A monetary coup under the cover of Brexit

Nick Hubble

What sort of policies will be passed under the cover of Brexit?

My worry is that you can twist the referendum any way you like and claim a mandate for whatever you want. As long as you include the word “Brexit” in the marketing of it, any resistance to the policy is anti-democratic.

Which is especially ironic in the case of the Bank of England (BoE) reforms. The chancellor laid them out in a Mansion House dinner speech last week. Apparently, they’re motivated by Brexit too.

Britain can’t be a rule-taker from Brussels because those rules are encouraging financial markets to move from London to the EU, Philip Hammond explained.

We need to do our own thing for our “stability”. And improving the BoE’s independence (ie, making it less democratically accountable) is part of this.

Brexit and EU policy are an odd thing to mention in connection with BoE reforms. We’re not in the eurozone and our own central bank controls our own monetary policy.

But mentioning Brexit sounds good.

What exactly are the reforms? They’re a monetary coup.

The BoE gets a capital injection of ÂŁ1.2 billion and the authorisation to lend ÂŁ750 billion to banks. The key change is that it can now use this money without needing Treasury permission first.

The BoE also gets to keep half of its profits until its capital reaches ÂŁ5.5 billion. Then profits go to the Treasury in full.

Suddenly, BoE governor Mark Carney is a fan of Brexit, even though the reforms are connected to the vote by nothing more than the chancellor’s comments.

The BoE governor called the increase in his funding and independence “a great achievement”. But it’s not clear for who it’s great.

“The Bank’s new approach can be summarised in four words: we’re open for business,” the governor said. But it’s not clear what business that might be, nor to whose benefit.

The BoE “now offers liquidity against a wide range of assets in lots of currencies” explained the Telegraph. For what purpose?

“[To] help the financial system even in “the most stressed environment”.”

Oh, we’re talking about the bank bailout business.

But “rescuing banks for the benefit of bankers” doesn’t sound as good as the “great achievement” to “open for business” the BoE “to help the financial system in the most stressed environment” and escape the crafty EU.

What’s really going on is simple.

Now that the BoE doesn’t need political backing to act, its bank bailouts won’t reflect badly on politicians. This is what politicians have learned from the financial crisis – how to avoid accountability for bank bonus rescue efforts of the BoE.

Secondly, the chancellor has bribed the BoE with new powers to get it to stop criticising Brexit. That is the only connection between Brexit and the reforms.

But rescuing banks is hardly a business. Especially when you’re the one causing their problems…

Criticising your own fallout to justify your own rescue effort

There’s a very deep and inherent stupidity hidden in the nature of modern central banking. A complex bundle of contradictions that have been exposed lately.

The Bank of England has two responsibilities. Monetary policy and bank rescues. What does that mean in practice? The BoE is responsible for making a mess of the economy, and then cleaning up that mess with a coverup.

But this can’t be acknowledged because it would trigger an existential crisis for central banks at a time when governments need them to finance deficits.

Let me explain.

Our money is based on credit. It is lent into existence. It is a liability, not an asset, by nature.

Our monetary policy is all about controlling the economy by controlling the amount of borrowing through interest rate manipulation.

This ties money creation with debt. The amount of both is inextricably linked.

What is the primary problem facing our governments and economies these days? Too much debt.

Given that central bankers control the price and amount of lending through monetary policy, the obvious person to blame for too much debt is of course the central banker. But instead of getting the blame, they’re dishing it out!

The news is full of warnings from Carney, Mario Draghi and their colleagues about household debt, government debt and bank debt. They want us to pay our borrowings down.

This is so spectacularly worse than the pot calling the kettle black that it beggars belief.

Central bankers financed the debt. They encouraged borrowing with their monetary policy’s low rates. They encouraged the over indebtedness by rescuing borrowers from the consequences with bailouts – so called moral hazard.

And now they criticise governments, companies and individuals who borrowed too much!?

But let’s assume central bankers get their wish and we begin to pay down our debts. Don’t forget, that also means less money in the economy.

That’s what triggers an economic and financial crisis like in 2008. When people borrow less money, there is less of it coursing through the economy. As banks fail, the same institution that initiated the borrowing binge, and then criticised it, next becomes responsible for bailing out the banks who lent too much.

That’s the most hilarious part. The same people causing the problem and blaming others are also in charge of the coverup operation – the bailout duties that the chancellor has just removed democratic accountability from.

Then the cycle repeats. Central bankers return to their quantitative easing (QE) and interest rate cuts to encourage borrowing again. As though it will lead us somewhere new this time around.

Does the buck stop anywhere?

In the face of all that, what did our chancellor do last week? Encourage it. The BoE now has more power than ever before.

The interesting thing about having such powerful central bankers is that there is no obvious way their world comes crashing down around them. They control the amount of debt and the rescue mechanism for the consequences of too much debt. It’s a cycle.

Where does the cycle break?

Historically, it was inflation. Central banks that did too much bailing out and manipulating eventually saw their currencies fall apart.

But that hasn’t happened. People still fear deflation. They still think central bankers might eventually fail to offset a crash. And in one place, they could be right.

Find out where here.

The other possibility is that people finally identify the true culprit of their economic instability. And demand an end to modern central banking. Which is what the Swiss failed to do in their recent referendum.

Until next time,

Nick Hubble
Capital & Conflict

Category: Central Banks

From time to time we may tell you about regulated products issued by Southbank Investment Research Limited. With these products your capital is at risk. You can lose some or all of your investment, so never risk more than you can afford to lose. Seek independent advice if you are unsure of the suitability of any investment. Southbank Investment Research Limited is authorised and regulated by the Financial Conduct Authority. FCA No 706697. https://register.fca.org.uk/.

© 2019 Southbank Investment Research Ltd. Registered in England and Wales No 9539630. VAT No GB629 7287 94.
Registered Office: 2nd Floor, Crowne House, 56-58 Southwark Street, London, SE1 1UN.

Terms and conditions | Privacy Policy | Cookie Policy | FAQ | Contact Us | Top ↑