Central banker morality
The banking industry is nothing other than a simple leverage scheme that borrows money far in excess of its base capital and turns around and re-lends it at a positive spread. Common sense and the facts of history tell us it’s an extremely high risk venture which couldn’t possibly exist without overwhelming government support. Banking is essentially a government managed operation – the government insures bank deposits, regulates and tightly examines all aspects of operations, and most importantly through its central banks, provides unlimited cash when bank leverage schemes face inevitable difficulties. That this highly subsidized industry channels massive financial rewards to the well placed would seem to be a great “moral hazard”.
Otmar Issing is a German economist and former member of both the Executive Board of the European Central Bank and its German predecessor the Bundesbank. Unsurprisingly, he’s currently an advisor for Goldman Sachs. In the Financial Times today, he warns of great moral hazards in an article entitled “Moral Hazard will result from ECB Bond Buying”. The immorality that Issing sees has nothing to do with the great profits going to government subsidized leverage schemes; he focuses instead on far more dangerous sins. He doesn’t object to society, through the ECB, acting as lender of last resort to “private” leverage operations; his ire is directed solely at the thought of society creating its own purchasing power through the ECB purchase of government bonds.
Issing asks a fundamental question about societal debt and is forced to admit its ultimate monetary nature. This is dangerous territory as the entire myth of a global debt crisis collapses when the gaze shifts from horrible debt burdens requiring unending austerity to far more benign issues of monetary policy.
Should a central bank act as the ultimate buyer of public debt? (One should not disguise it under the term of lender of last resort)….Bringing this issue into the domain of the central bank means transferring an obligation of public finance into a monetary phenomenon.
His question can be rephrased down these lines: Should society create sufficient purchasing power to assure widespread prosperity if private wealth holders are unable or unwilling to do so? This question is far beyond the competence of a central banker, a mere regulator of leverage schemes, to answer; it’s a fundamental issue of democracy and prosperity. But of course he nevertheless answers his question in true banker fashion: “All the arguments in favour of such a “solution” of the public debt problem imply that the central bank will be taken hostage by politics…”. As if his preferred policies of tight money weren’t the height of politics. The issue isn’t whether monetary policy would be taken hostage by politics, it’s which politics will rule.
Issing considers the democratization of purchasing power to be not only a moral hazard but a terrible sickness, a pathology: “Stressing the role of the central bank as the ultimate buyer of public debt should be seen as an indication of the pathological state of public finances not as a sign of strength.” We must identify this view for what it is: not technocratic neutral economics but deeply undemocratic politics of the sort that’s existed since the dawn of human civilization. He continues: “(T)he prohibition of monetary financing is an indispensable element for a stable currency. Pressing the ECB into the role of ultimate buyer of public debt of individual member states would create the biggest conceivable moral hazard.” Is it conceivable that excessive monetary creation could lead to currency instability? Of course. But when Europe is experiencing massive unemployment and ever declining living standards, it’s absurd to think reasonable levels of monetary creation would be excessively risky.
Central banker morality is one of the main pathologies in the world as it’s a prime barrier to widespread prosperity. That Issing’s views are widely accepted as moral is itself a moral hazard. In his universe, morality has nothing to do with human well being, full employment, or economic security. It’s nothing but the old tired aristocratic demand for tight and undemocratic control over society through the domination of money. Our standard of living is far too important to leave in the hands of bank leverage schemes and central bankers.
Comments on Inequality 
Issing is of course insane and utterly ignorant of economics & its history. Bankers are in essence employees of the government Bureau of Engraving & Printing who are given a license to steal newly printed bills for a while, invest them with their cronies & who will not be punished by a benign supervisor for their defalcations as long as they return them with a little extra. The “moral hazard” is obvious.
Issing’s absurd complaint is of the “moral hazard” (really, a hazard of real morality appearing) if the supervisor ever interferes in this cozy peculation by actually using the Bureau of Engraving & Printing for its legal purpose, using money for the general welfare, not of a random, arbitrarily selected bankster class. His stupidity is manifest by his not seeing that the “little extra” cannot logically come about unless the Bureau once in a while is diverted from the state of absolute corruption he yearns for. Should a central bank act as the ultimate buyer of public debt? What was the Bank of England formed for, sie dummkopf? The Euro, Maastricht effectively prohibits a stable system of modern banking. He is stating the exact opposite of the truth. The use, not the prohibition, of monetary financing is an indispensable element for a stable currency. What he wants is only a theoretically conceivable limiting case which in reality requires a stable or declining population & level of technology, and is never seen in the long run.
Central Banks are a recent innovation in finance. Governments got along fine without them for millennia. The USA did for much most of its history. If the King wanted to make some money, he minted it. Didn’t always work well, because they did not understand economics as well as the currently heterodox (but orthodox during the exceptional Keynesian full employment Golden Age, les Trentes Glorieuses) economists. Fraudulent history, often reversing the true course of development – the gold standard, central banks, “commodity money” existed from time immemorial – is a central part of the moronic bankster project to imprison & immiserate the human race by their idiotic superstitions.
As I said some time ago in a thread I never had time to reply to, by now – had technical & scientific progress not slowed down during/after the 70s – we should have space elevators – see Wikipedia – ordinary people would have the prospect of vacations on the Moon – or some equally far out thing should have happened. With all its manifest natural & other advantages, it took very hard work, a successful de-development project, to make the average American as poor as he & she are today.
Jim,
you shouldn’t pay attention to what our German BuBa high-priests Otmar Issing, Jürgen Stark and Jens Weidmann preach to the unwashed masses. This can turn out to be a very unhealthy exercise. I can attest to the disease symptoms caused by this endeavor. The average German is obsessed with monetary policy and fears Weimar and Hyperinflation and Wheelbarrows full of worthless notes just around the next corner.
Our new BuBa overlord Jens Weidmann misses now opportunity to point out “as we’ve learned in the 1920s …” I do not consider this bunch of dogmatic gold-standard warriors as central bankers. They live either in a separate universe or in the 19th century? The later can’t be true because in order to save the Empire the Bank of England several times ignored the gold-standard rules and did what was necessary to save the day.
There are good central bankers and there are mindless zealots posing as central bankers. Otmar Issing, Jürgen Stark and Jens Weidmann are prepared to commit monetary suicide out of principle and out of fear from death by supposed hyperinflation. They seem to very eager to secure their place in history by playing a central role in the sequel: Lords Of Finance — 2012, The Great European Recession, And The Bankers Who Broke The Euro.
Sorry Stephan,
I’ll try to pay less attention to these 19th century aristocrats. The problem though is that their outlook is the outlook of ruling parties everywhere. I don’t know of any “good” central bankers, if by “good” you mean a moral outlook favoring something like human values. Human values and capitalism seem completely irreconcilable.
Calgacus,
Your last paragraph is so true. A tremendous de-development project!
Jim,
Well, to my knowledge the best central banker ever was an American citizen named Marriner S. Eccles. His moral outlook outlook favoring human values was outstanding given the adverse condition of The Great Depression. I’ve uploaded a hearing of him by the US Senate in February 1933 for your consideration:
Investigation of Economic Problems — Marriner Eccles
Good point. Where are the Marriner Eccles today? Nowhere to be seen at the Fed office, perversely named the Eccles Building! And give FDR credit for appointing him. Who did Obama appoint? Republican Bernanke. That’s as far left the political system will go today.
I would doubt there’s anyone to the left of Bernanke at the ECB…
Jim,
Good point ;~) Before leaving my desk I just received the latest “research” from the Cleveland Fed. Me thinks this should answer your question. There are clowns in charge:
Why Some European Countries and Not the U.S.?
I mean these people seem to know simply nothing NADA about central banking and modern monetary arrangements. Complete idiots are in charge.
Germany doesn’t have euthanasia, why is that? Because of their really bad experience with it in the past. Brings back memories of their Nazi-era, and every German school child has visited at least ONE deathcamp during their school career.
Likewise, Germans will be very hard to convince that anything good can come from inflation. Why? Because of their history with hyperinflation which more or less directly led to aforementioned Nazi-Era.
Before any American focusses on the Gernans, however, please consider the own insane US system.
There was this recent report that the US govt gave the US bankers 7.7 TRILLION dollars, (yep, trillion not measly billions) over the course of the last 10 years, on which they paid …. .0001% in interest rate, which they in turn then LEND TO ….. (wait for it) … .the very same US govt, for 4 % interest rate.
Nevertheless, S&P has the gall to downgrade the US
Nevertheless, “markets” have the gall to increase interest rates on hardworking Greeks, Spaniards etc.
yah and don’t believe all these stories about Greeks retiring at 55. THEY ARE NOT TRUE. Instead, think for a moment about all the US policemen and firefighters retiring at … 50? 55?
@yeahwRight
This comment is flat out wrong in regard to the German history. Before making such claims it’s always good to visit some history book. The only thing true here is that we Germans and Austrians (I’m Austrian) visit death camps while being in school.
The Weimar hyperinflation happened in the 1920s. Then came The Great Depression in the 1930s. Because of the hyperinflation experience the Heinrich Brüning government insisted on harsh austerity measures and defended desperately the Gold-Standard. Britain left the Gold-Standard 1931, Germany not. The result of the Brüning policies was devastating unemployment. His austerity policy fostered the rise of the Nazis and Hitler.
You can draw your own conclusions what will happen in Europa if Germany has its way and every nation indulges in insane austerity measurements. My conclusion: there will be blood on the streets.
Stephan – from the Cleveland Fed document:
“In the euro zone it seems the commitment devices set forth by the Maastricht Treaty limiting the national governments’ debts and deficits lacked bite and ultimately failed, shattering the credibility of some of the member countries’ governments.”
Why did the dinosaurs die out?:
In the Cretaceous, it seemed that the giant jaws & teeth of the Tyrannosaurus Rex limiting the herbivorous dinosaurs proliferation LACKED BITE, and ultimately failed, shattering the terrible tyrant lizard’s credibility. Anyone who thinks it had anything to do with a meteor impact, global dimming, vegetation & herbivores dying out, is an anti-scientific Velikovskian idiot.