Former CEO of UBS And Credit Suisse: "Central Banks Are Past The Point Of No Return (trunk)"

Sounding more like a "tinfoil" blog than the former CEO of the two largest Swiss banks, Grübel warned that central banks have "crossed the point of no return" which will ultimately “end in a crash."

Joining Deutsche Bank in slamming NIRP, Grubel said that banks are losing hundreds of millions of francs each year to negative interest rates paid to central banks.

Worse, he warned that central banks will eventually lose their credibility in the markets but that this could take 10 years or more, at which point it will "all end in a crash." What happens then? The former CEO believes that the final outcome will be wholesale financial nationalization: “after that all banks could belong to the state”

Grubel also the doubted the wisdom of the Swiss National Bank’s balance sheet: "the Swiss National Bank's balance sheet now accounts for 100 percent of GDP. Japan is also 100%, but mainly invested in its own state paper. The ECB and the Fed are 30%. Switzerland is far, far, far ahead. Is that wise?"

The former CEO also touched on a point we have made ever since 2010 when we said that in a world of unprecedented political polarity, politicians now control the world almost exclusively through monetary policy, to wit: "After the financial crisis, politics has taken power in the banking sector: It has bound the banks into a regulatory corset and now they can no longer move. Politicians have told central banks: now you determine what is going on with the economy."

Congress needs to spend some time re-writing the Federal Reserve Act. Over the past seven or eight years the Federal Reserve has assumed powers never anticipated by Congress. Allowing them to build a long-term asset portfolio of over 3 trillion dollars, financed almost entirely by overnight deposits at commercial banks, is insanity.

The Fed is now running the largest positive carry trade of all time. It loses big if they allow interest rates to rise to “normal” levels, so they have a clear conflict of interest in allowing that to happen.

This is an area that Trump really hasn’t weighed in on yet and it will be interesting to see where he comes down on it when he finally does.

Thank you. One of the true risks the Trump administration faces is an unwinding of recent Fed policy. The Fed has always been able to manipulate short-term interest rates to whatever level they want to achieve, but only recently have they sought to directly influence long-term interest rates. To do so, they had to implement massive purchase programs of long-term Treasury bonds and mortgage paper.

However, if the market decides that the whole thing is a shell game (and it is), then even though short rates might still be constrained by the Fed, long rates could rise significantly, and without regard to what the Fed desires.

Two things will happen then. First, the Fed’s own long-term bond portfolio will suffer tremendous losses, losses that will directly impact taxpayers. Second, the cost of borrowing by the Treasury will escalate quickly. A one percent increase in cost on $20 trillion would increase the annual federal budget deficit by $200 billion and the rise could easily be twice that or more in just the first half of Trump’s four-year term.

And if things really get out of hand, with the bond market panicking due to the increased deficit, rates could jump far higher, raising the deficit by a trillion or more dollars per year. That is the risk that the combination of Obama’s reckless spending and the Fed’s ridiculous interest rate policy have bestowed upon the nation, and the incoming administration.

The only way I see out of it is to put policies in place that generate extremely rapid economic growth while cutting the federal spending enough to reduce the federal deficit to near zero, or even to a modest surplus. “Drain the Swamp” would be a good start, along with favorable tax policies. I’m assuming that the “drain the swamp” part would cut the regulatory burden dramatically.

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