Will Central Bank Policies Set off Another Global Financial Crisis?

The world is heading toward another epic financial fall. The question is not if, but when.

An Interview with Nomi Prins cross-posted from Knowledge@Wharton.

Author Nomi Prins is a former banker with Goldman Sachs and Bear Stearns who is critical of the Fed and other central banks. She takes them to task for how she believes they mishandled the 2008 crisis. Three years ago, Prins was invited to address a joint meeting of the Federal Reserve, the International Monetary Fund and the World Bank after characterizing central bank policies as “insane.” She contacted the Fed to ask if the invitation was a mistake. They replied, “We’re looking forward to hearing what you have to say.”

In the author’s note in her new book, Collusion: How Central Banks Rigged the World, she writes that the world is headed for another epic financial fall: The question is not if, but when. Prins recently joined the Knowledge@Wharton radio show on SiriusXM to talk about her book. 

Knowledge@Wharton: This has been an important topic for you over the last decade or so. How do you believe central bankers made mistakes and set us up for the next fall?

Nomi Prins: You mentioned the conference that the Federal Reserve, IMF and World Bank have every year in Washington, D.C., where they invite other central bankers from around the world. At the time, the topic that is relevant to your question was, “How come Wall Street isn’t helping Main Street?” That was the topic they chose, not me.

The idea was that we have offered so much help to the financial system, and to financial assets and markets around the world, how come this isn’t trickling down into the real economy? How come it’s not instilling sustainable growth figures? That’s one of the main concepts within the book. There has been up to $22 trillion worth of subsidization for the financial system, for banks, for the markets, and that hasn’t really produced sustainable growth. Yes, we had in the last quarter in the U.S. growth of more than 4.1%, but that was largely due to the soybean sector, as well as a lot of debt that has been amassed by consumers, which is now nearing another record high.

“The Federal Reserve is supposed to be watching for crises that are building, not ignoring them.”

But over the last 10 years, despite this conjuring of quantitative easing, low rates, and easy money policy by the major central banks in particular, there’s been relatively little sustainable growth. Certainly not more than 2% for any one year in any major economy in the last 10 years. Certainly not with respect to wages. There has been growth in debt, there has been growth in stock markets, and there has been growth in the health of banks because they receive this money. But it has not necessarily been in a sustainable manner for the true productive economy

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