Collusion between Private Banks and Central Banks

Ever since the election of Donald Trump as President of the United States, the world is fixated on the possibility of collusion between Trump and Russia. However, during the same time author, Nomi Prins has written a book titled “Collusion.” This is not a story about the collusion between Donald Trump and the Russians. Instead, it is a story of collusion between central banks and private banks around the world.

The author alleges that the major financial corporations across the world have colluded with central banks in the aftermath of the 2008 financial crisis. The author also states that this collusion has created even more inequality and instability, the end result of which will be a crisis much worse than 2008.

This article describes the author’s understanding of this collusion and its aftereffects.

The Background of Collusion:

During the 2008 financial crisis, the biggest companies in the world were reeling.

Consider the case of companies like AIG Insurance or even General Electric.

Private Banks like Wells Fargo were also under a lot of pressure. This is when the Fed, i.e., the Central bank of the United States came to the rescue of these private banks.

The collusion was not limited to the Fed only. All central banks such as European Central Bank and the Bank of Japan have also assisted the private banks with their easy money policy.

The Authors Point of View about Collusion

The central allegation made by the author is that the Fed has created fabricated money to keep the American economy afloat. This was done on a massive never seen before scale. It is estimated that the Fed has created more than $4 trillion additional money supply in the wake of the global financial crisis.

The other central banks haven’t been left behind either. The combined money creation by the central banks of the G-7 countries is estimated to be over $21 trillion. The central banks have created this money and purchased very risky assets with this public money.

For instance, in America, a significant portion of the mortgage bonds are now held by the government, i.e., the public. The government has also invested a lot in corporate bonds which can be considered risky by traditional measures.

However, there are some central banks like Japan and Switzerland which have invested in the newly created money in the stock market as well! This has created a bizarre scenario wherein central banks are buying speculative investments with public money. All this is being done to artificially prop up the balance sheets of private banks.

How Collusion Lead To Inequality

The result of the loose money policy by the government is that an unlimited amount of money was injected into the asset markets. This is why the stock market and the bond market are at record levels now. As a result, the holdings of the banks are now positive. However, the effect has been adverse on a lot of other parties.

Consider the case of companies who have borrowed more money to buy their own bonds. These companies were essentially replacing high-cost debt with low-cost debt. However, many of them have become very indebted in the process.

Individual investors were forced to take risks and invest in stocks. This is because the money was available very cheaply. As a result, investors who put their money in fixed income securities ended up making negative returns when adjusted for inflation. As a result, there was no real option but to invest in stocks.

The amount of money in the stock markets has increased manifold after the 2008 crisis. The gains have mostly accrued to the handful of wealthy people who control the stock market. It is estimated that 10% of the people own 86% of the stocks worldwide! However, the incessant money creation has caused losses to the common man who is now facing rampant inflation.

The Aftermath of This Collusion:

The problem is that low-interest rate policies cannot go on forever. At some point in time, these policies need to be reversed. This is when the markets usually tumble down. According to the author of collusion, the crash being caused this time will be much worse as compared to the 2008 crisis.

  • Emerging Markets: Because of the low-interest rate policies of the United States and Europe, dollar and euro loans were available very cheaply. This is the reason why emerging market countries have taken a lot of these loans. However, now since the interest rate is being increased, the dollar will strengthen. This will make it extremely expensive for the emerging markets to pay back the interest as well as the principal component of these loans. This debt trap is going to cause a lot of pain and unemployment in the emerging markets.
  • Individuals: It is likely that the governments and banks will not be able to sustain these shocks. Some banks may pressure the government for bail-ins, i.e., confiscating depositor money. Also, a lot of individual investors are likely to lose their life savings and also their insurance safety net as a result of the impending crash.

The Solution:

The bottom line is that there should be some limit on the amount of money that the Fed and other central banks can create. If this incessant money creation is allowed to go on, then the world may face an economic crisis which would be higher than the Great Depression.

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