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Thursday, 1 December 2011

Central Banks to the Rescue: Again!

In a significant concerted move a consortium of central banks [the currency-issuing banks of major countries] have jointly offered funds to the International Monetary Fund [IMF] which it will lend to central banks that decide they need it to lend to banks within their jurisdiction. This seems arcane to ordinary people who are only conscious that the purchasing power of their wages and/or benefits is going down while credit is getting harder to get and more expensive.Having urged people to borrow on their credit cards and in enlarged mortgages over many years of apparent prosperity, the banks are now notably unaccommodating to families and to small businesses. So if the banks are 'helping' people less, how can it be that they need to borrow more? And why should their central banks - which habitually lend to banks in their countries - want to borrow money from the IMF? If most of the major central banks have money to lend to the IMF, why are they not just lending it to banks in their own territory?

The US Federal Reserve [supported by other central banks] will indirectly give limited but significant support to the euro. International banks have begun to show their lack of confidence in the durability of the euro by selling bonds denominated in euros and buying US dollars and assets denominated in dollars. Despite the deficit on US finances, the size and strength of the US economy can still be trusted; while nobody can say how great would be the chaos that would follow if the euro collapsed. What would French government bonds be worth, in yen or pounds sterling, after a collapse of the euro? Anybody's guess is as good as anybody else's; but most commentators would reckon that French bonds would be worth more than Greek bonds, when most euro-denominated bonds were catastrophically devalued. German bonds might increase in value after a euro collapse; but the whole scenario is beyond anyone's capability accurately to forecast. So governments and central banks have adopted the view that everything must be done to prevent it happening. This is understood to mean that the European Central Bank must have enough dollars to be able to buy enough bonds to keep the market going. If the dollars are made available by the IMF, there will be strings attached: IMF loans are always conditional on the assisted country [or economic union] maintaining agreed economic policies. So the European Central Bank will be required to enforce discipline on member states' governments, or refuse to buy bonds that they have issued and let them be bankrupted. This suits the Germans very well, and worries the French who do not want the European project to be fractured by some of the reckless Club Med states dropping out of the eurozone [and maybe out of the EU as well].

So the new funding via the IMF is another step in the pathetic saga of governments and central banks making up new policy and risking inflationary pressure on the whole economy in order to 'calm the markets'. This determination to propitiate the financial trading corporations - generically known as 'banks' - shows that the governments are still scared by bankers' behaviour.

Yet the banks are created under the company law of individual countries, and are granted licenses to trade in other countries under each nation's laws. Their units of account are currencies issued by the central banks of sovereign states. Sovereign states can give instructions to central banks and central banks could enforce much greater discipline on banks than they have done in the past couple of decades: if that control was applied, and looked like failing, new rules could be imposed by governments. There is a fear that some countries would adopt new rules and others would not [or would apply them in a non-standard way], to their short-term advantage and to the disadvantage of other countries' economists. So there is to be a new round of buying the banks' quiescence while the political negotiations about the future management of the eurozone drag on. The stock markets globally rose on the news: and a superficial, brittle sort of 'confidence' returned; notwithstanding the increased risk of worldwide inflation.

The Chinese central bank took separate synergistic action to increase lending to the faltering manufacturing and property sectors. So the real confidence that has very slightly been increased by the central banks' actions on November 30, 2011 is that the political masters of all the major economies are capable of working together. There is no indication that the beggar-your-neighbour policies that intensified the global depression in the early nineteen thirties will be allowed to emerge. There is a good chance that governments will eventually become scared enough to act on Franklin D Roosevelt's most famous dictum, that "the only thing to fear is fear itself": it is especially true of the fear of bankers, but it seems that things will have to get much worse before the politicians grasp the nettle.

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