- Global central banks are engaging in “monetary schizophrenia,” Societe Generale’s Albert Edwards says.
- Central banks are actively fuelling the credit bubbles they seek to deflate, Edwards says.
LONDON — Societe Generale’s notoriously pessimistic strategist Albert Edwards let rip at central banks, accusing them of “monetary schizophrenia” in their approach to policy.
Edwards focuses most of his ire on the Bank of England, which he accuses of inflating a consumer credit bubble, while at the same time warning of the dangers of rising consumer credit levels.
“The simple fact is monetary policy is way too loose in the UK as well as in the US, and let us not forget the BoE cut rates in the immediate aftermath of last July’s Brexit vote. Bubbles are appearing in areas like consumer credit because interest rates are far too low and need to be raised,” Edwards writes in his weekly Global Strategy note,
Citing a recent article by Ed Conway, the economics editor of Sky News, Edwards notes that the Bank of England has just extended its Term Funding Scheme to the tune of £15 billion.
The Term Funding Scheme — which Conway describes as “one of the most technical, abstruse schemes” ever thought up by the bank — was brought in last August when the bank cut interest rates.
The basic rationale behind the scheme was to try and make sure that retail banks kept lending to customers if the UK’s economic situation deteriorated, and to ensure that they passed on lower rates to those customers.
That was done by lending large sums of money to those banks through the TFS — as it is known.
By engaging in this scheme while also warning about the dangers of growing consumer debts and record low household savings, Bank of England Governor Mark Carney is making himself look “ridiculous,” Edwards says.
“This makes Governor Carney’s cautious statements about consumer credit look ridiculous and takes BoE monetary policy to a new level of schizophrenia.”
Ultimately, when the credit bubble pops, Edwards argues, the Bank of England will be faced with popular anger when the public realises the role the bank has — in his view — played in blowing that bubble.
“Yes, when interest rates are excessively low, both borrowers and lenders do stupid things. But to ignore their own role in creating debt misery for millions, the BoE can only deal with its own cognitive dissonance by blaming someone else. When this debt bubble blows, I suspect citizens rage will be directed where it belongs.”
Edwards has made a similar point about “citizens rage” before, saying in a June note that c
entral bankers will be the ‘next sacrificial lambs to throw to the wolves’ of populist rage in the coming years.
His criticism is not focused entirely on Carney and the Bank of England.
Here Edwards is one last time (emphasis ours):
“I do not think this debt time-bomb is specific to the UK. We are in a QE, zero interest rate world, where central banks are effectively force-feeding debt down borrowers throats. They did it in 2003-2007 and they are doing it again. Most of the liquidity merely swirls around financial markets, but there is certainly compelling evidence now of a consumer credit bubble in both the UK and US (as well as a corporate credit bubble in the US).”