Central Banking

The Skyscraper Index Meets the Supertanker Index

Many people familiar with Austrian economics are familiar with the Skyscraper Index, popularized by Mark Thornton. And while there may not be a perfect correlation between the building of large skyscrapers and business cycles, it is still the case that the same conditions that lead to the building of mega-skyscrapers are those that lead to the boom and bust of the business cycle. Easy central bank money makes long-term, capital-intensive projects cheaper and incentivizes the misallocation of resources into those projects. Of course, it isn’t just skyscrapers that can be indicative of a central bank-induced business cycle. The same can be said of other sectors as well.

And So It Begins… Negative Interest Rates Trickle Down in Japan

The negative interest rates imposed by the Bank of Japan have begun to make their way into the Japanese banking system. Japanese trust banks have begun to impose negative interest rates on accounts held by institutional investors. It shouldn’t be surprising that Japanese banks are trying to pass on the costs imposed by the central bank’s policy of negative interest rates. It happened in Switzerland, it is happening in Japan, and it will happen in Europe. And as it becomes more widespread, investors will begun to withdraw their funds from the banking system.

What the Federal Reserve Could Do

The financial media is abuzz with speculation about what the Fed will do next, and whether it will decide to hike the federal funds rate target at its April Federal Open Market Committee (FOMC) meeting. There is a lot of speculation too as to what the Fed might do in the event of another recession or financial crisis. Some recent articles at the Brookings Institution delve into that possibility. And what is the first potential policy action discussed? Negative interest rates.

It’s Normal, All Central Banks Do This

“It’s normal, all central banks do this.” – Nelson Merentes, President, Central Bank of Venezuela

Debasing their currencies? Monetizing government debt? Impoverishing the common man while enriching the politically well-connected? Well, they do that too, but what Mr. Merentes was referring to was the common practice of central banks engaging in gold swaps. Venezuela has exported $456 million of its gold reserves, most of which was recently repatriated from the New York Fed’s gold vault, to Switzerland in order to gain some cash due to the dire effects of the government’s monetary policy. Venezuela is a basket case, for sure, but the comment that “all central banks do this” bears some looking into. There have been rumors over the years of central banks, including the Federal Reserve, swapping or loaning out their gold reserves, but relatively little hard evidence. This is especially true in the case of the Fed, which does not publicize much surrounding the gold it holds on behalf of the US Treasury and foreign governments, nor is the Government Accountability Office (GAO) allowed to audit much of the New York Fed’s gold holdings. Shouldn’t the American people know whether the gold held by the US government and the Federal Reserve is used to engage in gold swaps, loans, or attempts to manipulate the market price of gold?

Hold Onto Your Hats, Price Controls May Be On The Way

If you thought negative interest rates were as bad as it could get with central banks, you might be in for a surprise. Central banks have been so spectacularly unsuccessful with their accommodative monetary policies that they are discussing pulling out all the stops to get the results they want. They fail to realize that the reason prices aren’t rising is because they really want and need to fall. Bad debts weren’t liquidated during the last financial crisis, the debtors were merely bailed out. Overpriced assets weren’t allowed to be reduced in price. Central banks pumped trillions of dollars into the economy to attempt to paper over the recession. Market forces want to drive prices down, while central banks attempt to prop them up. So what to do when central banks aren’t getting their way?

German Response to Negative Interest Rates: Safe Deposit Boxes

Image: -JvL-

Image: -JvL-

The Japanese response to negative interest rates was to buy personal safes. The German response is to pull money out of bank accounts and stick it in safe deposit boxes. Both are perfectly understandable reactions to the prospect of having to pay interest to a bank for holding deposits. It is particularly interesting in Germany, where the Bundesbank a few years ago admitted that the average real rate of return on savings deposits has been negative for nearly the past 40 years. Now that nominal rates have turned negative too, the facade of savings accounts as a safe place to park money to earn a little bit of income has finally been ripped away.

Some Questions for Chairman Yellen Regarding Bangladesh Bank Heist

A few questions for Fed Chairman Yellen regarding the attempted transfer of $1 billion from the Bangladeshi central bank’s account at the New York Fed, in which the thieves initially got away with about $100 million.

  1. Why did it take so long for this incident to get reported? Was Congress or were any international organizations (IMF, BIS) informed?
  2. What exactly happened on the New York Fed end? Why did no one from the New York Fed contact the Bangladeshi central bank to check to see if these withdrawals were legitimate?
  3. What kind of checks and balances are there for withdrawal requests from central banks? For withdrawal requests from reserves held by commercial banks?
  4. Has anything like this happened before this incident or since this incident?
  5. Are any safeguards being put in place to ensure that this does not happen again?
  6. What kind of safeguards are in place to ensure that the $2 trillion in commercial bank reserves held at the Fed are not fraudulently disbursed?
  7. Will the Fed be providing a report to Congress once this entire situation is finally resolved?
  8. Given the Fed’s seeming screw-up in this case and its reluctance to provide any information about what happened, why should the Fed continue to remain exempt from a full audit of its operations?

The European Central Bank Has Gone Full Retard

ECB Full Retard
Just when you thought central banks couldn’t get any nuttier, the European Central Bank (ECB) has gone and done it. One of the ECB’s new programs may actually pay banks to borrow from it. Take away all the accounting sleights of hands and the net result would be an outright payment to those banks. It’s a direct subsidy, so why all the subterfuge? Just set up a direct pay-for-loan system, the more the banks loan the more the ECB pays them. That’s what most likely will happen eventually. It would be much simpler and much more honest, which is probably why they’re not doing it right now.

More on Bangladesh and the New York Fed

More juicy details are coming out about the New York Fed and the Bangladesh central bank’s hacked account. Zerohedge has a good synopsis, and there are more articles at Reuters and at the Financial Times. Apparently the heist was targeting $1 billion in funds and was only stopped due to a pretty egregious typo, misspelling “foundation” as “fandation.” Bet that guy wishes he had paid more attention in school. It appears that the Bangladesh central bank’s systems may have been compromised in some way, allowing hackers to spoof a request for funds to the New York Fed. Maybe Bangladesh doesn’t request funds all that often, or maybe there are so many transactions coming in that the New York Fed doesn’t do a great amount of due diligence if SWIFT codes are correct, but both sides are blaming each other with no one willing to take responsibility. There are still a lot of unanswered questions, the most important of which is: Could this happen again? Let’s hope that Chairman Yellen gets some tough questions about this fiasco at next week’s press conference.