PERMANENT DISTORTION

A hard-hitting survey of the “forces…that fuel financial markets at the expense of destabilizing the real economy.”

Prins has written several books about the lack of connection between the financial markets and the real world, including Other People’s Money and All the Presidents’ Bankers, and as a former Wall Street executive, she has plenty of experience to draw on. Here, she delves into the roots of the disjunction and considers the consequences. Much of the problem, she writes, can be traced to the response of the Federal Reserve to the 2008 financial crisis. The Fed poured money into the market, arguing that some of the leading institutions could not be allowed to fail. This worked reasonably well, although much of the money ended up in the pockets of bankers who were already wealthy. The real problem was that once the flow of cheap money started, it was difficult to stop it without causing another crisis. Prins explains how all this worked, looking at the mechanisms of quantitative easing and bond buybacks. The recovery and the subsequent boom were built on an ever growing mountain of debt, but that was a problem for another generation. The author sees a similar reaction to the Covid-19 pandemic, as the economy was flooded with money as economic stimulus. “What started as an emergency response to two crises,” she writes, “became a permanent power grab…and while people and small businesses received some fiscal support on the fringes, the bulk of manufactured money zoomed into financial assets.” Prins is understandably worried about the future of the economy, with emerging disintermediation avenues and an increasing recognition of the widening gap between the mega-rich and the rest of us. The big banks might be flush with the largesse of their central bank sponsors, but, as the author clearly demonstrates, they should expect turbulent times ahead.

Prins effectively dismantles the machinery of financial markets and explains how they operate in a secret world of their own.