Central Bank Chutzpah

We must be getting closer to the global asset bubble bursting or the end of central bank intervention, or both since the latter is likely to cause the former. How do I know? Central banks and the international agencies that support their policies have already begun the blame game, in order to deflect criticism from themselves when the bubble does burst.

European Central Bank President Mario Draghi started the process two weeks ago. With the troubles at Deutsche Bank, Germany’s largest bank, perhaps as his reference point, Draghi struck back at European bankers’ criticism of the ECB’s negative interest rate policies, which the banks blame for their difficulty in turning a profit. While accepting some of the responsibility for that, he instead said a good part of the blame belongs to the commercial banks themselves.

“Low-interest rates tend to squeeze net interest margins owing to downward rigidity in banks’ deposit rates,” Draghi admitted. “But over-banking is also a factor in the current low level of bank profitability. Overcapacity in some national banking sectors and the ensuing intensity of competition exacerbates this squeeze on margins.”

He was quickly seconded by other members of the European establishment, who make the rules that others have to live by the best they can.

In releasing its annual Global Financial Stability Report, the International Monetary Fund – which has been a vocal advocate of the Federal Reserve keeping interest rates near zero in the U.S. - said that while the ECB’s monetary policies did pose threats to the banking sector’s health, the main problem is the banks themselves. It said the banks should stop blaming low rates - which have done exactly nothing to boost the euro zone economy - for their problems and instead make “deep-rooted reforms” to address low profits and the financial markets’ fears over their future, as the Financial Times reported.

“There are simply too many branches with too few deposits and too many banks with funding costs way above their peers,” said Peter Dattels, deputy director of the IMF’s monetary and capital department, echoing Draghi. He didn’t say how many deposits European banks have lost as a result of the ECB’s negative interest rate policies, in which big depositors pay banks for the luxury of holding their money, instead of the other way around, as has been the case ever since banks were created.

Andrea Enria, chairman of the European Banking Authority, also jumped on the blame-the-banks bandwagon.

This line of reasoning is more commonly known as the Bart Simpson Defense: “I didn’t do it.”

Here in the U.S., fortunately, the debate has taken on a different, and more promising, tone. Rather than be on the offensive as its European counterpart is, the Federal Reserve has actually been on the defensive, under attack by Donald Trump and others for inflating the asset bubble and for subsidizing with low-interest rates Obama Administration economic policies, which have nevertheless produced the weakest economic rebound since World War II.

Granted, the Fed doesn’t deserve all of the blame for the state of our economy, and perhaps not even most of it. But it certainly deserves the lion’s share for driving up stock and bond prices to unreasonably high levels without solid economic growth to back them up. Fortunately, if ever so slowly, it seems to have begun to realize that, or at least I hope it has.

As we all know, the Fed late last month telegraphed the beginning of tighter monetary policy, possibly before the end of the year. The Fed justified doing so on the basis that the case for raising interest rates “has strengthened,” even as it lowered its own economic projections. Janet Yellen even went to the extreme of saying that the Fed doesn’t want the economy to “overheat,” as if it were even remotely possible for the economy to reach lukewarm given the constraints on American businesses by federal regulatory and tax policies.

Rather, it seems to have dawned on some Fed voting members that keeping rates so low for so long is doing more harm than good. “A failure to continue on the path of gradual removal of accommodation could shorten, rather than lengthen, the duration of this recovery,” as Boston Fed President Eric Rosengren, the leader or at least the public spokesman for this camp, said last month.

While we shouldn’t be deluded to think this means that our problems are over and that the full Fed is finally coming to its senses, it does provide some consolation to know that at least a few of our central bankers aren’t as dumb - or as arrogant - as those in Europe appear to be. Whether it’s too late or not to prevent any serious damage is another question.

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George Yacik
INO.com Contributor - Fed & Interest Rates

Disclosure: This article is the opinion of the contributor themselves. The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. This contributor is not receiving compensation (other than from INO.com) for their opinion.