Fairy Tales from Europe’s Central Banks

Most people seem to accept that women should be paid less than men because men (and sometimes women) in suits normally make the decision about who gets paid. You do not tell you boss, the one in a suit, that your female colleague should get the same salary as you do, assuming that you are also a male.

It is obvious that most people must accept this because the fact is that on average women do receive around 25% less than men according to a new study here in Finland, that great Nordic country that believes in Equality with a capital letter. It is doubtful if the situation is any different elsewhere.

It is the same thing with Central Banks. We have one here in Finland run by a Finn who also speaks seriously dressed in a dark suit, white shirt and blue silk tie. He is also one of those VIP’s who we are taught to respect and honour from the earliest school days.

We see him in the media making serious pronouncements. During recent years he has been talking about the risks of having too much debt for home-owners. He is also a person who talks about austerity – countries should not borrow too much. But actions speak louder than words, as our mothers used to say.

His message is a cruel joke. The reason people borrow is because they want to own the home where they live. They borrow money because they have not got enough savings to pay for an ever increasing cost of apartments in Helsinki, and in other major cities in almost every European country. The price of new homes has soared by 15% the last four years. The reason for that is because of cheap money as demand for new homes has soared.

Low interest rates encourages people and companies to borrow more – that is what the Central Banks wanted when they decided to push interest rates down. They call this “Monetary Policy” and it sole purpose is to get the EuroZone back on its feet after the Financial Crisis.

Has the financial crisis disappeared? Are we on safer territory now? Are the banks, who were the rot then, are they in better condition now? 

If you look at the Italian banks, the answer is no. German banks are also underperforming and the French banks are probably under-reporting their problems. The Nordic banks are probably doing fine but they were always having an easy time after the big bailouts of the 1990’s. Back then they became mainly domestic players, with Protestant regulators, and they missed their chance to become big losers with the financial crisis of 2007/2008, even though they did manage to take some losses.

Draghi, and now Lagarde, did little to solve the challenges facing the weak banks in the EuroZone. 

The same banks are still weak ten years later.

Doing “whatever it takes”, Draghi’s recipe for saving the EuroZone, has just created a new problem which this man in the dark suit calls “Quantative Easing”, which is a fancy word for secretly printing money for weak governments in the Eurozone to hide their desperately weak financial position. 

Quantative Easing mans that the European Central Bank (ECB) is buying huge amounts of bond issued by all of the EuroZone governments. Weak and badly managed governments like Italy and Greece, plus a few others, have seen their cost of borrowing fall to ridiculously low levels because of the ECB is buying the bonds “from the secondary market”, which is just another fairy story. The ECB is buying from the banks that arranged the bond issues after the issue date! No serious long term investor would buy these bonds at such low rates of interest from such weak issuers. 

When interest rates rise these huge bond investments – €2 600 000 000 000 – that is €2.6 trillion – will show some very big losses…

The banks in Europe have complained that low interest rates hurt their profits and the central bankers again believe these fairy stories by giving banks cheap long term funding.

The banks want us to believe that an efficient banking sector is a key to a working economy. However only 25% and less, of banks’ balance sheet goes to real economy – to big and small companies. Around 50% goes to housing loans, with the rest for speculation and liquidity.

So by lowering interest rates and supporting banks, without cleaning them up, the economies of the EuroZone are meant to get better! Well, that is not the case. Very little has in fact been done to clean up weak banks.

But there are further unwelcome solutions permitted by central banks and regulators. In countries like Finland the regulator has allowed the banks to unilaterally increase their interest rates they charge on lending if they fall below zero. 

During many of the last years we have seen the short-term market 3 and 6 month Euribor rates below zero, but private home owner borrowers have not been allowed to take advantage of this lower rate when it has gone below zero percent! Naturally the bank pockets the difference and pays the senior management huge bonuses for a job well done! 

Low interest rates are poison for savers. They work wonders for borrowers who can access the bond and corporate debt markets. The present banking system enjoys unprecedented benefits and all this is thanks to the fairy tales told to and by central bankers.

But what can you expect from Central Bankers. Ours used to be a EU commissioner who wanted Turkey to be a full member of the EU, Draghi worked hard at Goldman Sachs and Lagarde was found guilty in France for negligence in the Bernard Tapie case when she was the French finance minister! 

Do not believe in fairy tales because they make a few others far richer at your expense. 

Picture: Wikipedia – The Arthur Szyk Society, Burlingame, CA 94070 (www.szyk.org)

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