Essay by Dr. Tillmann C. Lauk; presentated at the ECAEF Workshop, in Bratislava on September 8, 2016
Since the GFC1 of 2008 all central banks of the Triade are pursuing the same monetary policies. All central banks of the advanced-/over-indebted economies stick to this recipe. The main tools are QE2, ZIRP3 and NIRP4 and possibly in the future „helicopter money“ and a ban of cash. All tools have in common that they are highly repressive, malicious for the economy (mal investments), they stealthy expropriate savers, and massively hurt retirees. What the tool-kit of central banks is targeting at:
• Quantitative Easing means buying assets from the commercial banking system which in return gives cash to the private banking sector. The money required for those purchases is simply „printed out of thin air“.
• 1st Rationale: increase credit to the economy in order to stimulate aggregate demand = what is supposed to spur productive investment and employment.
• 2nd rationale: create a wealth effect through raising asset prices = equities and other (financial) assets.
• 3rd rationale: through this increase of the money supply try to create controlled inflation and to devalue currencies in the hope to stimulate exports.
• 4th rationale: ZIRP or even NIRP aim at (a) bringing down the debt service obligations of the ever increasing sovereign debt and (b) forcing savers to spend.
Now, let’s check whether data support that statement …
During the press conference, which followed the 21st July’s meeting of the ECB Governing Council held in Frankfurt, Governor Mario Draghi declared that the European banking system currently has a “future profitability problem” rather than a “solvency problem”. He related profitability imbalances afflicting European banks with the high amount of non-performing loans (NPLs) in banks’ assets but he also said that he felt “confident that strong supervision and robust regulation, and better communication, indeed, by the supervisory authorities, the EBA and all this, will still improve the situation and the perception in the rest of the world’s eyes”.
If we look at some stylized facts, we realize that the profitability problem of banks is serious indeed, not only in Europe but everywhere. The Wall Street Journal recently wrote of “the big-bank bloodbath”, estimating the total losses of the 20 biggest world banks (J.P. Morgan Chase & Co. Wells Fargo & Co., Bank of America Corp., Citigroup Inc., Goldman Sachs Group, Morgan Stanley, Royal Bank of Scotland PLC, HSBC Holdings, Barclays PLC, Standard Chartered PLC, UBS Group AG, Credit Suisse Group AG, BNP Paribas SA, Credit Agricole SA, Société Générale SA, UniCredit SpA, Deutsche Bank AG, Banco Santander SA, Industrial and Commercial Bank of China Ltd. and Mitsubishi UFJ Financial Group Inc.) near half a trillion dollars, as plunging share prices in the first half of 2016 have erased a quarter of their combined market capitalization, according to FactSet data. The following FactSet chart shows losses for each of the twenty observed banks:
On effectiveness (or ineffectiveness) of the ultra-expansionary monetary policies undertaken by central banks, especially the Fed, BOE, BOJ and ECB much has been written and continues to be written. Positions, amongst economists, are not aligned at all. While Keynesian economists see the monetary easing as the only possible remedy to heal the world economies hit by the crisis and stimulate consumers’ demand (George Cooper’s “pre-emptive Keynesianism”), the Austrian School of Economic has always condemned this type of stimuli, focusing on the perverse effects they generate on the real economy.
In the recent 12th Gottfried von Haberler Conference, organized by ECAEF.li and held in Vaduz (May 2016), Prof. John B. Taylor (Stanford University, USA) defined the actual world monetary environment as a “rule-free zone”, while historian Johan Norberg (Stockholm, S) described the actual financial crisis as a consequence of the “corrupting effects of easy money”. When the Euro was created, short-term interest rate decreased for peripheral countries like Spain and Ireland, whose economies ended in huge, inflated housing bubbles. Norberg reminded us as the average Spanish mortgage rate had collapsed from 18 to around 5 percent after the introduction of the single currency, and debt in proportion to income doubled for the average Spaniard between 1997 and 2006. At its peak, Spain built more than Germany, France and Italy combined. After the burst of the housing bubble, building companies collapsed and banks as well, being packed by NPLs in their balance sheets. Those same NPLs which governor Draghi accused of being the cause of the current troubles of the European banking system, without considering that the ECB is one of the architects which create this moral hazard problem in the peripheral economies.
The creation of a gigantic financial bubble is not the only consequence of the “easy money” policy undertaken by the ECB. A recent empirical paper by Borio et al. (2015)1 published by the Bank for International Settlement accelerated the existence of a correlation between the interest rate structure and banks’ net interest income and discovered that, over time, unusual low interest rates and flat term structure erode bank profitability.
In order to comprehend this second point, it’s useful to remind that the lion share of a bank’s profit comes from the interests that the bank charges for its services and the interest that it earns on its assets. The figure below depicts the average net interest margin for all U.S. banks since 1984 compared to the one-year constant maturity yield on U.S. Treasury securities, a proxy for the general level of short-term market interest rates.
To understand the relationship between market interest rates and net interest margins (NIMs) one has to consider that the optimal asset-liabilities management for a bank is synthetized by “lend long and borrow short.” This happens when the average maturity of the banks’ loans exceeds the average maturity of deposits and other type of debt. Hence, when market interest rates fall, banks’ funding costs usually fall more quickly than their interest income. As a result, NIMs rise. Over time, however, as banks repay or renew loans at lower interest rates, NIMs reduce. Thus, in the medium-to-long term, NIMs are largely unrelated to the general level of market interest rates. The point is that all this happens only under normal conditions. From 2010 something of abnormal happened, as NIMs have continued to fall while the yield on one-year Treasury securities and other market rates has been relatively stable at historically low levels, as a consequence of the ultra-expansionary monetary policies. Over this period we can observe that bank-funding costs have been exceptionally low, while the average rates of return on bank assets have fallen at a more sustained pace. If before the crisis banks underwrote loans at relatively high interest rates, during the crisis they have been obliged to underwrite new loans at lower interest rates.
In conclusion, the extraordinarily loosen monetary policy undertaken by central banks, such as the zero interest rate policy (ZIRP) associated with Quantitative Easing programs has put downward pressure on banks’ NIMs. Figure 1 shows how, over the past 32 years, banks’ NIMs have fallen by nearly -11,5%. The decline of this indicator at large banks is driven by two main factors always linked to the ZIRP environment. The first factor is due to banks’ liabilities, as funding costs at small banks strongly decreased, and accounts for the majority of the gap in the behavior of NIMs between large and small banks. The second factor comes from the other side of banks’ balance sheet. Specifically, over the last years large banks have been hit by bigger decline in the interest income that they earn on “other” assets, such as assets held for trading purposes.
*Dr. Emanuele Canegrati is a PhD at Catholic University of Milan, economist at Department of Treasury, Head Market Analyst at BlackPearlFX and Fellow of the Liechtenstein Academy Foundation.
Peter A. Fischer, Neue Zürcher Zeitung, 21. Mai 2016
Jeder Zentralbanker kennt die Taylor-Rule und John Taylor kennt die meisten Zentralbanker. Der US-Ökonom ist besorgt über die gegenwärtige «strategiefreie» Geldpolitik, hat aber eine Lösung parat.
Schon Ludwig von Mises hat davor gewarnt. Der zusammen mit Friedrich A. von Hayek zu den Gründervätern der liberalen «österreichischen Schule» zählende Ökonom schrieb 1923, Regierungen und Bürokratien wollten mehr ausgeben, als sie den Stimmbürgern über Steuern zumuteten. Deshalb würden sie sich überschulden und suchten dann ihren Schuldenberg über eine hohe Inflation oder durch finanzielle Repression wieder loszuwerden.
Angesichts der seit der Finanzkrise in vielen Staaten explodierenden Verschuldung, den präzedenzlos tiefen Zinsen und der enormen Geldflut dominierten an der diesjährigen 12. internationalen Gottfried von Haberler Konferenz denn auch wohlbegründete Befürchtungen. Gewarnt wurde an der vom liechtensteinischen Fürstenhaus unterstützen Konferenz davor, dass es plötzlich doch noch zu hoher Inflation kommen könnte, eine drohende Monetarisierung der Staatsschulden die Sparer enteignen und die Altersvorsorge vernichten würde und dass der technokratische Charakter der europäischen Integration zu Demokratieversagen führe.
Optimistischer gab sich in Vaduz der in Stanford lehrende John Taylor. Er hat 1993 die nach ihm benannte berühmte Verhaltensregel für die Geldpolitik entwickelt. Die Taylor-Rule definiert den «richtigen» Zinssatz als gewichtete Summe des natürlichen realen (Gleichgewichts–)Zinssatz, der Abweichung der tatsächlichen Inflationsrate vom Zielwert und der Differenz zwischen Wirtschaftsleistung und Potenzialwachstum.
A Seminar for Scholars, Journalists and Entrepreneurs
“One must always repeat the truth, because even the error around us is preached again and again. And not from individuals but from the crowd.” J.W. von Goethe
When political speech writers pen speeches for presidents, prime ministers, and other influential dignitaries, they choose their words carefully, knowing that rhetoric matters. A classic case of an intentional deception of words, according to Schumpeter was the hijacking of the term liberal. In a similar fad, the market economy is increasingly condemned as a system of crony capitalists, the empty notion of social justice turned into a general verdict on our society’s moral status, or carbon pollution became a substitute for the greenhouse gases. In chapter 7 of The Fatal Conceit, “Our Poisoned Language,” F.A. von Hayek lists over 100 words before which we put social ranging from social accounting to social property to social waste, and in each case obfuscate their meaning.
Have you ever wondered how many of our habitual political terms have assumed quite different meanings or, maybe deliberately, have even taken on undertones that suggest something detrimental to what we want to get across? It seems as if the old Confucius warning “when words lose their meaning people will lose their liberty” has more relevance today then ever before.
With Confucius’ admonition in mind, PERC, Liechtenstein Academy, and ECAEF have teamed up to organize a seminar on “Semantic Traps: Politics with Loaded Terms”. Details including the agenda are listed below. If you are interested in finding out more about the seminar, contact co-directors, Terry Anderson or Kurt Leube.
Seminar Date: June 9-11, 2016 (Thu evening to Sat noon)
Location: Liechtenstein Academy Foundation Campus: Freudenfels Castle at Lake Constance, Eschenz, Switzerland
Admission Fee: Free Admission
Program Director: Hans-Rudolf Maag
Academic Directors: Terry L. Anderson and Kurt R. Leube
Thursday – 9 June, 2016:
tbd Opening Dinner (optional) and welcoming remarks by H.S.H. Prince Michael of Liechtenstein
Friday – 10 June, 2016:
09:00 – 09:30 Registration
09:30 – 10:00 Welcome and Opening
Member of the Princely Family (LI), Hans-Rudolf Maag (CH) and
Terry L. Anderson (USA)
Session I: Politics
10:00 – 10:30 «On the Confusion of Terms in the Political Debate»
Michael Wohlgemuth (D)
10:30 – 10:45 Discussion
10:45 – 11:15 Coffee break
11:15 – 11:45 «Justice, Fairness, Solidarity! The Prophecy of a ‘Socially Just’ Society»
Hardy Bouillon (D)
11:45 – 12:00 Discussion
12:00 – 12:30 «Is the ‘Public Interest’ really in the Public’s Interest?»
Carlos Gebauer (D)
12:30 – 12:45 Discussion
12:45 – 14:00 Buffet Lunch for all participants at seminar site
Session II: Economics
14:00 – 14:30 «Are the Poor really Getting Poorer as the Rich are Getting Richer?»
Erich Weede (D)
14:30 – 14:45 Discussion
14:45 – 15:15 «In Defense of Private Property»
Gary Libecap (USA)
15:15 – 15:30 Discussion
15:30 – 16:00 «Fair Trade and Sustainability: Is Globalization Evil?»
Robert Nef (CH)
16:00 – 16:15 Discussion
16:15 – 16:45 Coffee break
16:45 – 18:00 Q&A, Session I and II
19:00 Dinner at the seminar site (Freudenfels Castle; mandatory); Speaker TBA
Session III: Environmental Issues
09:45 – 10:15 «Dynamic Economics and Dynamic Ecology: The Essence of Free Market
Terry L. Anderson (USA)
10:15 – 10:30 Discussion
10:30 – 11:00 «On Secular vs. Non-Secular Environmental Beliefs»
Mark Pennington (UK)
11:00 – 11:15 Discussion
11:15 – 11:45 Coffee break
11:45 – 12:15 «Unleashing the Power of Free Market Environmentalism»
Martin Hostettler (CH)
12:15 – 12:30 Discussion
12:30 – 12:45 Closing remarks
Member of the Princely Family (LI), Hans-Rudolf Maag (CH) and
Terry L. Anderson (USA)
12:45 Individual departures
An Introduction to the Austrian School of Economics (Seminar)
Understanding how society works features a comprehensive innovative curriculum in Austrian Economics, LIECHTENSTEIN ACADEMY tries to get entrepreneurs, individuals and key opinion leaders in politics, the media, and academia interested. We are not awarding degrees. However, our world-class faculty will grant a degree for the individual modules if successfully mastered. The seminar is designed as a sequence of 8 self-contained modules and thus can be booked individually. To affirm an interactive and open-ended learning environment, we have limited the class size to 20 to 25 students. The instruction will be either in English and/or German. At a later stage, upon request all modules will also be offered in Spanish.
The contents of the individual modules represent a recommended minimum and thus may be subject to additions and change of emphasis by our instructors.
M1 – Economics
An introduction to the “Austrian School of Economics’
M2 – Philosophy
The methodology and the limits of the social science
M3 – Law
Selected topics in legal theory. The evolution of law, natural law and spontaneous order
M4 – Philosophy
Markets, moral and business ethics
M5 – Economics
Money, banking and behavioral finance; selected topics in monetary-, capital- and business cycle theory
M6 – Politics
Institutional economics and public choice analysis
M7 – Sociology
The problems of demography, immigration issues and social security systems; the illusion of the welfare state’ and alternative models
M8 – Economics
Environmental economics, property rights and the eminent domain problem. Public goods and “the tragedy of the commons’