Central Banks: Enemy of the People; Enemy of Populism?

Central Banks: Enemy of the People; Enemy of Populism?

Italy’s bonds rallied for a third day after the country’s leaders reiterated a pledge to respect European Union deficit rules.

-       Italy Bonds Rally as League Hits Reassuring Tone on Budget Plan – Bloomberg

I believe that banking institutions are more dangerous to our liberties than standing armies.

-                       Jefferson

By J.M. Hamilton (9-9-18)

Two reoccurring themes are starting take hold throughout Western democracies.

As predicted by JMH many years ago, centrist parties are being thrown to the curb (or having to bend like contortionists to retain power) in favor of populist parties, who proclaim that they will use the levers of government to look out for their citizens (as opposed to the Establishment, the 1%).  We've seen this in France, Germany, Greece, Italy, the UK, and the US of A (et al.).

The second emerging theme is that once in power, some populist parties are doing an about-face - in very short order - and not delivering upon their campaign promises to end austerity and use government fiscal policy for the betterment of the commonweal. 

Greece's Syriza Party, and just in a matter of weeks, Italy's populist coalition government - led by Five Star & the League - have done a ritiro.  Syriza came to power in early 2015 on a pledge to end economy crippling austerity, and Italy's aforementioned coalition ran on a pledge to install a flat tax and a universal basic income.  Both the Greek and now, the Italian governments quickly capitulated to the EU and ECB.  The radical Syriza went back to austerity, which has racked up a considerable body count; and Five Star/League have already promised that they will play by EU/ECB fiscal rules, in terms of government spending, which runs directly counter to the programs and promises that they ran & won upon.

Trump, of course, ran as a rightwing Senator Bernie Sanders.  Trump sowed discord and division, along w/ pledges and promises to turn the government from the establishment and place it, instead, back into the hands of the people.  Since entering power, Trump's actions can best be described: as one nation under plutocracy, divisible, with liberty and justice for wealthy white men. In short, POTUS Trump seems to be hanging his populist credibility upon an economy w/ low unemployment (while wages continue to stagnate, and 40 to 45% of US citizenry are considered to be impoverished), and a ginned up stock market (which benefits an elite few).  

To his credit, Trump does appear to be addressing trade issues, that have harmed the American worker and tax base, but the verdict is still out.

All three economies face head winds from globalization, AI, automation, concentrated markets (i.e. monopoly), crony capitalism, and catastrophic national debt.

So what to make of Syriza' and Italy's new populist government's retreat?  Well, we know both populist governments came into power under crushing national debt.  We also know that national commercial banks, within both countries, were in very deep trouble during the Great – Global - Recession, and many banks are still in trouble to this day. (In fact, w/ the help of Goldman Sachs, the Greek – establishment - government hid the extent of their national debt to gain EU admittance). 

Commercial bank bailouts (in the case of Greece, a backdoor German banks bailout) have been implemented and account for no small measure of the ongoing fiscal crisis & national debt, in both nations, as well as, economic turmoil (If commercial banking is the conduit for monetary & free market policies, and said commercial banks are unhealthy/unsound, then the economy will be unhealthy/unsound). When it came down to it, centrist parties - from Greece & Italy, encouraged by the EU & ECB - adopted neoliberal, pro-multinational/pro-commercial banking policies, of: fiscal austerity for the public; bank bailouts, paid for on the backs of the taxpayers & future generations; privatization; and cuts to education, pensions, and social services.

No wonder the establishment parties have been thrown out.

Recently installed populist parties, however, reverse course when the bond markets --- controlled by multinational banking interests, shadow banking, institutional investors, and central banks (i.e. the establishment) --- start dumping their country's bonds, which in turn jacks up yields, future borrowing costs, and debt service loads.

In short, each country's national debt --- created by the establishment political parties, w/ bank bailouts and pro-plutocratic tax policies, and corruption on a horrific scale --- is in turn used as a straitjacket against populist political parties and their pro-citizen campaign pledges.  (In the US in particular, we have the strange optics of endless warfare, costing trillions, and tax cuts for the wealthy, paid for by the nation's credit line, while the GOP does everything w/in its limited time & power to take a chainsaw to entitlement spending.)

Central banks, in this case the ECB (run by a Goldman Sachs' alumnus), basically threaten to enforce rules on fiscal spending, cut off the monetary assistance that was available for banks & the establishment political parties, and suddenly, pledge to normalize monetary policy.... if the populist parties don't shut up and play ball.  In turn, the populist parties are given a Faustian choice: enact their populist policies - and face the wrath of central banks, the establishment, rising interest rates, no debt relief/restructuring, and a collapsing economy; or play ball with the establishment and go back to austerity, a mediocre economy at best, an economy rendering a humanitarian crisis at worst, and centrist pro-neoliberal policies. 

So how can populist parties w/ draw from the Establishment's and Central Bank’s power play?

There are several tools available to them:

1) Hold a referendum freeing them from the EU's stranglehold, a la Brexit;

2) The country can default on their national debt that was created by corrupt centrist political parties, bank bailouts, and tax avoidance by the wealthy (this would also entail reinstalling their former national currencies);

3) The country can reject the ECB and the Euro, and end the EU's power play;

4) Populists can insist that the ECB, and central banks (including The Fed), expand their mandate to include the welfare of the Republic and its citizens (that is add rising wages - and an expanded social safety net - to monetary policy objectives);

5) Central banks can takeover commercial banking services --- dispense w/ the middlemen, commercial banking establishments, who frequently act w/ great malice against the people's interests --- and allow citizens to bank, directly, at the ECB or Fed (the stimulative impact of allowing Americans to earn the same yields at the Fed, versus the paltry sum handed out by US banks, would be considerable in the aggregate); and

6) Democratize the central banks, by allowing their boards, governors, and leaders, to be elected (to better insure the enactment of the expanded central bank mandate). Eliminate any private bank ownership of central banks, including The Federal Reserve.

These are just some of the ideas that would allow populist parties to act upon their mandate, and many are not new ideas.  (Note: None of these ideas are panaceas, and the cure might – at least in the short to intermediate run – prove as challenging as the neoliberal disease; but then again, if troubled countries act in concert, the threat against the establishment EU – and the possibility of breakup – may force the elites to provide serious concessions in the populist governments' favor).  

That said, until nation state debt is addressed, expect more of the same: more austerity for the people; more banking welfare; more using national debt as a cudgel against fiscal/monetary policies designed to benefit citizens; and more privatization – the sale of public assets – at fire sale prices.  Also, expect more populist parties to gain power and subsequently retreat.

What's in it for the elites (sole beneficiaries of central bank policies for the last decade)?  Well, multinationals are said to hate change and instability... if the current crisis continues, the people will increasingly turn to more reactionary/radical political parties (so as to make today's populist parties  - which are already becoming co-opted & owned, as the new establishment/centrist parties – look positively benign).

In short, w/out global financial banking regulation & reforms, democratization of central banks (or at least central banks w/ an expanded populist mandate), and the controlled, coordinated, & gradual write down of national debt ...  in terms of political upheaval, we, likely, haven't seen anything yet.

Copyright JM Hamilton Publishing 2018