also the banks profits and liquidity. And lets remember, the bank deposits in the Fed are without any risk. I wonder, why would the tax payers agree to such interest payments, unless they are madly in love with the commercial banks and their managers. So some other tool should be implemented to reduced the excess financial liquidity in the banks, like to increase the Minimum Reserve Rate Requirement from 10%, to adequate level, or implement the equity requirement (Basel). This will of course reduce the commercial banks function as money creator and will bring it back to the Fed. Is this such a big disaster?

      Viz full article;
      http://rodeneugen.wordpress.com/2013/10/09/will-be-a-new-real-estate-buble-in-the-us/

  3. Paul Handover Says:

    Trust the honourable Mr. Ayme is OK? Unlike him to be off the ‘radar screen’ for 24 hours or more.

    • Patrice Ayme Says:

      Thanks for your concern, Paul. Him or her, who knows? Who should care? Yes, I was off the screen. I go through very frequent bouts of closing up like a clam and thinking in closed circuit. Some of these issues had to do with where I have to be located to make a living. A down to earth, but weighty subject.

      Among other things, I went in the woods to talk with a hawk (!) and I was reading about the Yellen-Akelof work on employment, and realizing it was close to my general views about dividing the pie.
      I was also feeling my way around a number of issues, including the price of deep thought on the individual(s) producing it. There again, Yellen’s career is enlightening.

      So I will resurface…
      PA

      • Paul Handover Says:

        “Him or her ..” Now that stopped me in my tracks! I guess because I had ‘read’ a gender into your writings, albeit subliminally! How intriguing!

        • Patrice Ayme Says:

          Well, times they are changing. I am definitively transgender philosophically speaking, as I pick up the values that best fit the situation, masculine, or feminine, young or old, hard core or soft, whatever the situation is.
          PA

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