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Billmon: The Eurosystem’s (Monetary) Control of Europe’s Politics
Note: This post was composed from a Twitteressay by Billmon.
J.W. Mason lists some Lessons from the Greek Crisis:
Before the crisis no one even knew that national central banks still existed — I certainly didn’t. But now it’s clear that the creditors’ unchallenged control of this commanding high ground was decisive to the outcome in Greece. Next time an elected government challenges the EU authorities, their first order of business must be getting control or cooperation of their national central bank.
The quote says "control or cooperation," but I can guarantee the latter is never going to happen.
It is nearly impossible to exaggerate the degree to which the campaign for central bank "independence" has made them the enemies within for any left governments.
The central bankers waged a 50-60 year political war to wrest back the monetary flexibility that the break down of Bretton Woods gave to national governments. Having won that war across most of the developed world in the 70s and 80s, they extended the battlefield to the emerging markets in '90s and '00s.
The autonomy of central banks (meaning the political allegiance to Wall Street/London City/Frankfurt etc.) was maybe the biggest neoliberal victory of all. If rightwing political victories (Reagan, Thatcher et. al.) were the beachheads of the Great Counterattack on social democracy then "independent" central banks became the citadels of the occupation forces: Neoliberalism's "Republican Guard."
Ironically, the ECB was originally conceived – or at least was sold to the European left – as a way for governments to regain monetary flexibility at a higher level. As a way to a) escape US dollar hegemony and to b) outflank the Bundesbank by formalizing the joint political control of European monetary policy. I do not know if the hack establishment Social Democrats who sold that vision ever believed it, but if so, more fool them. Because what the European Monetary Union became, obvious now, was a way to turn the vision on its head: formalize joint MONETARY control of Europe's politics.
The "Eurosystem", the network of national central banks governed by the European Central Bank, gives central bankers unprecedented ability to squeeze and manipulate national governments in a coordinated way. It is as if every government in the Eurozone ALREADY has a colonial entity watching it like the Troika's agents are supposed to watch Syriza in Athens. And, since the ECB Governing Council (like other EU institutions) tries to operate by a non-transparent "consensus" (i.e. the votes are not revealed), the degree to which national central bank heads are representing the ECB in their countries, rather than the other way around, is often not clear.
As long as the cozy comprador system tied peripheral governments to the core (i.e. Berlin), the role of the ECB and the Eurosystem could be obscured. Peripheral governments appointed "made guys" (i.e. banksters and/or their technicians) to national central bank boards and pretended to govern. Core politicians and their local comprador politicians let the Eurosystem technicians in Frankfurt tell them what "structural reforms" they should push to make the EMU "work."
But the moment an outsider government like Syriza came to power, the role of the Eurosystem and the national central banks in it could no longer be hidden. The fact that the Greek National Bank was an instrument of the ECB in Frankfurt, not of the Greek government in Athens, became obvious to everybody. The ECB's role as the muscle behind the Eurogroup's (Berlin's) diktats put the Greek National Bank in the position of helping to choke its own banks and terrorize its own citizens. And under the rules of EMU the Greek government was completely powerless to do anything about it. A defining moment.
The inescapable conclusion is that the allegedly "independent" Eurosystem now operates not as a network of central banks but as a parallel government.
The role of the Eurosystem within the half-hidden political order of the eurozone really is comparable to the Soviet or Chinese Communist Party. Like the Communist Party, the Eurosystem is now the "leading organ" of the neoliberal order, operating at all levels of the EU structure and providing "guidance" to elected political structures which are not formally under its legal control, but in reality are dominated by it. And behind the administrative apparatus of the party (Eurosystem) is the Central Committee (Eurogroup) and the Politburo (the key creditor government officials). And behind THEM is the real locus of the party's centralized power: the General Secretary (Germany/Merkel).
So J.W. Mason is quite right: it is impossible for any left government to attack the dictatorship of finance unless it controls its national central bank. But while control of the national central bank is necessary, it is hardly sufficient. As long as the EMU exit is off the table, verboten, so to speak, control of the national central banks only eliminates the "near enemy."
Ultimately it comes down to political will, which in parliamentary democracies, comes down to public support. As long as the majority (of all voters or of propertied influentials, depending on the system) is more loyal to the Euro than to national sovereignty an effective challenge to the dictatorship of finance is impossible – no matter how many national central banks the left controls.
jfl @96,
Monetary economics theory, as defined, is a shell game. A very profitable one, but it suits no one’s interests but the banksters’.
This is not the right way to think about it.
As Paul Meli has pointed out, there are two broad general parts to the US monetary system.
1. The US federal government that CREATES the currency. (It’s a closed system worldwide. Only our govt can legally make a USD.)
2. The non-US federal government sector that USES the currency.
That’s it.
You have to start there. At the beginning. Memorize it.
You either create the currency, or you use the currency.
(Stay with me here.)
If you’re religious, think of it this way: the US federal government is the CREATOR, everyone else is not.
So who is in the non-US federal government sector?
State and local governments (can’t make currency!)
Businesses
Banks
Households
Foreign governments
Foreign businesses, banks, and households
This is the list of groups that USE the USD.
Notice that banks are USERS of the currency
In the US, however, banks are regulated by the Federal Reserve and banking laws. Forget for a minute that Fed chairmen like Alan Greenspan deregulated aspects of the Federal Reserve in the 1990s and so created loopholes for his Wall Street buddies. Congress should have nailed his toes to the floor for doing it, and the president should have fired him. But because, again as Paul Meli pointed out above, ordinary citizens don’t know how the monetary system works, no one rang the 10-alarm fire bell when banking laws were being dismantled during Clinton’s admin, and mortgage banks popped up all over. Mortgage banks are NOT regulated under the federal bank charter laws. Only the Federal Reserve can regulate them, and it failed to do that, even after the FBI in Sept 2004 told Congress in open testimony that there was an “epidemic of mortgage fraud,” that 90% of the mortgages were fraudulent.
You need to get the right foundational image in your head
Understanding how the monetary system works ain’t, as the cliché goes, brain surgery.
Once you sincerely grasp that there are two categories of actors in the US monetary system, you can begin to peel away the detritus of your own beliefs and what idiots tell you on TV.
So think of it as a teeter-totter.
On one side is the federal government. On the other side is the non-federal government.
(As simple as that, because when the economy is in the tank you’ll be able to understand that it’s Congress failing to do its job.)
When the federal government is up, or in surplus, the non-federal government is down, or in deficit.
When the federal government is down (on our teeter-totter), or in deficit, the non-federal government is up, or in surplus.
(In our US federal monetary system, we further divide the non-federal government into two sectors: the domestic non-government sector, and the foreign sector.)
This is why we don’t want the federal government to run a surplus or ‘balance the federal budget’
it means, automatically and without fail, that the private sector—the domestic non-government sector—will be in deficit. (The foreign sector, we know, has been, in surplus for them, or deficit for us (trade deficit) for decades.)
If you can etch this simple teeter-totter into your brain, you can begin to get a handle on the foundational structure.
There have been seven times in the 238-year history of the US when the federal government was either in surplus or balanced its budget. And each time was followed by a depression.
Same thing applies to Canada. They’re going into a recession and they can’t figure out why. They ran a deficit in August 2008 (that their finance minister foolishly apologized for) and Canada escaped the brunt of the Great Financial Crisis (GFC) of 2008. Starting in 2013, they worked on balancing the budget and look where they are now. In the tank. I’m adding this for james.
Posted by: MRW | Jul 19 2015 22:09 utc | 104
bjmaclac @160
The one problem I have with your analysis concerns the focus you have on bank lending, which you demonstrate as a contribution to the money supply.
Then, I obviously didn’t explain myself well at all. I apologize.
Let me try this.
Draw a big ” + ” on a blank sheet of paper. Literally. Take up the whole page.
The horizontal bar contains all the banks and financial institutions here and globally, businesses and households, state and local and foreign governments, and foreign banks & individuals that use the USD. One part of the Federal Reserve manages this huge system both domestically and globally. Note: these are the users of the currency, even though banks create “credit money” or bank money.
Everything, ultimately, on this horizontal line nets to zero. Even if a bank creates new credit (bank) money for a mortgage, it’s still offset by the value of the house. Ditto huge commercial developments, etc. One man’s asset is another man’s liability.
The vertical bar is the federal government, and the other part of the Federal Reserve that handles its finances for it, via the US Treasury. The federal government is the creator, or issuer of the currency. (There are technical terms for all this, “base money”, etc., but forget all that.)
Did you draw that cross on a blank sheet of paper like I asked you to? 😉
Draw some curved arrows raining down from the top of the vertical bar to the horizontal bar.
That’s the federal government spending. More specifically, and accurately, this is Congress spending NEW INTEREST-FREE dollars into the real economy—buying or paying for goods and services that the public and the federal government needs–adding new net financial assets to the economy and ultimate increasing the wealth of its citizens. This money never has to be paid back. There is no collateral required for this spending. There is no repayment schedule. There is no interest sought by the federal government in return for this largesse.
And guess what they call this largesse? Government debt. The word “debt” is a contronym. A contronym is one word with two entirely different meanings. Like the word “bolt.” Bolt can mean lock something up tight, or bolt can mean running away suddenly. Or the word “cleave.” Cleave can mean hold something to your chest tightly, or it can mean chopping something up with a butcher’s knife.
Government debt is government money, equity, what we as a people own. It is not the same kind of debt that exists on the horizontal line, which does have to be paid back, requires collateral, has a repayment schedule, and demands interest.
Now, money supply
Money supply means bank deposits. How much money is swilling around in the real economy. Forget that there are designations of the money supply: M1, M2. They are used as economic indicators.
The horizontal line increases USD bank deposits (money supply) every time a bank makes a loan, but these are offset by an equivalent asset.
The vertical line increases USD bank deposits (money supply) every time that Congress spends. What the government spends goes into the bank accounts of the businesses and ordinary citizens it is purchasing from. But. But. But. The US Treasury does something unique. Because it can, because it’s the creator of the currency, because it is sovereign, and because it doesn’t want the new money it has deposited into vendors accounts to run the risk of temporarily increasing prices and raising inflation, the US Treasury issues treasury securities in the amount of the spending to mop up the excess dollars.
There are two reasons for this.
One: Commercial banks only insure bank accounts to $250,000. That’s FDIC insurance. That’s the limit right now. Big companies like Lockheed and Boeing get monster contracts from the govt. They need something safer than an FDIC-insured commercial bank account to protect themselves over the time of the contract. Ditto pension funds, university trusts, and commercial banks, etc.
Two, and more importantly: treasury securities restore the money supply to balance on the federal end, the vertical line. All this happens before the private sector is even involved. The US Treasury auctions the treasury securities to the public. The Fed may handle it for them, but the Fed can’t buy treasury securities at auction, only the after-market. The purpose of the auction of treasury securities is to offer a safe, absolutely risk-free place to park your money. The federal government even offers interest on these treasury securities. It pays people to exchange their cash in commercial bank accounts for US federal government bills, notes, and bonds! A hold-over from the gold-standard days (another discussion).
In Federal Reserve parlance, number Two above is called “reserve add before reserve drain.” The ‘reserve add’ is when congress spends. The ‘reserve drain’ is when the US Treasury issues treasury securities.
The last thing is the “interest on the debt” that everyone worries about. Another shibboleth. In late August of every year, the US Treasury asks its banker, the Federal Reserve, how much interest it will owe on all outstanding treasury securities for the coming fiscal year only, whether one-year old or 30 years old. Then, the US Treasury creates brand-new treasury securities in that amount and auctions them off to the public to pay the interest. No children, no grandchildren, no taxpayers involved.
Does this make better sense? I’ll discuss derivatives in a separate post.
And oh, btw, the “Debt Ceiling” is the second shibboleth. It’s an antique from the gold-standard days—1917 to be exact—when Congress wanted a way to put a belt and pair of suspenders on protecting the gold supply. Completely outmoded. Absolutely out-of-date. The Depression and WWII intervened and congress never bothered to take it off the books when we went off the gold standard.
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BTW, paulmeli is right about the reserves. Banks can’t loan them out. The Federal Reserve supplies reserves to banks. It’s what the Federal Reserve Act of 1913 set out to do: protect the public from the danger of banks loaning out its customers’ deposits precipitously; hence, the rules and regs. Banks borrow among themselves to meet their reserves requirement at the overnight interest rate that the Federal Reserve controls, but if a bank can’t borrow from another bank, it can go to the Fed’s Discount Window to borrow at a rate that is more punitive than the overnight rate (Fed Funds Rate). Those reserves are kept in the banks’ checking account at the Fed, technically called a “Reserve account.” A bank’s savings account is called a “Securities account.” And as you can guess, that’s where treasury securities are parked, no different than a CD at your local bank.
Posted by: MRW | Jul 25 2015 20:51 utc | 181
@bjmaclac @160
Derivatives made easy
You, Freddie, buy $100 of Ford stock. You want to preserve your investment so you go to someone at the Goldman Sachs’ desk who will insure it for you.
Goldman Sachs says “Sure, I’ll insure it for you. Ford is a good stock. How about $2.00/year?”
You say “Dandy.” And tell your friend Marty about it.
Marty, unbeknownst to Freddie, goes to the Goldman Sachs desk and says, “Hey, I want to insure Freddie’s Ford stock too. I’ll pay $2.00/year.” GS says OK.
Marty tells his cousin Sue about insuring Freddie’s Ford stock.
Sue, unbeknownst to Marty, goes to Goldman Sachs and gets the same $2.00 insurance deal on Freddie’s stock.
Sue tells her beauty parlor friends about it. All ten of them go to Goldman Sachs’s derivatives desk and insure Freddie’s stock for $2.00/year.
Pretty soon, the guy at Goldman Sachs’ desk realizes that 100 people have insured Freddie’s Ford stock, and if anything happens to the stock, he could be out $10,000.
So the guy at the Goldman Sachs derivatives desk goes to his buddy at the JP Morgan Chase’s derivatives desk, and takes out $100/year insurance to hedge against his $10,000 exposure. (The Goldman Sachs guy makes 100 X $2.00 or $200/year from his people, so he nets $100.)
The JP Morgan Chase guy, unbeknownst to the Goldman Sachs guy, takes out $100/year insurance on the Goldman Sachs guy’s exposure and tells all his buddies at the bar about it. They, too, pile on, and pretty soon the JP Morgan Chase guy realizes he’s got a $1,000,000 exposure. So he goes to AIG, and gets insurance for $5,000/ year. He makes a $5,000 profit from the 100 people paying him $100/year.
And so on…and on and on, a pyramid scheme, or in james’ parlance, a ponzi scheme.
History
Back in 1990 or thereabouts, farmers and other people affected by the weather or gas prices could hedge their investments on Wall Street. They could take out insurance in case the price of gas skyrocketed and their fleets of taxis could be out of business, or they could insure against the weather (cold, heat) wiping out their crops. Whatever the threat to the business over time. But the insurance was just for that one person alone.
Somewhere in the 90s, that all changed.
People started taking insurance out on other people’s insured items or properties, with or without them knowing about it. It was insurance derived on someone else’s asset; hence, derivatives. You could also short the insurance. You could bet on it (the commodity, stock, bond, whatever) falling.
Who is allowed to participate in this derivatives market
Anyone who has got $5 million to start with. That was the initial rule—don’t know what it is now—which was how these players got away with it. They convinced the regulators that they didn’t need regulating because they were all “sophisticated investors” who understood the risks and the price of entry was high enough not to involve the hoi polloi.
This was what Brooksley Born warned about
Brooksley Born was chairman of the Commodities Futures Trading Commission. When she tried to warn Congress about this unregulated insurance scam and its potential to blow up the global financial system, she received death threats and Alan Greenspan, Larry Summers, and Robert Rubin went after her with a vengeance, getting her denigrated in the press, sneering at her ability as a woman, the works. Born graduated top of her class at Stanford Law.
These three with Arthur Leavitt (Head of the SEC and former chair of Merrill Lynch) went in to see Clinton in the Oval Office in 1996 to assure him the derivatives market didn’t need regulating. Alan Greenspan, Larry Summers, and Robert Rubin told Clinton that derivatives were so complicated—did you have trouble following the above? doubt it—that only highly sophisticated investors used them, and that the market for them was so rarified that only the extremely rich and investment-savvy with a lot to lose engaged in them so they were careful with their risk and money. (After the Sept 2008 crash, I heard Leavitt almost in tears on public radio describe this meeting, and apologizing for what he had done. Only one to do it.)
Then on December 15, 2000, the last day of the Clinton admin, someone slipped in a 262-page addendum to the 11,000-page budget that said it was against the law to regulate derivatives. And by regulating, they even meant publishing the names of all the other people who held insurance for the same stock, bond, or commodity, so that an investor could protect himself.
A great one-hour radio show about this is Episode 365 of This American Life that aired October 3, 2008. Called “Another Frightening Show About the Economy.” If you want to understand how the above works, it was brilliant in reducing it down so that you could understand it. Best I’ve ever heard.
Posted by: MRW | Jul 25 2015 22:22 utc | 183
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