Neil Macdonald: The secretive world of printing money

Today's central bankers are like modern alchemists, Neil Macdonald writes, creating unimaginable sums of money out of a few strokes on the computer to try to stimulate moribund economies. Few practices deserve greater scrutiny and accountability.

The case for more public scrutiny of the central banks. Power Shift 3

Gathering for 'the family photo' at the G20 meeting in Washington. Seen (L-R) are Irish Finance Minister Michael Noonan, Brazil's central bank governor Alexandre Tombini, U.S. Federal Reserve chairman Ben Bernanke and Saudi Arabia's Minister of Finance Ibrahim Al-Assaf.

Consider this: As America agonizes and argues over the pain of government cuts totalling about $85 billion next year, the U.S. Federal Reserve is printing that much every month.

Its current balance sheet — the amount of money it has created, the bulk of it in the past five years — stands at $3.2 trillion, about twice Canada's entire annual economic output.

The European Central Bank's balance sheet is even higher at $3.45 trillion, and others, like Japan, are racing to catch up.

The central bankers

When the record of the 2008 global financial catastrophe is fully written — that story remains a work in progress — the leaders of the world's central banks will emerge either as heroes, or the people who administered a cure that turned out to be as bad as the disease.

As of late last year, these central banks had printed about $17.4 trillion in new money, just over half of it in the past five years. That total is roughly a quarter of the annual economic output of the entire planet, and stock markets, banks and real estate have risen on this tide of cheap money.

Three of these bankers in particular will go down in history: Ben Bernanke of the U.S. Federal Reserve, Mario Draghi of the European Central Bank, and Canada's own Mark Carney, soon to be the governor of the Bank of England.

The world's central bankers are, in a sense, modern alchemists: They create these unimaginable sums of money out of binary electronic signals — to buy, among other things, government and retail bank debt and securities — with a few strokes of computer keys.

It's not an act they allow to be filmed or otherwise recorded. Actually, they permit very little recording of anything they do.

The plain fact is that these central bankers are executing what is perhaps the most profoundly important public policy of our time — an unprecedented printing of money and lowering of interest rates — with little in the way of public debate.

Such debate that is taking place is at rarefied levels among macroeconomists and other academics, or in the feverish blogs of the far right, whose members tend to see government conspiracy in just about everything.

But at least they're paying attention. Much of the mainstream media, fixated as it is on political horse races, is largely ignoring what's happening. There are honourable exceptions — economics specialists in certain newspapers and business-focused cable channels — but they are few.

The general public mostly hasn't a clue. Neither do many elected politicians, judging by some of the things they say publicly about the subject.

Hiding the bad news

What these bankers do with this new money they print is buy government debt, or shore up failing banks or teetering national economies or industries like housing or insurance, part of the policy they call quantitative easing.

They say, and many respectable experts support them, that quantitative easing has saved entire economies from imploding.

They also say — high priest-like — that they must keep the details of their discussions secret because their words could be misinterpreted, and entire markets could move on a misunderstanding.

And they stress they are operating entirely within the mandates given them by elected governments.

That's as may be.

It's also true the central bankers did not ask for the immense power they now exercise.

It was thrust upon them because the private sector made enormous, stupid, ruinous blunders, and because elected politicians were too terrified to make all the deeply unpopular decisions, like whether to let more banks fail, that had to be made when the financial meltdown started feeding on itself.

Politicians, given the chance, kick the can down the road; central bankers act.

But because of their mandate to maintain economic stability, they like to hide the bad news, or obscure it with vague euphemisms.

The transcripts of the U.S. Federal Reserve meetings make fascinating reading, even though they're only published five years after the decisions are made.

But the tone is a bit patronizing. Transparency and informing the public is clearly not high on the governors' agenda. They have drawn what one British financial regulator called a "veil of ignorance" around the subject of money printing.

"They see something coming, they may be right, they may be wrong. But they are bound not to tell the folks what they feel and see for fear that it will upset the system," says William Greider, an author and keen student of the U.S. Federal Reserve.

In Canada, Britain and Europe, central banks never release transcripts of internal discussions.

But while economists are divided on the wisdom of all this money printing, the central bankers aren't: They've marched together, to the same tune, since 2008, making a giant collective bet.

Don't tell the punters

Not since early last century, when the central bankers of Great Britain, Germany, France and Europe acted in concert to try to remediate the market crash of 1929, has such a radical policy been implemented on such a global basis.

Of course, those central bankers of yore did the exact opposite of quantitative easing. They actually tightened the money supply, and are generally blamed for having created the Great Depression.

That bit of history goes a long way to explain why today's central bankers are running the printing presses almost nonstop.

But there are huge implications for everyone in what's happening.

Some economists warn it will lead to inflation, or hyperinflation. So far, it hasn't because consumers, investors, and businesses, still nervous and wary, have sat on what cash they have, rather than embark on the sort of spending sprees the central banks are now trying to encourage.

But certainly all this QE has distorted asset prices, and pushed some stock markets to all-time highs.

It has also fuelled heavy borrowing and real estate bubbles in parts of the world. And it has punished people with savings, older people especially, by artificially depressing interest rates and the return on their money.

Should the money printing continue?

In the U.S., the far right sees the practice as a government conspiracy to destroy the money system.

Some days it feels like almost every second advertisement on Fox News these past few years has been for gold, supposedly the eternal hedge. Some crackpots are even planting survival gardens in anticipation of systemic failure.

The political left supports even more money printing, along the lines that Japan has recently embarked upon (a doubling over the next two years).

Among the suggestions: Lend directly to companies that need credit. Send free money to every household. Do whatever is needed to kick-start growth.

The fact is, it's impossible to know where all this is going, or whether the central banks, having addicted governments and consumers to cheap money, can close the money taps without enormous disruption to the system.

But it's something that screams for public discussion.

"It may be time for modern citizens to get educated about their own capitalism," says Greider, who says there is nothing democratically healthy about the bankers' opaque discussions and decisions on a scale like this.

Lord Adair Turner, the outgoing chairman of Britain's now-defunct banking regulator (the Financial Services Authority), summed up the bankers' attitude in February in a speech at London's City University. (It was there he spoke of "the veil of ignorance" in which bankers like to shroud their handiwork.)

Considered a front-runner last year for the Bank of England's top job (the one that went to Mark Carney), Turner suggested that the times are so dire that the central bank should consider simply printing every pound the British government needed to borrow, effectively monetizing its deficits, a practice, he concedes, that is generally considered taboo.

The problem in doing that, said Turner, is telling the hoi-polloi.

"Once we tell the populace and the popular press and the backbenchers of Parliament that this is possible, they'll want to do it not only in the one year out of 100 when it's appropriate, and not only in a reasonable amount, but all the time and in excessive amounts to try and win the next election."

Turner is right, to an extent. Politicians can certainly be pusillanimous fools, and voters uninformed. It would be nice if they weren't, but it is ultimately their right.

Still, unelected officials that operate at the behest of governments have no business cloaking such profound decisions. Few topics deserve more attention.


  • Clarification: This article has been amended to make clear, as earlier columns in this series and the CBC documentary 'Monarchs of Money' did, that while the Bank of Canada has been maintaining a low interest rate policy it has not been one of the central banks that have been printing money and buying financial assets in the attempt to reflate the global economy.
    May 02, 2013 1:48 AM ET