Central Banking Fail: The Message Sent May Not Be the One Received
The Power Behind Monetary Policy … As I watched Cyprus' financial minister discuss the seizure of bank deposits in his country, I realized that this situation is a great lesson on the value of independent Monetary policy and the raw power that central banks can wield … – Flourish Financial Analysis
Dominant Social Theme: Central banks … caring, friendly, concerned.
Free-Market Analysis: Here is an article that focuses on the reality of central banking power. As we have often pointed out, central banks and those who run them – and it is apparently only a handful who DO run them – have strenuously positioned Money Power as a technocratic facility that works with mathematical tediousness.
Nothing, of course, could be further from the truth. Those controlling central banking are merely human despite their great power; they are subject to great passions, resentment, greed, fear, etc. One could argue these emotions are magnified by the control of literally tens if not hundreds of trillions of dollars.
No one wants to lose such control, but the Internet in particular – the modern information age – has made it increasingly difficult to continue business as usual. Given predictable human reactions, the result of what we call the Internet Reformation has been an increase in the use of money power itself to enforce the system as it is.
We are not surprised, for instance, at how Brussels's Eurocrats are acting when it comes to trying to salvage a bad idea … the European Union. But what we have written a number of articles on – the propensity to substitute force for reason when developments are not in line with elite prescriptions – is not a subject for mainstream contemplation.
In fact, even within the ambit of the alternative media, the increasing activism of central banking is not being noted for what it is, a failure of the paradigm itself.
We have written regularly of the ratcheting-up of every kind of government activity, from war to invasive government welfare schemes to central banking itself, but we rarely come upon an article that notes the rising decibel level. This article does. Here is a further sample:
During Friday's marathon negotiations, the ECB essentially threatened to bankrupt Cyprus's two largest banks unless politicians find a way to raise 5.8 billion euro. The only way Cyprus could raise that money was to raid the bank accounts of Cypriot and foreign depositors in Cyprian banks. If they failed to do so, the ECB said it would remove all liquidity support for the two main banks as soon as the markets re-opened.
This put Cyprian politicians in a precarious position. On the one hand, if they had called the ECB's bluff and allow the liquidity their banks need to be withdrawn, their two largest banks would implode, causing massive (possibly total) losses for the depositors in those banks. On the other hand, if they agree to confiscate depositors money to fund the bailout, they would bowing to external pressure, breaking their own depositor insurance guarantees and they would have to impose a national theft on a grand scale, which is something the President vowed never to do a few short weeks ago …
One aspect of this crisis, which has largely been ignored by market commentators, is that the ECB has really displayed an unprecedented amount of raw political power in this situation. For an entity that is supposed to be non-political and is meant to represent all the nations in the Eurozone equally it is rather shocking that they blatantly gave the Cypriots an impossible ultimatum. Either confiscate your citizens' money and renege on your deposit insurance or your banks face financial ruin on Tuesday. Either way, it destroys the countries banking sector.
The arbitrary nature of this seemingly last-minute decision is what has really taken markets aback. The proposal completely ignored deposit insurance (in a continent that really needs to do its best to reassure depositors), is blatantly imposed by foreign interests, will surely ruin Cyprus' economy and has been carried out in the most disorganized manner possible.
This analysis notes the subtle shifts in central banking policy and how it is being used increasingly in an adversarial way, to support programs and policies that are largely opposed by many in EU nation-states. It's a significant point and one that investors and policymakers alike would do well to ponder.
The article goes on to point out that the Cyprus situation shows the dangers of "outsourcing monetary policy." Of course, this is the cornerstone of the European Union and the euro. The whole idea of the "deeper union" that is contemplated involves increased subservience to a central state.
Brussels has sent a message about the power of the ECB, but as this article notes, the message that is received may not end up being the one that Brussels wanted to send.
Citizens of Southern Europe, under attack for years now, may soon conclude not that the EU is an irresistible empire but that they are better off out than in – out of the euro anyway and perhaps out of the EU entirely.
Cyprus is completely at the mercy of the ECB because it does not have its own central bank or currency. The island cannot control its interest rate or currency value because the ECB oversees all of this for the whole Eurozone. This is all well and good, except when the ECB is trying to impose policy decisions on elected officials by threatening to withdraw previously available liquidity.
The former governor of Cyprus' central bank has gone so far as to call this "blackmail". Call it what you will, but the point is that the Cyprian government is in a miserable position, a position that it has been placed in by its creditors (see Germany et al) and the central bank which is supposed to look out for its interests.
Good points again. Does Brussels really want to send a message to its constituents that central banking "blackmail" is part of its policymaking tool kit? That seems to be the case and the ramifications will now play out over months and even years.
Central bank policy is evolving and central bankers both in the US and Europe are increasingly exercising the "raw force" of Money Power. This is a fundamental trend that is of great import.
The game is changing in unexpected and even dismaying ways.
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