Wolf Richter www.testosteronepit.com [12] www.amazon.com/author/wolfrichter [13]
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 [14] 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 [15]. “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 [16]. “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 [17]