Deutsche Bank Not Impressed With How Central Banks Are Behaving

Deutsche Bank's German Economic team put the European Central Bank on blast. Like any good subordinate, the German-based bank began their report by saying, "the Bundesbank and Federal Reserve are respected for achieving monetary stability."

That view remains debatable, but one truth remains and that's the truth that once central bankers begin to follow the economic dogma of the day they risk executing flawed policy. Deutsche Bank correctly notes that when central banks give into economic dogma, "their mistakes can be catastrophic."

Seven years into the overt and blatant intervention of central banks has caused a mental re-anchoring to money management. Participants have now become used to low-interest rates and using increased principals to generate returns over a shortened maturity time-frame. Now that the system is dependent on cheap money, Deutsche Bank feels the ECB policy is "threatening the European project as a whole for the sake of short-term financial stability." The same could be said for the Federal Reserve in the United States.

The question today is, are central banks acting outside of their mandates by influencing societies and individual citizens (think negative interest rates)?

Deutsche Bank thinks so.

"Two months ago parliamentary groups attacked the ECB for its zero/negative rate policy and suggested Berlin intervenes – in effect questioning the ECB’s independence. Such a chorus shows that monetary policy lurching to extremes has consequences far beyond the realm of financial markets and the real economy. It is dangerous for central banks not to consider these wider consequences, especially since it might be argued that they lack the mandate to wield such influence on societies and individual citizens."

The intervention by central banks has amplified moral hazard. Deutsche Bank says:

"The benefits from ever-looser policy are diminishing while the litany of distortions, perversions and disincentives grows by the day. Savers are punished and speculators rewarded. Bad companies survive while good companies are too scared to invest." And this is not a good thing. Not only are participants more likely to behave recklessly, there has also been an increase in total indebtedness in the eurozone. There is now a knock-on impact being witnessed as "Badly needed labour, banking, political, educational and governance reforms have been slowed or abandoned."

The world has entered a new era, one where the banks themselves now bite the very hand that feeds them.