A former Goldman Sachs managing director who exited the investment bank to expose what goes on inside the industry warns that a financial crisis “more vicious” than the 2008 collapse is building.
“We’re headed for another epic fall” that will “devastate the global economy,” Nomi Prins, author of “Collusion: How Central Bankers Rigged the World” (Simon & Schuster May 2018), tells ThinkAdvisor in an interview.
It’s the central banks — for the U.S., that’s the Federal Reserve — who have created and fueled the oncoming disaster by “subsidizing” private banks with fabricated money for the last decade. In doing so, they’ve created asset bubbles, argues Prins, who before Goldman, held high-level posts at Bear Stearns and Lehman Bros.
Both the Fed and President Donald Trump are ignoring the red flags, she insists in the interview.
Since leaving Goldman in 2002, Prins has “dedicated [her] life to exposing the intersections of money and power,” she says.
In her new exposé, she has harsh words for the Fed, which “greenlights legal manipulation of the stock market” by allowing companies to buy back their own shares, she charges.
Prins, who cautioned about credit derivatives four years before the 2008 financial crisis, argues that the central bankers — or “illusionists,” as she calls them — indeed practice collusion because they secretly and deceitfully coordinate their efforts to control global markets and dictate economic policy. Such “collusion has run rampant and deep,” contends Prins, who, at Goldman, was responsible for the analytics underlying credit derivatives.
She further maintains that “subsidies” courtesy of the central banks, supposedly intended to help economies, are only helping private banks, big corporations and Wall Street realize record profits and stock market highs.
The central bankers have no exit strategy when it comes to the flow of “conjured money” — as Prins terms it — that’s artificially lifting up the financial system. But if it’s reduced or eliminated, another disastrous meltdown will result, she predicts.
Prior to Goldman, Prins was a senior managing director at Bear Stearns in London, having started out as a Lehman Bros. strategist in the U.S.
Reinventing herself as an investigative journalist, the Poughkeepsie, New York-born Prins has so far penned seven exposés, including “All the Presidents’ Bankers: The Hidden Alliances that Drive American Power” and “Other People’s Money: The Corporate Mugging of America.”
Her newest work reveals the international relationships and coordination among the Federal Reserve, European Central Bank, the Bank of Japan and other central banks that have “funded banking activities at the people’s expense,” she says.
ThinkAdvisor recently interviewed Los Angeles-based Prins, on the phone from Seattle, a stop on her book tour. The ex-insider’s advice to financial advisors: Watch what the central banks do — not what they say.
Here are highlights of our conversation:
THINKADVISOR: You write: “We’re standing on a dangerous financial precipice.” What could happen?
NOMI PRINS: Most definitely another financial crisis could happen. The major central banks of the world are providing a subsidy of cheap money upon which the private banking system and financial markets are floating. If that were to go away or be reduced, the money would come out of the same financial system that it’s been inflating. And that’s the definition of a crisis. We’re in a dangerous time because we’ve never had this much money provided by the central banks lifting up the financial system. We’re in unknown territory.
When would such a crisis occur?
It could be in a year; it could be two years. Or things could happen in small shifts along the way because central banks will continue what they’re doing for as long as they can. Ten years after the financial crisis, there’s a lot more money supporting the system artificially that the central banks have conjured [created] than we had going into the last crisis.
Why did you title your book “Collusion”? Have the central banks made a secret agreement for an illegal purpose?
There is a secret element. Deceit is part of collusion as well, but it’s not always criminal. With the central banks, there’s deceit in terms of secret meetings. A lot of conversation goes on that simply isn’t public. The members get together all the time, either in the aggregate or individually. They have a lot of face-time.
Do they coordinate their efforts?
They specifically talk about coordination. I have that in my book from multiple sources and statements provided by a number of central bank leaders over the last 10 years.
Why else is “Collusion” a valid title for your book?
The central banks have unlimited, regulatory and money-conjuring power that’s unchecked and unaudited. That’s not necessarily illegal, but it’s certainly deceitful because while the conjuring of money to the financial system and banking network is supposed to be helping [Main Street], there’s a low level of growth in the countries whose central banks have produced the most money.
But can’t they prove that it’s helping economies?
There’s literally no evidence to support central banks’ narrative of why they’re doing all this stock and bond buying through conjuring money, which makes it possible [for them] to one day not have enough money to buy a certain amount of assets from the market, but the next day to have it. They are the source.
What evidence do you see instead?
The [private] banks have had record profits and that although they’ve paid fines, they’ve given healthy increases in compensation and bonuses to their senior-level members, and the stock market is at record highs.
You write: “The big banks game the system repeatedly, and the central banks abet them.” Please explain.
Let’s say you go to a casino and don’t have enough money to play, but your parents — the central banks — say, “Here’s money, and you don’t have to pay it back.” Because you didn’t have that money, you might have been less inclined to play blackjack.
You say that “much of the 20th century belonged to Wall Street. The 21st century now belongs to the central banks.” Please elaborate.
They’re the source of a tremendous pile of money. In the past, they’ve only created it here and there. But in the last decade, [the amount] has been substantial. That creates asset bubbles because all this money coming into the system has to go somewhere. So it goes into the easy place: the stock market. And that creates bubbles.
You say President Trump and the Federal Reserve aren’t paying attention to alarm bells. What are those signs?
Record levels of consumer and student debt owed by citizens of our country [for example]. When that becomes difficult to repay, delinquencies happen; and that’s when corporations’ expenses get cut. Then jobs get cut. If the subsidies to private banks were to be taken away, we would definitely see crashes all over the place, which is why they’re not being taken away.
Is there potential for Trump to direct the Federal Reserve to execute an action that would upset the economy and trigger a market crash?
He doesn’t have the power to make the Fed do one thing or the other. However, he was the person who appointed [Fed Chairman] Jerome Powell, and a number of other new people coming into the Fed who are all proponents of deregulation. So that could mean some real financial fallout either from things that happen or from things Trump says. There’s a lot of potential for the market to be [further] upset by geopolitics. And to the extent that the statements come from Trump, absolutely.
How can being knowledgeable about the central banks help financial advisors in investing clients’ money?
By being more aware of what’s going on in the days in which the central banks are involved in the markets. If things start to look like they’re getting shaky, it’s usually because there are [reliable] rumors that the central banks are going to pull the plug — that is, raise interest rates too quickly. So investment advisors should pay a bit more attention to what the central banks do rather than what they say.
What else should FAs keep in mind in connection with the banks?
One of the byproducts of these 10 years of cheap money is that many companies have borrowed more and more to buy their own stock. A good investment advisor will look at that. If rates go up or if there’s a problem with credit or a market correction or a crash, it’s the companies that have the most debt who are going to be hurt the most.
How much power does the Fed chair have?
He or she certainly has the ability to shape regulatory policy. They can’t make laws, but the Fed committees can do things like say no to stock buybacks. So there are things they can do that will mitigate some of the problems we have, but current Fed philosophy won’t do that.
What are your expectations for Chair Powell, then?
He [wants to] loosen restrictions on the banks rather than tighten them, and that could be problematic. The Fed has missed a lot of crises in the past because it got complacent when it looked like things were better. In today’s environment, the banks look better because they’ve been provided all this money from the Fed. I don’t think that Jerome Powell is necessarily considering all of that.
Corporations aren’t using Trump tax-cut money to expand operations or put it into Main Street’s pocket. They’re using it for stock buybacks.
Right. Private banks have to ask permission of the Fed to use their money to buy their own stock. The Fed could say, “No — we want you to use that money to forgive some student loans.” But they don’t do that. They just say yes.
Why doesn’t the Fed just say no?
Because the Fed believes the narrative that as companies grow, it will trickle down to the rest of the economy.
But that doesn’t seem to be the case.
Correct. The [February] Labor report said that wages have grown by a whopping 0.1% [she notes facetiously].
Most Americans don’t know what really goes on with the central banks, and they have no way to change the situation in order to help themselves.
Right. The [system] can plaster over growing problems; and when markets come down, it’s individuals who get hurt. Then the companies that borrowed all that money have to pay it back; and if they haven’t grown organically, they’ll start cutting expenses to repay it. Part of that is cutting wages and jobs. And so the whole thing falls apart.
If the House goes Democratic in the midterm elections, will that change any part the above equation?
I don’t think it will change what the Fed is doing with monetary policy because a Fed appointee is a Fed appointee, and the Congress doesn’t ask a lot of questions of the Fed. It might awaken some conversations on the Hill about re-regulation of the banks rather than deregulation, or it might block some deregulatory moves. But the Democrats, as well, have been involved in believing that the banking system is fine over the last 10 years because of the Dodd-Frank Act and other acts.
But you certainly have a different point of view!
The reality is that if the banking system is “fine,” it’s being subsidized by $4.5 trillion of Fed money. So that doesn’t seem fine. If it were really fine, that money could be unwound — but it’s not [about to be].
Any suggestions to mitigate a financial crisis in advance?
We need to break up the banks and require companies to divert more funds into the real economy — siphon off some of what they have to infrastructure development, wage increases or student loan-forgiving — anything that would actually help the overall economy instead of buying back their stocks. Some of the money that’s been conjured for the banks can be used for that rather than where it’s gone — into the financial system.
But wouldn’t that plan require a gut renovation of the entire system?
Yes. That’s what should have happened in the wake of the financial crisis. Instead, things were plastered over, money was fabricated, and the banks received it. The error is that it has somehow helped economies.
On a personal front, you’ve said that you “moved back to New York [from London] for Goldman Sachs, which was tragic for me from a moral perspective.” Why?
I left when the banking sector was overstepping its boundaries, and the whole system was changing. It was a time when there was a lot more extraction of wealth from the economy. I felt that things were coming to a head. It was time for me to go onto the other side and examine the impact, and talk and write about it.
As a former insider, was your intention to write exposes?
Yes. That’s what I’ve been doing. That was part of it. The seven books I’ve written and my articles have been related to that.
I gather you like writing about the industry more than being in it.
I do. I feel more balanced. Certainly it’s freer [for me] to discuss the truth.
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