THE BANK for International Settlements (BIS) – dubbed the bank for central banks – issued a dire warning in its latest quarterly review that crucial parts of the global financial system are at risk from the drive by central banks to end the era of cheap money by pushing up interest rates and then being undermined by having to bail-out bankrupt bankers.
Central banks, including the Bank of England, the US Federal Reserve, and the European Central Bank, have been attempting to rein in inflation by pushing up borrowing rates while at the same time cutting back on the trillions of pounds, dollars and euros that it flooded the world with under Quantitative Easing programmes.
This era of cheap money has, the BIS says in its report, led to investors seeking even riskier returns on their investments.
The BIS says: ‘When these risks materialise and the attendant economic costs are substantial, there will be pressure on central banks to provide a backstop,’ adding: ‘While justified, this can contrast with the monetary policy stance and encourage risk-taking in the longer run.’
In other words, the BIS is warning that the crisis in the unregulated world of ‘shadow banking’, which includes investment funds, private equity and hedge funds, has come out of an orgy of risky acquisitions and investments financed by cheap debt, courtesy of near-zero level interest rates.
Now that the central banks are desperate to damp down rampant inflation by pushing up the cost of these debts, the bankers are in real trouble and facing catastrophe.
What has caused the BIS to panic is that, when this crisis broke out in Britain following Liz Truss’s mini-budget in October, the Bank of England was forced to make an ‘emergency intervention’ to try to avert a crisis that it admitted ‘threatened to contaminate the entire economy’ and bankrupt British capitalism.
The intervention was to completely reverse the policy of cutting back on Quantitative Easing by electronically producing billions of pounds to buy up government bonds – piling up yet more debt on the UK economy.
The bankers dumped UK bonds and, in the process, taught the Tories the lesson that the bankers are in charge not the Tory government.
The Bank of England was forced to drop its attempt to end the era of cheap money. This crisis has alarmed the BIS with the head of its monetary and economic department, Claudio Borio, saying: ‘What we’ve seen in the UK is just one possible example of what might happen.’
In other words, when the world bankers, hedge fund speculators and investment funds face bankruptcy, the central banks will step in to bail them out just as they did after the 2008 banking crash.
Indeed, all these bankers will now be safe in the knowledge that whatever risky investments they make, paid for by debt, in the end it will be the central banks that step in to save them.
This in turn, the BIS warns, will lead to even more risk-taking from a bunch of parasites who gamble for billions of profits and, when they lose, the working class is expected to pick up the bill just as the working class had to pay for rescuing the banks after 2008 through massive austerity cuts.
Attempts to end the era of cheap money and debt fail miserably in a world capitalist system that exists entirely through debt.
What is clear from the BIS report is that there is no economic way out of this crisis for capitalism.
This crisis can only be resolved in a fight to the finish between the two classes – between the working class determined not to be driven into the poverty of the Depression era of the 1930s, and a capitalist class that can only survive by dumping its crisis on their backs.
The only way forward for the working class is to demand the trade unions step up and call a general strike to bring down the Tories and go forward to a workers’ government that will resolve this crisis by expropriating the bankers along with major industries and bring in a socialist planned economy.
Socialist revolution is the way forward today.