Das Capital: Trust in banks wanes as savers find other ways to protect their money

All systems – social, cultural, spiritual, economic and financial – rely on trust. Policy makers are now systematically undermining trust in institutions, turning to financial repression in attempting to deal with the economic crisis.

Current government policies focus on low interest rates, with returns artificially set below the true inflation rate. Where interest rates are near zero, governments print money, manipulating the amount rather than the price of money.

These measures reduce borrowing costs allowing borrowers to maintain high levels of debt. Rates below that of inflation help reduce the value of the debt, effectively decreasing the amount that must be paid back in economic terms. The policy subsidises borrowers at the expense of savers.

These policies debase currencies, undermining money’s function as a mechanism of exchange and a store of value. Once an unquestioned store of wealth, investors in government bonds are now threatened by the risk of sovereign defaults or destruction of purchasing power.

Jim Grant of Grant’s Weekly Interest Rate Observer, noted that where once government bonds offered risk-free return, now they offer “return-free risk”.

Low rates reduce the income of savers, including retirees. They undermine compulsory retirement saving schemes, designed to ensure a secure, post-work life.

Some nations have used regulations and political pressure to force banks and investors to adopt patriotic balance sheets. This entails institutions purchasing government bonds and prioritising lending to domestic borrowers.

More aggressive financial repression is also evident. In the restructuring of Greek debt, retrospective legislation was used to deliberately prefer official creditors including the European Central Bank, allowing them to avoid losses at the expense of other creditors. Unsurprisingly, investors are now reluctant to finance some governments, fearing adverse future changes to their legal status.

Governments have seized private savings or have directed it into approved investments.

The European Central Bank, which oversees the 17-nation eurozone, has implemented programmes that indirectly may entail “monetary financing”; that is, central-bank funding of governments which is prohibited under European Union treaties. As Jens Weidmann, president of the German central bank, the Bundesbank, warned in November 2011: “I cannot see how you can ensure the stability of a monetary union by violating its legal provisions”.

The crisis revealed numerous instances of financial institutions placing their own interest before that of clients and exploiting customers for egregious profits.

In the lead up to the crisis, finance executives received high salaries and bonuses, based on dubious, often manipulated profits. Even in the aftermath of the crisis after governments were forced to support ailing banks, bankers’ voracious desire for large bonuses has continued. The inability or unwillingness of governments to rein in the industry remains a point of contention.

To preserve the value of their savings, savers are reversing the historic trend to “the abstraction of property through paper currency”. The ultra-rich are switching to real assets – gold, commodities, farm land, fine arts and other collectibles.

The rising lack of trust in banks and global finance has led to growing interest in alternative paper money, such as the Bavarian Chiemgauer, England’s Lewes Pound or the Berkshares programme in Massachusetts. Interest in digital currencies such as Bitcoin, also reflects, in part, increased concern about the monetary system. Irrespective of whether these alternative currencies succeed, they are testament to a growing distrust of governments and the financial system, representing a challenge to the authority and apparatus of states.

In the US, on Bank Transfer Day, an online phenomenon launched by an unhappy Bank of America client, customers withdrew money from traditional banks transferring it to not-for-profit credit unions owned by members. The growth of peer-to-peer lending which facilitates the matching of savers and borrowers for small consumer loans also evidences this trend. Examples include firms such as Prospect and Lending Club in America as well as the UK start-up Funding Circle.

Loss of trust even extends to dealings between central banks. In early 2013, the Bundesbank announced that it would move around 674 tonnes of its holding gold bullion from foreign central banks (the Federal Reserve Bank of New York and the Bank of France in Paris) to Frankfurt. While Bundesbank officials stressed there was no question of “mistrust”, Bill Gross, a founder of investment firm Pimco, tweeted the obvious inference: “Central banks don’t trust each other?”

Reviled and mistrusted, money and banks are losing legitimacy.