great fun with central banks
Every country has its own central bank charged with many tasks; the main one is controlling the issue of money (national currency) into circulation. The most important one of all is the Federal Reserve of the United States of America (known on the playground as the “Fed”). There are twelve Federal Reserve Banks which form a major part of the Federal Reserve System and together they divide the nation into Federal Reserve Districts, and were created by the Federal Reserve Act of 1913 (see below). They are jointly responsible for implementing monetary policy set by the Federal Open Market Committee (FOMC). Each Federal Reserve Bank is also responsible for the regulation of the commercial banks within its own particular district, but until the 2008 crisis, investment banks were not part of the Federal Reserve System and operated independently.
Most central banks are independent and privately owned, the shareholders being mainly commercial banks and ultra-rich banking families: (see supporting exhibit IV). The obvious exception is the Bank of England (BoE) which was ‘nationalized’ in 1946 and appears to be controlled by the UK government. It is these banking families who devised, over the centuries, the financial systems we use today throughout the world. There are a group of six major central banks, each with its own governor, (see supporting exhibit IV), who decide and implement global financial policy independent of governments and politicians. It may come as a surprise that our rulers are not who we are told they are: the politicians and bureaucrats all take their orders from central bankers. Despite the substantial changes in the world economy during 2009 – 2013, the US Treasury market and Fed continues to exert significant influence over global interest rates regardless of other large economies including UK, China, Japan and Germany. Yet the fact that national business cycles are not synchronized means that some economies are less well positioned to cope with higher interest rates. When the Federal Reserve was created the US President of the day said:
When the Bank of England was created in 1694, by a Scotsman: William Paterson, he famously said: “The bank hath benefit of interest on all moneys which it creates out of nothing” (William Paterson). In 1977, the BoE set up a wholly owned subsidiary named, “Bank of England Nominees Limited” (BOEN), a private limited company with two of its one hundred £1 shares issued. The objectives of the company are: “To act as Nominee or agent or attorney either solely or jointly with others, for any person or persons, partnership, company, corporation, government, state, organization, sovereign, province, authority, or public body, or any group or association of them….” However, it is important to note a technicality: that BOEN is “no longer exempt from company law disclosure requirements”, as the written answer from the Lords’ Hansard on 26 April 2011 makes clear. This means that BOEN is no longer granted an exemption, under Sec 796 of the Companies Act 2006, to the notification provisions required by Sec 793 as was the case previously. As stated in Hansard, the BOEN is a company set up with the intention of holding shares confidentially on behalf of “Heads of State” and certain others, presumably, HM the Queen and her “immediate family” and certain governmental bodies.
It is clear that the ‘ownership’ of the BoE is at least clouded enough to raise questions about who or what actually benefits (quo bono) from its activities.
This course does not intend to draw on the many conspiracy theories which abound in the internet space. Suffice to say that there are very good reasons of national security and sound commercial practice that allows the ownership of the BoE to remain unpublished. Right?
Because the world’s central banking systems are based on the British model, perhaps a short history of the BoE will help to fit yet another jigsaw piece into the emerging pattern of banking in general. England’s crushing defeat by France in the 1690s (Battle of Beachy Head) became the catalyst for England to rebuild itself as a major power. England had no choice but to build a powerful navy if it was to regain global control. No public funds were available, and the credit of William III’s government was so low in London that it was impossible for it to borrow 1,200,000 (at 8%) that the government needed.
The Bank of England (BoE), formerly: “Governor and Company of the Bank of England”, is the central bank of the United Kingdom and the model upon which most modern central banks is based. Established in 1694, it is the second oldest central bank in the world and also acted as the English Government’s banker and remains the banker for HM Government. The Bank was privately owned and operated from its foundation in 1694 until it was nationalized in 1946. In 1998, the Labor government revised the Bank of England’s charter and it became an independent public organization, wholly owned by the Treasury Solicitor on behalf of the government, with independence in setting monetary policy. The Bank is one of eight banks authorized to issue banknotes in the United Kingdom, but has a monopoly on the issue of banknotes in England and Wales and regulates the issue of banknotes by commercial banks in Scotland and Northern Ireland.
Now please bear with the most outrageous run-on sentence we’ve ever created….
A primary task of a central bank is to act as a lender of last resort to the commercial banks, and to raise finance for the government which it does by printing money ‘out of nothing’ (which by law it is allowed to do!) and loaning the funds to the government in exchange for an IOU – in effect pieces of paper known as bonds or gilts which accumulate over the years and amounts to the total debt owed by the government to its taxpayers; it is known as the National Debt and is discussed in Lesson 5.
The central bank now has bought government IOUs and because ‘outside investors’ (that is: The Bond Market, see Lesson 7) view them as rock-solid investments, with no risk of default, offer an income in the form of interest which is what investors need being people with surplus money or savings. People with more than enough money don’t need to work by selling their labor, but ‘earn’ their living by lending money to other people, companies and governments in return for an income known as yield in the form of interest or dividends. Commercial banks, who are all members of the exclusive central bank system, buy these bonds from the central bank using depositors’ funds or other borrowed money and sell or lend them at a profit to investors who then receive the interest income; if this sounds like a circular process that’s because it is.
This is how the banks’ ‘musical chairs game’ begins, because investors, who are now holding these government bonds, can use them as security to borrow more money from financial institutions (often in the City of London and Manhattan) and speculate (gamble) with it in risky markets. Now that the financial institutions have possession of the bonds, they can actually ‘sell or lend’ them back to the central bank for more cash, which is printed into existence using the magic of the central banking system! It works so long as nobody stops the ‘music’. This merry-go-round of money is known as ‘repurchase agreements’ or ‘repos’ which was briefly noted in Lesson 3.
In the 21st century bankers effectively rule our world. Silently, without much public fuss or discussion, a new ruling class has risen in the richer nations. These men and women are unelected and tend to keep in the shadows unlike their mouthpieces, the politicians. These ultra-rich people are the world’s central bankers. Approximately every six weeks they meet in Basel, Switzerland, for secret discussions on monetary policy and global financial strategic planning where they work together to perpetuate the global system of banking and finance. Basel is also the home of the Bank for International Settlements (BIS) of which you have probably never heard. It is an organization of central banks which “fosters international monetary and financial cooperation”, serves as a bank for central banks, and is not accountable to any single nation or government. It provides banking services only to central banks and other connected international organizations.
The BIS was established by an inter-governmental agreement in 1930 by the Rothschild Family (surprise, surprise!) and was originally intended to facilitate reparations imposed on Germany by the Treaty of Versailles at the end of the First World War. According to its charter, shares in the bank could be held by individuals and non-governmental entities and enjoy immunity in all the contracting states. It is now wholly owned by BIS members (central banks) but still operates in the private market as a counterparty, asset manager and lender for central banks and international financial institutions. Profits from its transactions are used, among other things; to fund the bank’s other international activities.
These bankers now wield at least as much influence over the lives of ordinary citizens as presidents and prime ministers of the past. Since the financial crisis in 2008, these central bankers have so far saved the world’s economy from total collapse, but at the same time have created potentially more problems through quantitative easing (QE) policies that are effectively printing money out of thin air. The quantities involved are gargantuan: over 20 trillion US dollars in euro, Yen, UK Pounds as well as other smaller countries’ currencies. At the end of 2012, the balance sheets of the world’s largest central banks, those of the G20 nations and the Eurozone, including Sweden and Switzerland, totalled 17.4 trillion US dollars according to Bank of Canada calculations from publicly available data.
When the history of the 2008 global financial catastrophe is finally documented the world’s central bankers may be seen either as our saviors, or rather as perpetuators of an even great financial collapse; history will be the judge. However, three key personalities will go down in history: Dr. Ben Bernanke, chairman of the U.S. Federal Reserve, Mario Draghi, head of the European Central Bank, and Canada’s Mark Carney. These three countries represent nearly a quarter of global GDP, or about USD 17Tn in value. The main effect of central bank money printing (QE) is to distort the gap between the rich and poor especially those approaching or at retirement age.
Most generations grew up believing that if you save and exercise prudence you would earn at least a modest return on your hard-earned money and have at least a reasonable pension and manageable old age. Continuous, artificial low interest rates, created by central bankers, mean that savers and pension funds find it very difficult to achieve the yields needed to provide a positive return. In fact real interest rates (rates after allowing for inflation) are now negative. As time goes on inflation causes investments to become eroded and worth less every year. This ‘zero interest rate’ (ZIRP) policy has savaged, slayed, and beat the heck out of pensions and savings returns worldwide.
The real problem lies in the major differences between those economists advising policy-makers and those guiding central bankers. Economic theory is at the center of these arguments with the two main schools if thought holding diametrically opposed views of how to manage a 21st century global economy. We have never been in this space before where all national economies are inextricably linked together through instantaneous technology. It certainly is a challenge for all those involved in trying to find solutions by applying various economic models from the teachings of John Maynard Keynes on the one hand and the Monetarists on the other. The basic theories are discussed in Lesson 11 and show how their application can individually affect our personal economic health.
Central bankers have so far adhered to the ‘monetarist’s model’ which claims that a central bank’s first priority is long-run price stability by targeting inflation within set limits of around 2% per year as well as controlling the issue of currency. However this from “Central Banking at a Crossroad,” Paul Volcker, at the Economic Club of New York, May 29, 2013 highlights some of the risks:
Legendary, [former] Fed Chairman Paul Volcker spoke again this week before the New York Economics Club. Mr. Volcker has myriad issues with contemporary central banking and is no fan of the Fed’s dual mandate*. When asked for his preferred central bank mandate, he referred to the Bundesbank [The central bank of Germany] and monetary stability before providing the following: “A central bank is in charge of the currency. And the responsibility is for a stable currency.”
* The US Congress established three key objectives for monetary policy in the Federal Reserve Act: Maximum employment, stable prices, and moderate long-term interest rates. The first two objectives are sometimes referred to as the Federal Reserve’s dual mandate. Its duties have expanded over the years, and today, according to official Federal Reserve documentation, include conducting the nation’s monetary policy, supervising and regulating banking institutions, maintaining the stability of the financial system and providing financial services to depository institutions, the U.S. government, and foreign official institutions. The Fed also conducts research into the economy and releases numerous publications, such as the Beige Book.
However, we now live in an era where global central banks prefer weak currencies to stable ones. Almost in unison, today’s monetary policy doctrines support currency devaluation. The Fed’s loose policies have weakened the dollar for many years causing 96% of the USD value to be eroded since 1913. Monetary stimulus rose to unprecedented extremes following the bursting of the mortgage finance bubble in 2008 and exacerbated by the open-ended QE policy adopted by the Fed in September 2012. More recently, the Bank of Japan has embarked on an extraordinary (and similarly fateful) monetary experiment to weaken the Yen and inflate their price levels. This is not working too well at present and the result of this policy is yet to unfold.
The conventional view has held that China, Asia, Latin America and Eastern Europe were the ‘global locomotive’ that was going to drive the struggling developed economies into a new growth cycle. Regrettably this has not worked in so far as unprecedented monetary excess from the Fed and other central banks has driven already overheated “developing” credit systems and economies into a dangerous bubble without the expected, attendant growth.
These experimental monetary policies always risk unintended consequences. The Fed’s $85bn monthly QE has spurred a powerful bubble throughout U.S. securities and asset markets. These unintended consequences also include the re-emergence of ‘king dollar’ dynamics and the attraction of speculative finance from the ‘developing’ markets. The Bank of Japan has succeeded in weakening the Yen, but at the expense of South Korea and “developing” Asia. The weak Yen has further bolstered “king dollar,” placing additional pressure on commodities markets, economies and currencies.
The longstanding policy of monetary stability seems to have worked well over the years since the horrendous inflation experiences of the 1970s. Without analyzing the causes of the crisis of 2007-8 we do know that markets have become more unstable over the past 10 years. Monetary economists (e.g. the Chicago School) emphasize market efficiency, rational expectations and the ineffectiveness of government policy interventions, which are known as ‘fiscal’ polices, as being the solution to global financial imbalances. However, the ‘New Keynesian’ economists (often found at Yale, Princeton and Berkeley) place heavy reliance on governments to act and stabilize markets by applying policies such as QE, nationalization (e.g. the rescue of RBS by HMG buying 80%+ of the ordinary shares) and applying initiatives to reduce unemployment. The continual conflict between these forces leaves the central banks with financial objectives which become beyond their ability to manage.
The Fed uses various ‘economic tools’ to influence the economy, one of which is significant for affecting markets directly: the ‘Federal Open Market Committee’ (FOMC). This committee and how it is managed is described in Lesson 7 about Markets; suffice to say here that central banks are having a far more direct input into markets in general that a consensus is emerging that markets are no longer ‘free’ but manipulated by massive amounts of ‘printed into existence’ money by the Fed and other central banks.
If the people of the world truly understood how the Federal Reserve system works and what it has done to them there would be an outcry for an immediate change to the system. This system was designed by international bankers for the benefit of international bankers alone, and it is systematically impoverishing everyone as the rich owners of capital become even richer at the expense of 95% of the world’s people.
Why can’t the governments just print enough money as they have done for centuries at no cost to the taxpayer? Would our economies not function more efficiently if we allowed the ‘free markets’ to function without interference and government control of the purse strings?
The International Monetary Fund (IMF) is an organization of 187 nations and all of them have a central bank and use the same fractional reserve banking system devised by the Federal Reserve of the United States of America in 1913. There are some good reasons why the system should be changed but at present those in charge are of course benefiting from it and have no incentive to take action that would damage their own interests. Here are some unhealthy features of the global banking system, created by central bankers, which you might recognize:
The very nature of the banking system requires there to be inflation which is, in effect, a ‘tax’ as the value of currencies go down and is reflected in the prices we pay for essential items of food and energy. The winners are the 10% of the world who hold assets which ‘appreciate’ at the same time the currencies devalue. The value of the US dollar has fallen by 83% since 1970 but prices have seriously escalated between 2002 and 2012 as these examples of basics show: Eggs 73%, Coffee 90%, Bread 39%, water…, electricity 42%, and motor fuel 158%.
The bankers’ system relies on trapping the government in an endless debt spiral from which there is no escape. When a government needs to spend more than it takes in taxes it cannot print the money; the treasury must go to the central bank offering an IOU (Treasury bond) which exchanges the bond for newly minted money. The bond is then auctioned off to the banks and financial institutions operating in the bond market. However the government must pay interest to the central bank on the money it receives therefore the amount of debt is greater than the amount of money created (this is called ‘servicing the national debt’). The government will remain in debt in perpetuity without being able to service the debt unless they borrow more! It is a one-way, crazy system and works only in the bankers’ favor.
The central bankers intervene in the operation of most, if not all, global markets and influence prices and values artificially, not allowing markets to freely discover the market price of commodities and products. This distortion creates artificial economic signals which challenge free trade and causes ‘bubbles’ to occur at regular intervals. The sudden bursting of these bubbles creates the recessions and economic misery we see around us continually and which are all too familiar.
central banks are privately owned
The stockholders in the twelve regional Federal Reserve Banks are the privately owned banks that fall under the Federal Reserve System. These include all national banks (chartered by the federal government) and those state-chartered banks that wish to join and meet certain requirements. Even the Federal Reserve itself has argued in court that it is “not an agency” of the federal government and is not accountable to the people or society in general. Most central banks follow this pattern, even the BoE is believed to be ‘privately’ owned in spite of a supposed ‘nationalisation’ by a Labor Government. This arrangement causes conflicts of interest between private and social financial objectives which adversely impacts government policy affecting each and every one of their national populations.
Perhaps a recent interview with the current head of the Bank of England, Mark Carney, will illustrate the attitude of central bankers’ towards their governments and populace:
Carney would prefer not to talk about the enormous power central bankers have gained since 2008, saying only: “We have a tremendous responsibility … because of a series of mistakes that were made in the private sector and the public sector.” As witnessed by the surge in central bank holdings, the printing of new money beginning in the spring of 2008 with bank bailouts and the acquisition of long-term securities to keep interest rates down (International Monetary Fund). Because Canada had performed better than most Western nations, Carney did not order any new money printing. But he kept interest rates down and that energized the real estate booms over the last few years in Vancouver, Toronto, Calgary and the rest of Canada. He scoffs at the suggestion that “the party” will end at some point. “I am not sure we are having a party right now,” he says. “It doesn’t feel like a party.”
He has repeatedly expressed concern at the huge debt levels Canadians are accruing, at least partly because of his low interest rate policies. Surely he understands the anger of an older person watching their savings being eroded? Carney smiles grimly. This question is clearly a sore point; he gets a lot of post on the topic. “Canadians”, he says, “must understand that the alternative is massive unemployment and thousands of businesses going under”, and “my experience with Canadians is that they tend to think about their neighbors and their children and more broadly … they care a little bit more than just about themselves.” Asked whether central bankers are not in fact enabling irresponsible behavior by speculators enamored of cheap money, not to mention politicians who seem unable to curb their borrowing and excessive spending, Carney merely remarks that: “Voters in a democracy get the governments they choose”.
ShopSquawk thinks this really sums up central bankers’ tendency to be immune to ordinary peoples’ concerns; some would call it arrogant. In the process of the largest liquidity injection (again, another name for ‘printing money’ from nothing) in the history of the world it is politics and the entire financial system that has effectively been rendered obsolete.
Politicians are now nothing more than figureheads in a central banker world and the general public would be very angry to know that the only institution remaining to make global macro-economic decisions is a private organization run by academics who act as lackeys for the world’s private banks.
However this would require the co-opted, mainstream media to actually explain and illustrate just what is going on behind closed doors; a process that would entail the loss of their financial advantage which is why we expect confusion to remain about who actually pulls the strings of the global financial puppets.
There is little doubt that nothing will happen to change anything until another major crisis occurs. Nobody can predict when this might come to pass but we can be sure that it will happen and probably suddenly without warning just as last time, and thus now is the time to prepare by understanding the picture emerging from this jigsaw of financial mystery. These first four lessons complete a central part of our jigsaw puzzle picture and with this knowledge we can move on to the following lessons about how governments handle their finances and interact with global markets.