The Power Of The Financial Lobby: “For 25 Years, It’s Never Been The Right Moment” To Tighten

Wolf Richter's picture

Wolf Richter

Things move quickly at the G-20 when markets go south. The turmoil following Chairman Bernanke’s mere suggestion of a vague and slow taper of the Fed’s multi-year money-printing and bond-buying binge has already incited our illustrious finance gurus and central bankers at the G-20 to buckle, apparently.

At prior meetings, they might have palavered uneasily about the easy money, trying not to call it a currency war when Japan began to flood its land with it. But now, they suddenly fear the opposite, namely an exit, or even the mere suggestion of a taper, given the mayhem it had already caused in the markets.

So at their July meeting in Moscow, they will likely discuss how a taper might impact, say, emerging economies, according to unnamed Japanese officials, who leaked it to Dow Jones Newswires. And it would be “quite possible” that they will ask the IMF, if they haven’t already, to study the spillover effects of a taper. Because it’s not the right time to tighten.

“That’s the whole dilemma!” said William White, one of the few central-bank economists who’d predicted the Financial Crisis with increasingly dire warnings when he headed the Monetary and Economic Department of the Bank for International Settlements (BIS). On its board, among other luminaries, sat the governors of the largest central banks in the world. Back then, his words were brushed off with that forced patience of the exasperated.

“For 25 years, it has never been the right moment,” he told the Spiegel Online. “It’s always: Yes, in the long term we need to stop with the policy of cheap money and just piling on debt. But please not right now; now the economy must first get back on its feet. That was the response to the 1987 stock-market crash, the 1997 Asian crisis, the internet bubble implosion in 2001, and the world financial crisis of 2008.”

He’d spent over two decades at the Bank of Canada before joining the BIS in Basel, Switzerland, in 1994. While at the BIS, he criticized Fed Chairman Alan Greenspan for his easy-money theories and the speculative asset bubbles and busts they engendered. At the Kansas City Fed’s annual meeting in Jackson Hole, Wyoming, in August 2003, he confronted the maestro, as the googly-eyed mainstream media still called Greenspan at the time, and challenged him: jack up interest rates when credit expands too fast and force banks to increase their capital cushions during fat years to use in lean years.

“We started worrying about this at the same time that Alan Greenspan started worrying about irrational exuberance,” White later told Bloomberg. “The difference was he stopped worrying about it, or at least he stopped worrying about it publicly, and we didn’t.”

Unlike Bernanke, who’d learned his lessons from the Great Depression, White learned his lessons from the vastly more relevant Japanese real-estate and stock-market bubbles in the 1980s, and their consequences, which he’d watched while at the Bank of Canada.

But didn’t the central banks, particularly the Fed, prevent an even worse worldwide recession with these easy-money policies? Yeah.... “But every time we fight the implosion of a speculative bubble with even more cheap money, we sow the seeds for the next even larger bubble,” he said. “All of the excess liquidity has to go somewhere.”

And it went somewhere. That “next even larger bubble” was already here, and we were in the middle of it, he said. “The stock market boom in Japan, followed by a sudden swoon. The prices of gold and other commodities, also with strong fluctuations. The gigantic flow of capital into emerging markets that is looking for investment opportunities there, and reacts very nervously at bad news. This volatility everywhere, that’s typical of a speculative bubble.”

Bernanke’s mere suggestion that the Fed might taper its money-printing operations just a bit was enough to throw worldwide financial markets into turmoil, he said. “Which at the same time is an argument for the financial lobby: ‘See, the economy is still so fragile, we really cannot burden it now with shocks.’ My fear is that the central banks will once again follow this argument.”

That financial lobby – representing the prime profiteers of central-bank money-printing operations – must already have wormed its way into the G-20 and scared the bejesus out of everyone, for it to buckle so quickly. For the financial lobby, it’s simply never the right time to take the deliciously spiked punchbowl away, no matter how besotted the markets are.

Or, as David Stockman wrote in his bestseller, The Great Deformation: The Corruption of Capitalism in America, “All of the checks and balances which ordinarily discipline the free market in money instruments and capital securities were being eviscerated by the Fed’s actions.” With “pernicious consequences, however.” Read.... How The Fed Got Cramer’d

Comment viewing options

Select your preferred way to display the comments and click "Save settings" to activate your changes.
Dig Deeper1's picture

Despite all evidence to the contrary, these guys/gals ain't stupid.  It is almost as if, maybe, these responses by our immoral leaders are somehow orchestrated to benefit...oh, I dont know, maybe our entrenched oligarchy by attempting to "normalize" everything...all actions are wrapped in the pretense of protecting the sheeple.

rsnoble's picture

What a fucking joke this world is.

cdskiller's picture

What I am most sick of is the brain-dead repetition of the lie that Fed policies since the crash of '87 prevented a deeper recession. Total self-serving BS. Zero substantiating facts. If the Fed had responded properly back then, subsequent crises would not have happened. The arguments made starting in 2008 that banks had to be bailed out, that AIG CDS had to be paid, that the lending window had to be opened up to private IB's, that M2M had to be suspended, that Fannie and Freddie had to be absorbed, that quantitative theft had to begin and continue until the end of time or the whole system would come crashing down is nothing more than fear mongering to make sure losses could be transfered. There is no real argument that can be made to prove that any of those criminal steps prevented something worse than what the world continues to experience.

moneybots's picture

"While at the BIS, he criticized Fed Chairman Alan Greenspan for his easy-money theories and the speculative asset bubbles and busts they engendered."


Greenspan wrote in the 1960's that 1920's FED policy lead into the Great Depression.

Greenspan didn't have an easy money theory, as he knew what easy money caused.  Greenspan did the opposite of what he KNEW was right to do.  Why did Greenspan go from FED policy lead into the Great Depression, to lets DOUBLE DOWN on the Great Depression? 

This mess has happened because a blind eye was turned toward the financial truth that was already known.  Greenspan did what he knew was wrong to do.  So did many others.  The SEC knew leverage above 12 to 1 was dangerous, so investment banks were limited to how much leverage they could use.  In 2004, leverage limits were waived by the SEC.  In 2008 the investment banks crashed, as was known in 2004, would happen.  Leverage increases losses.

Experts knew what would happen if Glass Steagall was dismantled.  They warned congress.  Congress didn't care what was going to happen what was going to happen in 2008 and dismantled Glass Steagall.

A massive political and financial fraud.

Midasking's picture

moneybots - this is exactly why Greenspan can't claim ignorance.  Just read his "Gold and Economic Freedom" essay and it is clear he knew what he was doing as Fed Chairman.  In the end, regardless of what they say the primary objective of the Fed is to inflate the currency.  Simply modern day coin clippers... this is how all paper money systems eventually go.  Why?? because that is the whole point of a paper system!

Curt W's picture

It has never been the right moment to cut back on deficit spending either.

max2205's picture

Lets start by enforceing accounting rules and MTM..amoung other things like buying Congress...and term limits

besnook's picture

get with the game. corruption has been made legal so there is no corruption. the rule of law at its logical conclusion.

Never One Roach's picture

Since the Fed can print money with no hard asset collateral to back it up, bankers love inflation. That's a central way of money-making for them. Deflation works against them. We won't see much more deflation then we have now except in a few Bubble areas like stocks and houses.

dcb's picture

full englis translation of interview

Crisis prophet William White: "We're in the middle of a new bubble"
Until the details of William White in 2003 has predicted the global financial crisis. No one wanted to listen to him at that time. The Economist explains in an interview why the world is already heading for the next crash - and why the new EU banking rules will not change that.
Gold vault: Wildly fluctuating prices indicate speculative bubbles
SPIEGEL ONLINE: Mr. White, the banks have learned their lesson from the financial crisis?

White: They claim it at least. You talk a lot of the customers, it is to regain trust. But I do not believe it. It is enough not mean that the CEO of a bank preaches new values. He has to reprogram the thoughts and actions of a global organization. Not an easy task when you consider that now an entire generation of bankers is based on the principle of "anything goes".

SPIEGEL ONLINE: "Anything Goes" - what do you mean?

White: I spoke some time ago with an investment banker who should place the bond of a Chinese company in the market. I asked him about the financial results of the company. He accordingly said, "No idea, I also do not know the paper is always oversubscribed umpteen times it will be gone within one month back from our inventory and if I do not do the business, somebody else will..." There were times times because bankers interested in the quality of a company before its bonds have recommended their clients.

SPIEGEL ONLINE: regain the lost confidence of customers is one thing. The cautious approach to risk another. The banks have since made progress?

White: It seems the industry has retreated from some of the most risky business models. But I think there is just at the major investment banks to adjust the setting: Sometime this talk is on risk reduction probably stop and then we can finally pursue our usual business.

SPIEGEL ONLINE: If it does not create the financial industry under its own power to reform, the regulatory authorities must give force.

White: The national regulators are especially busy, protection of their respective banks against alleged risks from abroad currently. But there are not always the most risky business models that are taken with it. Many banks withdraw such pressure on their regulatory authorities for the financing of international trade transactions. The international trade finance is really one of the oldest and most socially valuable activities of banks at all.

SPIEGEL ONLINE: But there were also advances. We do this interview in Basel. A few meters from here, the Basel III Agreement was adopted which provides a dramatic increase in capital requirements for banks. From the right knowledge out: The more the banks with their own money must vouch for their business, the less they tend to gamble.

White: Basel III is certainly a step forward. But that is frightening but, all these agreements are based on what is politically feasible. The real question no one has answered: How much equity capital a bank would actually hold in order not to collapse in a financial crisis?

SPIEGEL ONLINE: What is your answer?

White: I do not know. But there are very credible experts who say it would be much more than the 7.5 percent equity, which dictates Basel III. In addition, banks have already started to look for loopholes, such as capital requirements can be circumvented.

SPIEGEL ONLINE: What are these loopholes?

White: The widest gateway is the risk weighting. The regulatory capital is not so fixed 7.5 percent. Depending on the risk level of the business so that it can be made even more clear. Because of course every bank tries to get a particularly low-risk classification for by itself very often practiced shops. The lobbying effort, which is operated by the banks in such regulatory issues is enormous. At the same time, regulators are also dependent on the cooperation of the banks.

SPIEGEL ONLINE: The economy in Europe is in recession. The equity returns of major banks fell from 20 or 25 percent before the crisis to a meager four percent to eight percent. Is this really the right time to make the banks the business? Then they would forgive loans even less in doubt than they already do it anyway.

White: That's the whole dilemma! For 25 years, never is the right moment. This is true for stronger regulation of the banks as well as monetary policy. It's always: Yes, in the long term we need to stop with the policy of cheap money and making simple debt times. But please do not right now, must now first have to get the economy back on its feet. That was the response to the 1987 stock market crash, the 1997 Asian crisis, the internet bubble burst in 2001 and the world financial crisis of 2008.

SPIEGEL ONLINE: Still, it have the central banks due to their decisive intervention succeeded in 2008 to avert a global recession period as in 1929 ...

White: ... which is a great achievement, especially by U.S. Federal Reserve Chairman Ben Bernanke, in fact. But at the same time we place every time we fight the effects of a burst bubble with even more cheap money, the seeds of the next even larger bubble. All of the excess liquidity must go somewhere somewhere.

SPIEGEL ONLINE: Are we currently playing at the beginning of a bubble?

White: At the beginning? We're already in the middle: The stock market boom in Japan, followed by a sudden slump. The prices of gold and other commodities, also with strong fluctuations. The massive flow of capital into emerging markets, is looking for investment opportunities there - and reacted very nervously at all the bad news. This volatility everywhere, which is typical of a speculative bubble.

SPIEGEL ONLINE: Ben Bernanke has announced that he will soon be pulling in the reins a little tighter monetary policy.

Display White: And that presumption alone was enough to topple around the world financial markets in turmoil. Which at the same time an argument for the financial lobby is: You see, the economy is still so fragile, we can now expect no shocks her really. My fear is that the central banks will follow this argument once more.

SPIEGEL ONLINE: Nevertheless, the EU has now agreed on Operating Rules for ailing banks: Shareholders are the first thing you lose money, taxpayers stand in the very end. But that is a good thing, right?

White: Potentially, yes. But in a new banking crisis, the politicians also need the courage to enforce these rules - against the lobby pressure from the banks and against the argument that is this industry will certainly put forward: namely, that an overly vigorous action against the banks could cause an economic collapse. In the course of the euro crisis we have often seen how clear rules were broken - because it supposedly given the crisis was no alternative.

besnook's picture

......the final, the ultimate, check and balance is war. that is a sure thing as the human propensity for violence as a solution is a genetic flaw wrought by the apple and the snake.

humans are like the mission impossible tape. we have always been meant to self destruct in 5 seconds. nature is brilliant.

q99x2's picture

Old elite's only make honorary decisions. No one is in control except for various autonomous divisions of various military organizations which are in the process of splintering into organized crime syndicates. The rule of law has been suspended and even the NWO globalist elite is falling apart at the seams. It is a free-for-all until the mushroom clouds and pandemics of the war to protect us wins as it claims "no human to ever be threatened again."

ebworthen's picture

"  'But every time we fight the implosion of a speculative bubble with even more cheap money, we sow the seeds for the next even larger bubble,' he said.  "


We are in FED Bubble Part II.

Why can't the PhD's see it, or is it by design?

Either there are a lot of epically stupid PhD's in charge, or malevolently evil one's.

August's picture

The Upton Sinclair response: it is difficlut to get a man to understand something when his salary depends upon his not understanding it.

williambanzai7's picture

Will Ed Snowden be attending the July Meeting in Moscow?

blindman's picture

greenspan, " I have discovered a flaw in my thinking." or some
shit, alternative jawboning, like that. yes, there is a flaw.
your money system is an extension of slavery and outright owning
human fucking beings as a commodity, you psychopathic fuck.

are we there yet's picture

Humor: why are ther no Jewish gangs in prison... Because they are in the treasury doing gods work.

Colonel Klink's picture

"And the judas goat, yet to be named"

I thought he had a name and that name was Obama?  Or is there a tribe of goats?

robnume's picture

Right, as usual, Wolf! Love, respect and read ALL of your cross posts onto ZH; you've actually got a bloody brain!! And you know how to use it. I'll stop fawning now. We are long past the time in asking for "responsibility" from those who would run things, i.e., TPTB. These turkeys don't understand that globalism is already dead because it is not sustainable. We will return to a "world made by hand", to quote James Howard Kunstler. As he points out, we're way beyond peak oil and that even if oil prices were to decline, US citizens will not have the money to buy even cheap oil. That's what happens when your leaders turn your country into a statist/corporate regime. I knew back in the '80's that the much touted "service sector" economy and the "financial services" industries were not practical or sustainable because they do not PRODUCE anything. Now we live in the United Stasi of America and TPTB will want to lock us all up - what else are those FEMA camps for - and the judas goat, yet to be named, will lead us all to the slaughter. They think that they don't need us anymore, but the fact is WE DON'T NEED THEM!!!! And we never will.

spinone's picture

Globalism is wage arbitrage subsidized by cental banks for the benefit of corporate profits.  If cental bank's interventions stopped, globalism would no longer be profitable.

i-dog's picture

Globalism is indeed wage arbitrage - though the central banks play less of a role than do taxation policies of national governments. The spread of globalism has been facilitated mainly by enforcing minimum wages and conditions in developed economies.

Wage arbitrage is as old as civilisation itself ... with slavery being the ultimate in wage arbitrage ... and it will not be stopped by any amount of "regulations". Better to innovate and move on from hanging onto "old" industries that are neither healthy for the workers nor cost-efficient for consumers.

The fundamental problem for society to address is how to distribute the gains made from capital investment in the wealth-generating export economy down into the [non-productive] service economy that employs the majority of the population. "Capitalism" relies on the wealth generators getting rich and then "trickling down" their profits into the service economy through wages, productivity bonuses, dividends or lavish spending ... while "socialism" relies on confiscating the profits and "distributing" them to eager recipients (mainly in government itself). Neither alternative is without perceived "unfairness" in the distribution.

mvsjcl's picture

Slavery has as much to do with wage arbitrage as rape has to do with sex. It's all about psychopathic power lust.

i-dog's picture

Cute comment ... more suited to twitter.

Nope ... it's about profit. Slave labour in the early US was an early form of offshore manufacturing in a cheap labour market. Now, because of modern communications, instead of importing slaves, they can export the work to where the slaves live. It was always inevitable.

mvsjcl's picture

What does profit matter to people who create "money?" Profit is a means of control, of distributing it to those who would be controlled by it.