The downfall of the monetary system

A former economist at Deutsche Bank, which has been having troubles, predicts inflation and global recession. Thomas Mayer, who is one of the founders of the Center for Financial Studies in Frankfurt, specialized for reforming European financial system, says that the euro cannot remain viable in the long term because its basic conditions have always been missing: a unitary European state. There has not been and there will not be one. He also adds that central banks simply cannot leave the artificially low interest-rate environment of the west, and the result is a sudden and sharp inflation, and the loss of faith in banknotes.

Péter Zentai: If today’s big banks are so much better capitalised and safer than they were before the crisis, then why do markets still consider financial institutions too risky?
Thomas Mayer:
Banks were not only forced to increase their capital, but they also could not make taxpayers cover the costs of their restructuring or their failures anymore. Consequences now fall on shareholders and creditors only. In this situation, the market considers bank securities extremely risky. With such low share prices, however, banks can hardly gain any new capital. This created a trap, where the banking sector is persistently weak.

Do you agree with that the problems of Deutsche Bank are the results of the risky speculations of its former leaders?
Putting all the blame on others’ greed and making them scapegoats is the easiest. If really that had been the case, then simply changing the staff would have been a solution. However, the problems were more fundamental. Deutsche Bank wanted to become a global investment bank, and to do so, it took high risks. While markets were booming, this strategy worked fine. However, as soon as markets started falling, the dangers coming with the risks had their effects. For this reason, on one hand, the bank has to pay for its failure, and on the other hand, it also has to rethink its future strategy.

How typical is the problem of Deutsche Bank for other big financial institutions?
The whole European banking sector is weak but the specific circumstances are different in every country. For example, Italian banks are having troubles because the Italian economy itself is problematic. In Germany, the economy is strong, but banks struggle because of their past mistakes. For getting entangled in lending to America, now they also have to deal with the low interest-rate environment. Nowadays, German banks can hardly profit from their business activity, and they are reluctant to charge their depositors. This way their profit keeps dropping.

Shall the operation of big banks be reformed?
Big commercial banks would only be safe if the financial system went under a fundamental reform. The point of the reform would be that only central banks could create money, while commercial banks would be prohibited from ‘printing money’: they would only focus on mediation between savers and investors.
The primary reason of the current risks is that commercial banks create money by lending. This appears in their accounts, but it turns into actual money by the banks making a promise: the amount in their accounts can be exchanged for cash at the central bank anytime and under any circumstances.

Despite the promises, a European bank union has not been formed yet. What is its reason? That the euro-zone countries cannot agree on numerous things, especially when it comes to dealing with political challenges?
The founders of the European financial system established the ECB to somewhat centralise monetary policy and money printing along with it too. Financial supervisions, however, are within national competence, meaning that each member state has its own supervision. The system is extremely unbalanced since financial system managing institutions do not have a centre or support. However, we have seen that a common currency of certain states has never been long-lived. Since the birth of a unitary European state is not likely to happen, there is a high chance that the euro will not survive for too long. It will disappear, just like its predecessors.

How long can developed economies bear zero or even negative interest-rate environment?
Nobody can predict that. However, it surely cannot stay like this forever. I think that it is impossible to back out from this interest-rate policy. By now, companies, banks, households, families, and governments have gotten used to low interest-rates. For this reason, any form of an increase of interest-rates would push the global economy towards a severe recession. I do not believe that central banks would take their chances, so the risk of unchecked inflation keeps rising. All in all, I think that the whole monetary system will turn into a crisis.

Is it possible that if Donald Trump becomes president, it will cause further problems to the world economy?
The worst consequence of his election would be that he wants to push through a protectionist and inward looking policy. Following the 1929 stock exchange crash, the government’s response was increasing duties to protect American jobs. In response, the rest of the world did the same. Basically, this caused the 1930-33 world crisis: protectionism became a worldwide phenomenon. If Trump follows the strategy of earlier protectionists, the global economy can fall into recession or even depression.

Original date of Hungarian publication: October 10, 2016