The ‘New’ Old Idea: Central Banking Ponzi Financing Schemes

From the Wall Street Journal,

Even as the European banking crisis shows signs of easing, lenders across the Continent are engaging in a variety of maneuvers to avoid, or at least delay, coming to terms with potential problems lurking on their books.

Some banks are concocting unorthodox structures designed to improve all-important capital ratios, without raising new capital or moving unwanted assets off their balance sheets. Others are engaging in complex transactions with struggling customers to help temporarily avoid loan defaults—but possibly exposing the lenders to future problems.

Banks now have greater flexibility to pursue such tactics because of the roughly €1 trillion ($1.33 trillion) of cheap three-year loans that the European Central Bank recently handed out to at least 800 lenders. The program, known as the Long-Term Refinancing Operation, or LTRO, is widely credited with averting a possible catastrophe as banks struggled to pay off their maturing debts.

But by granting the new lease on life, the ECB program also has enabled the industry to delay its cleanup process, according to some bankers, investors and other experts.

The impact of the current inflationist policies in the Eurozone has been to:

-shield bankers from adapting reforms,

-promote the moral hazard of accounting or book keeping prestidigitation,

-become heavily dependent government’s sustained rescue efforts and

-rely on continued asset inflation by the ECB in order to keep the banking sector’s balance sheets afloat. The late neo-Keynesian Hyman Minsky would have labelled this Ponzi financing.

Here is a very relevant quote from fund manager David R. Kotok (bold emphasis mine)

“The mind, once expanded to the dimensions of larger ideas, never returns to its original size.” Oliver Wendell Holmes, Sr.

Holmes, Sr. lived in the century before World War I. He preceded central banks like the Federal Reserve and European Central Bank. He didn’t know there would be an International Monetary Fund. In his time, he was a thinker, author, physician, poet. His son was the famous Supreme Court Justice.

Fast forward. The new idea is to take the government-institutional official sector coalition and empower it when there is a financial crisis. This approach is at work in the Eurozone, the UK, the US, and a growing number of other venues. The new idea is to crush the private sector and to keep the official sector in the game for a prolonged period.

This “idea shift” is a distinguishing feature of the recent crisis period that started in 2007-2008. The old idea was that the official sector would intervene, rebalance the system, and then exit. The old idea was to get the private sector back in the game quickly. The old idea was to recover the official money and then let the market resume its functions of pricing and clearing and providing capital.

The old idea is dead.

So Ponzi schemes from central banking have been the “new” idea. Well, it’s really nothing new. Simply ask the incumbent governor of the Reserve Bank of Zimbabwe Gideon Gono.

Today’s inflationism by developed nations has signified as a modified digital version of an ‘age old’ practice by political authorities.