by Nomi Prins
In contrast, the twenty-first century gave rise to a financial world war. Conjured money was the weapon of choice. Fabricated funds went toward subsidizing the private banking system and buying government debt, corporate debt, and stocks. By providing the grease that kept money flowing, central bankers superseded governments—they set the cost of money and provided the confidence in ongoing liquidity—the world was their battlefield.
On the surface, the International Monetary Fund (IMF) was established by the United States and Europe (with olive branches extended to other countries) to fund postwar development. But, in practice, both the IMF and the International Bank for Reconstruction and Development (part of the World Bank Group and commonly referred to as the World Bank) fortified the economic and political power of the core US-Europe alliance. The power of this entity increased after the most recent financial crisis, as did its growing embrace of emerging economies, including China and Russia.
Leaders of developed and developing countries embarked on a paradigm shift. The world would gradually be divided between those who depended on Fed policies and those who had been harmed by them. Gatherings and conferences of central bank leaders would become focal points and outlets for criticism against the systemic risk, low growth, and poverty being spawned.
The global financial system elites meet up in swanky locations. They take each other’s calls and tend to avoid mere mortals (some have not driven their own cars in decades). In practice, they operate in such a way so as to continually grow and retain their power. The modern outsized influence of these nondemocratic private-public banking institutions and individual leaders eclipses that of governments and has become an indispensable backdrop to markets and capital flows. Theirs is a natural process of greasing the wheels of banks and markets. Except it’s not. By following the money and power alliances to their source, a more compelling story emerges, one of collusion, forced collaboration, and a changing monetary and financial system hierarchy.
In 2009, the world was coming to terms with how massive the global financial crisis was. The American financial system was broken. The international monetary system was breaking. It was unclear how far that “developing disaster” would extend. Central bankers are not elected by voters. Yet they play at government. They promote policies under the auspices of stabilizing prices, achieving full employment, and maintaining (a somewhat arbitrary level of) inflation. Since the financial crisis, they have ushered in an unprecedented period of artificial intervention.
Before the crisis, central bankers exhibited gross negligence of their regulatory responsibilities to contain bank risk and fraud. In an effort to minimize the fallout, they lavished extreme monetary intervention on the biggest banks and markets in which they operated. What started as a rescue mission for the biggest US banks in the form of liquidity “lifelines” metastasized and became global.
This in turn caused other countries to reexamine their positions in the international financial hierarchy relative to the United States. Non-Western nations such as China and Russia had no interest in becoming casualties of another US-led crisis and came to understand that dependency on the US dollar put them at risk. Emerging market nations began to gravitate toward China for refuge, seeking a way to maintain trade while diffusing exposure to the risks of the US.
Classic monetary policy sets rates and credit conditions in “pursuit of maximum employment, stable prices, and moderate long-term interest rates.”4 But after the financial crisis, zero percent interest rate money remained manna for stock and real estate markets. What began as self-described “emergency measures” by the Fed became the new normal. Like Dr. Frankenstein, the Fed had created something with implications far beyond what it understood.
Wall Street was nourished by this monster. Foreign capital slithered around the world like a ravenous snake in search of prey. Speculation, short-term profit, and central bank encouragement allowed for global collaboration and ultimately unsustainable markets. All this created the illusion of economic stability.
The financial crisis of 2007–2008 converted central bankers into a new class of power brokers. Their behavior ran roughshod over the very notion of free markets because they rendered markets sustained through artificial means. Central banks re-redefined the balance of power in the international order. In developed countries, they launched a strain of financial warfare whereby they backed governments, implicitly forcing austerity on weaker countries. In developing countries, they advocated austerity for their own populations.
In the decade that followed, US debt rose from about $9 trillion in 2007 to $20 trillion in 2017.5 The debt-to-GDP ratio nearly quadrupled, from 40 percent to 105 percent. The Fed held the equivalent of almost one-third of this amount as “reserves” on its books. This was effectively debt created by the US Department of the Treasury, bought by big banks, and returned to the Fed to earn interest for those banks. It did nothing to support the real, or foundational, economy. And without a solid foundation, you don’t have a solid economy.
Something had to give—people’s patience. The Fed’s rising influence and power to create money—but not financial security or economic prosperity—prompted major shifts in voter preferences. Large-scale moves toward nationalism were met with bitter battles to maintain globalism. Superpower realignments and fresh alliances were activated with a zeal not seen since the wake of World War II. The Fed’s fabricated-money strategy left other central banks with a choice: collusion or consequences.
THE POWER GAME
Classically, central banks hold reserves in case of emergencies, set interest rates, and allocate funds to calm or restructure the world after panics or wars. The more recent role they have assumed is one of securing the entire financial system and influencing the economic trajectory of entire sovereign nations. This is the antithesis of democratic rule. Such a monetary oligarchy operates beyond democratic norms and limits.
The scope of their activities, and the sheer level of international coordination and its results, was unthinkable before 2008. Never before has money been so cheap—for so long. Never before has there been no imagined alternative to artificial capital. Never before have certain elite central bankers sought to control all others. Never before have central bankers attempted to dominate the world monetarily and economically—and been able to do it.
Much of the twentieth century belonged to Wall Street. The twenty-first century now belongs to the central banks. Historically, every bubble has been followed by a bust. Central banks have created an artificial money bubble, specifically crafted for the purpose of lavishing banks and markets with cheap capital. Though the Fed began to signal a reduction in the size of its book in mid-2017, by miniscule percentages, reducing it substantively in practice has significant ramifications. These include catalyzing a rise in rates and therefore the cost of debt denominated in dollars around the world. That could impair the ability of emerging markets (EMs) that borrowed money in US dollars to repay their debts. In turn, these actions could lead to corporate bond defaults for companies, forcing major job loss or wage reductions in order to remain afloat.
A handful of officials control the fates of billions of people. The more these officials rely on artificial money, the greater their power. G7 central bankers, such as Fed leader Ben Bernanke, followed by Janet Yellen, ECB head Mario Draghi, and BOJ head Haruhiko Kuroda, sought to subsidize their banking systems and markets through unprecedented intervention.
This situation belies an integrated network of a new, influential breed of central bankers. Lurking behind their actions is a monumental yet subtle shift. The rise of the Fed’s power and that of its allies catalyzed irrevocable changes that have provoked the increase in non-G7 central bank powers, such as that of the People’s Bank of China, and instability in major emerging market nations such as Mexico and Brazil.
POWER OF THE UNELECTED
From public or private posts, central bank governors are usually appointed by government offices or officials on the basis of
ideology and personal relationships. In the United States, there is a pretense of public choice, and then Congress votes on the candidate. In practice, however, no candidate for governor of the Fed has ever been rejected by Congress, so de facto the US president selects that individual. For purposes of job security, central bankers can either stay aligned with the president or they stay above ideological politics. But they don’t have to. They are free to decide monetary policy as they see fit, without transparency or accountability.
In countries like China, Brazil, and Mexico, the president or minister of finance appoints the central bank governor. The selection is fraught with political undertones, even though some presidents stress that the central bank operates independently of the government. In the case of the multinational central and development banks that shape monetary policy, such as the IMF, the World Bank, and the Bank for International Settlements (BIS, or “the central bank of central banks”), leaders are chosen by member countries. Thereafter, they are selected and appointed by former members. It’s a rotating, exclusive club.
SUPPLYING DOLLARS, INCREASING INEQUALITY
Beginning in 2008, the Fed provided US dollar liquidity to international markets by doubling its foreign exchange swap lines with the Bank of Canada, Bank of England, Bank of Japan, National Bank of Denmark, European Central Bank, Bank of Norway, Reserve Bank of Australia, Bank of Sweden, and Swiss National Bank, from $290 billion to $620 billion. This was the central bank equivalent of “the House” providing extra money to the gamblers at nearly no cost, so they could keep placing wagers until their spate of bad luck dissipated.
When these carefully crafted (think: artisanal) subsidies, called “currency swaps,” were first used by central banks in the 1960s, the dollar was weakening as other countries hit post–World War II production strides. In that environment, the Fed offered $20 billion of currency swaps in dollars, an amount worth $160 billion today. The idea was to furnish foreign banks with US dollars with which to engage in trade and financial transactions with US banks. That amount was one-quarter of the figure on offer by the Fed in 2008. Currency swaps weren’t the only provision of money on the menu, nor were they enough to satiate the imperiled financial system, starving for more dollars.
By September 30, 2008, markets had devoured these currency swaps, pushing the value of the king dollar relative to other main currencies back on top. The global financial crisis was caused by US banks and their negligent-at-best regulator, the Fed. Yet, the dollar exhibited its most acute appreciation since being allowed to “float” after the gold standard was abolished in 1971. This happened by virtue of the Fed’s crafting just enough dollars to keep the system going, but not enough to drive down demand for the dollar. The Fed was the perfect drug dealer, keeping its customers always wanting a little bit more.
The dollar’s rise was attributed to traditional reasons: it was a “safe-haven” currency, there was a shortage of demand, and traders were “unwinding” or getting out of trades that had bet on a weaker dollar. All that was true. But the biggest factor was the Fed’s choreography.
Starting in 2012, the Fed portrayed the desire, but not the action, to retreat from its policies of providing liquidity to world markets and major banks. The US central bank offered a gamut of benchmarks, from inflation to unemployment, as necessary conditions to shift to tightening rate policy. But it feared negative repercussions of a major policy shift. So, the Fed’s goalposts stayed in constant flux.
Global citizens saw no significant upgrade in their personal financial conditions. To the contrary, the majority of wages stagnated after 2008. Between 2012 and 2015, developing country wage growth slowed from 2.5 percent to 1.7 percent. Among developed G20 countries, it rose from 0.2 percent in 2012 to 1.7 percent in 2015, but most of that increase went to the top 10 percent of the population.
Despite central banks’ claims of spurring economic growth with their methods, the wealth gap between the rich and the poor remained near record levels. In November 2016, the Organisation for Economic Co-operation and Development (OECD) announced that, although the richest 10 percent had rapidly bounced back, long-term unemployment, low-quality jobs, and greater job insecurity had disproportionately hit low-income households. According to the OECD’s study of thirty-five member countries, “By 2013/14, incomes at the bottom of the distribution were still well below pre-crisis levels while top and middle incomes had recovered much of the ground lost during the crisis.”6
Since 2009, central bank leaders in developing nations, from Brazil to China, and in struggling developed nations, have warned the public about the false sense of security this cycle of government debt creation and central bank debt possession provides. On June 29, 2014, Jaime Caruana, governor of the Bank of Spain and head of the BIS, noted, “Ever rising public debt cannot shore up confidence. Nor can a prolonged extension of ultra-low interest rates. Low rates can certainly increase risk-taking, but it is not evident that this will turn into productive investment… if they persist too long, ultra-low rates could validate and entrench a highly undesirable type of equilibrium—one of high debt, low interest rates and anemic growth.”7
The Bank for International Settlements was established in Basel, Switzerland, in 1931 during the Great Depression. This was a time when people had lost confidence in their banks and their ability to extract money when they needed to. The BIS was to sit above all the world’s central banks and monitor global behavior to thwart crises and stimulate coordination. In practice, because all the elite central bankers were involved, it was a central bank club more than a monitor. Even the BIS, in strange irony, has become critical of zero interest rate policy as an economic cure-all. In its words, “Globally, interest rates have been extraordinarily low for an exceptionally long time.… Such low rates are the remarkable symptom of a broader malaise in the global economy.” The conclusion of the BIS report minced no words. It pronounced an epic shift. “Global financial markets remain dependent on central banks.”
Dependent is a strong word. Yet a more accurate way to depict the situation had emerged. The biggest central banks had become the market.
The only policy intentionally propping up the entire global financial system is that of cheap money. According to the BIS, “Since the global financial crisis, banks and bond investors have increased the outstanding US dollar credit to non-bank borrowers outside the United States from $6 trillion to $9 trillion.”8
The Fed exacerbated a cheap-money addiction through its obtuse and often impromptu messaging, releasing disparate statements to tease or test markets. It behaved like an encroaching army: it colluded with allies but left no options on how to oppose its orders.
The symbiotic relationships among central banks, major governments, and private banks are nothing new. What is new is the extent to which the Fed’s collusive monetary policies first elevated and then diminished the status of Western central bank leaders relative to Eastern ones. The overriding reach of the Fed had the unintended consequence of opening the United States to the loss of its political superpower status. If the Fed raised rates too high or too quickly, it would cause a global crash, the ultimate proof of the policy’s ineffectiveness at fostering long-lasting economic stability.
Until the middle of 2015, the IMF had been mindful not to be too openly critical of the Fed. The time had finally come; when faced with the threat of the Fed raising rates and damaging already weakened emerging market currencies and potential debt payments, its managing director, Christine Lagarde, became emboldened to do so. She cautioned the United States and the world about the side effects of the Fed’s cheap-money policy, pointing to the problems that could arise if the Fed raised rates too quickly or by too much.9 Meanwhile, the IMF worked with the Chinese government and central bank to add the yuan to the “basket” of currencies backing the “IMF currency,” or special drawing rights (SDR) basket. This was in allegiance to the rising power of China and diversification of the global monetary system away from the US dollar.
The G20, relatively dormant on the issue of monetary policy since its creation in 1999, rose to prominence in the year following the financial crisis. In 2016, the global forum for governments and central bank governors comprising the twenty major economies convened in China for the first time. The move boosted a major US rival and reaffirmed its rising spot as a prominent economic and diplomatic contender. It punctuated and portended the trend of growing tension among developed and developing states.
The countries I explore in Collusion represent the main pivot points of the world’s post-crisis political-financial shift. Mexico was caught between its tight relationship with the United States and its growing desire for independence; Brazil, the largest Latin American economy, was deepening its associations with China but grappling with its United States–centric tendencies. China used the financial crisis to elevate its diplomatic and trade hegemony, globally. Japan was caught in the crosshairs of its old US alliance and fresh opportunities with Europe and its former foe, China. For Europe, certain elite leaders embraced United States–backed monetary policy, but the resulting internal political-economic turmoil would tear apart its structure. They represent case studies of the dual machinations of central bankers domestically and on the world stage.
MEXICO
In Mexico, the financial crisis and the Fed’s reaction to it presented a domestic conundrum. The Central Bank of Mexico, or Banco de México, had to decide whether and when to play follow-the-leader with Fed policy. On the surface, the United States’ southern neighbor had no choice because of trading relationships. The governors of Banco de México over that period, Guillermo Ortiz and then Agustín Carstens, were well situated globally because of their US relationships. However, they were also caught in the vortex of following the Fed or paying homage to their country’s domestic economic needs.