Schizophrenic Monetary Policy

How did the central banks manage to stabilize the financial system for the time being after the “bank quake” in March 2023? And what are the prospects for this form of crisis management?

February 29, 2024, Tomasz Konicz

The last banking crisis[1] that shook the financial system in March 2023 has long since disappeared from the headlines, but this does not mean that the financial system has been permanently stabilized. The market panic continued to reverberate for months. After all, it was finance capitalists in particular who warned against a return to business as usual in April.[2] The U.S. billionaire Leon Cooperman spoke to the media of a long-term “textbook financial crisis,”[3] which had been caused by “irresponsible fiscal and monetary policies” over the past decade – just a few days before another ailing U.S. regional bank, “First Republic,” had to be “bailed out” and taken over in early May.[4]


What this seemingly cryptic accusation means was made clear by financial investor Jeremy Grantham in an interview at the end of April.[5] The Fed has “hardly done anything right since Paul Volcker,” Grantham lamented. It has repeatedly contributed to the inflation of asset bubbles through its expansionary monetary policy in recent years and decades. This has resulted in “a chain-linked series of super bubbles” that, when they inevitably burst, will have “outrageously consequential, painful effects” on the entire global economy. The potential for crisis this year is far greater than in 2000, for example, when the dot-com bubble burst, Grantham warned, because now it is not only the stock markets that have been speculatively inflated, but also “bonds, houses, fine art, and other assets.” As a result, the financial sphere is in an “everything bubble,” a bubble that encompasses many sectors and asset classes of the financial markets, Grantham said, paving the way for the inevitable “crash and a painful recession.”

The functional elites of capital are thus quite capable of reflecting on the basic features of the crisis process – even if they do so in an ideologically distorted way. The chain of financial bubbles,[6] the neoliberal financial bubble economy, the bursting of the liquidity bubble, the terrible crisis potential that has accumulated – all of these historical crisis processes are certainly perceived by finance capitalists, while the remnants of what used to be the German left[7] remain largely ignorant of the crisis.[8] What both of the above-mentioned finance capitalists – Cooperman as well as Grantham – fail to mention, however, is the simple fact that they themselves profited handsomely from the financial bubble economy, which was increasingly dependent on the money printing of central banks.

And it was precisely the speculatively heated boom of the financial markets in the neoliberal era that acted as a key, credit-financed economic engine. The system runs on credit, with ever-increasing speculative bubbles generating credit-financed demand for a faltering real economy choking on its own productivity. This is why the past few decades of neoliberal globalization – which was essentially a globalization of this systemically necessary debt dynamic through deficit cycles[9] – have created gigantic mountains of debt. It is so bad that even hardened speculators cannot help but notice the accumulated crisis potential and feel uneasy.

Let There Be Money!

And yet, it should be noted that the acute crisis outbreak of the spring of 2023, which frightened even the finance capitalists, was successfully contained by rapid countermeasures taken by the functional elites. The pessimism of the speculators quoted above thus seems misplaced.

It is therefore worth taking a closer look at this rather routine crisis management policy. The first measures taken by the U.S. government after the collapse of Silicon Valley Bank (SVB), which kicked off the financial turmoil in mid-March, were aimed at preventing panic and stabilizing financial institutions. President Biden declared that the government would immediately provide unlimited protection for all bank deposits to nip in the bud any looming “banking storms” at other financial institutions where panicked customers would withdraw their funds (in the U.S., law only protects deposits up to $250,000). The Federal Reserve generated $143 billion for this purpose, which flowed to rescue companies and served to secure customer deposits at SVB and Signature Bank, which also collapsed. Not a single customer of the affected banks lost their money.

At the same time, Washington set about flooding the financial system with money to prevent a “freeze” in the financial sphere, which was a common occurrence in the aftermath of the Lehman Brothers investment bank bankruptcy during the 2007-08 global financial crisis. At that time, banks were afraid to continue normal interbank trading because it was not clear whether their trading partners were in danger of going bankrupt. To prevent such a catastrophic shutdown of essential transactions in the financial sector, the U.S. Federal Reserve opened its money floodgates wide: in the week from March 9 to March 15, more than $152 billion flowed to ailing banks as part of a liquidity provision program known as the discount window.[10] To get an idea of the scale of this crisis intervention in March, just look at the previous week, when banks claimed only about $4.5 billion through the Fed’s discount window. This figure, from mid-March 2023, far exceeded the weekly peak in the crisis year of 2008, when the Fed spent some $111 billion to stabilize faltering banks within a week of the collapse of Lehman Brothers.[11]

In addition, in March alone, $53 billion was lent to banks under the new Bank Term Funding Program.[12] By early May, this figure had risen to $75 billion.[13] Under this program, financial institutions can deposit their government bonds, which are falling in value during the current period of high interest rates and which triggered the crisis in the U.S.,[14] at face value as collateral. The Fed thus had to suspend a market mechanism to stabilize the financial market (when interest rates rise, the market value of bonds falls). In March 2023 alone, the direct crisis measures taken by policymakers reached a volume of more than $300 billion, roughly half of all spending during the 2008 crisis surge.

The response to the crisis was also globally coordinated.[15] In the second half of March, the central banks of the U.S., the eurozone, the United Kingdom, Japan, Switzerland and Canada agreed to ensure the supply of U.S. dollars to the reeling global financial system. In the process, the settlement of foreign exchange swaps was intensified. These so-called swap transactions, in which banks are supplied with the U.S. reserve currency, are normally settled on a weekly basis. But starting on March 20, the monetary guardians involved switched to a daily settlement of swap transactions in order to prevent possible liquidity shortages in the financial sector. Again, this can be seen as a strategy based on the experience of the crisis surge of 2007 and 2008. At that time, European banks had great difficulty in obtaining sufficient U.S. dollars to maintain their operations. This was prevented during the most recent financial market quake: the daily swap transactions served as “liquidity hedges to alleviate tensions in global financial markets and thus help to mitigate the impact of such tensions on the supply of credit to households and companies,” the Tagesschau quoted the ECB as saying.

This tactic of an extreme, globally coordinated money glut was actually a lesson learned from the 2008 financial crisis,[16] when Washington initially failed to act to “set an example,” and the Lehman bankruptcy led to the freezing of the financial sphere. Indeed, the measures taken in 2023 seem to have been successful. On the one hand, monetary policy went into “whatever it takes” mode, as one analyst put it, alluding to former ECB President Mario Draghi, who declared at the height of the euro crisis that he would do anything to save the euro – before opening the ECB’s monetary floodgates. Central banks can flood the financial market with freshly printed money, launch targeted liquidity injections, or simply accept devalued government bonds at face value, giving one the impression that they could contain any financial crisis. Monetary policy thus responded to the March 2023 crisis surge by “opening the money spigot” ever wider, as business media summed it up.[17]

The Interest Rate Screw and The Liquidity Bubble

But at the same time, central banks seem to be pursuing the exact opposite policy. To continue with the image above: Central bankers want to turn off the “money spigot” to fight inflation, and at the same time they need to turn it on to stabilize the financial sector. So far, both the U.S. Federal Reserve[18] and the European Central Bank[19] are sticking to their restrictive monetary policies, which consist mainly of raising key interest rates and shrinking central bank balance sheets. In the midst of the latest “bank quake,” on March 16, 2023, the ECB decided to raise its key interest rate to 3.5 percent. A few days later, on March 22,[20] the Fed raised the U.S. federal funds rate by 25 basis points to 5 percent.[21] After another round of rate hikes by central banks in May,[22] the key interest rate in the EU stood at 3.75 percent and in the U.S. at 5.25 percent. Following further increases in June and August, the key interest rate in the euro zone now stands at 4.25 percent,[23] while the Fed raised its key interest rate to 5.5 percent in July.[24]

The short-term billions in aid to the faltering financial sector in the spring of 2023 thus contrasts with the uninterrupted policy of high interest rates to fight inflation. Viewed in isolation, this anti-inflation policy appears to have been partially successful. In the eurozone, inflation, which was in double digits at the end of 2022, was brought down to 5.3 percent in July 2023.[25] In the United States, the official inflation rate was 3.2 percent in July 2023, down from 8.5 percent a year earlier.[26] Even if these official inflation figures are embellished, because wage earners from poor sections of the population in particular have to spend a larger share of their income on food, which is becoming particularly expensive, it must at least be noted that monetary policy has been successful in containing inflationary dynamics.

What’s more, monetary policymakers on both sides of the Atlantic are reaffirming their intention to continue shrinking their bloated central bank balance sheets. For context: The expansionary monetary policy of central banks that financial investor Jeremy Grantham lamented at the beginning of this article, which led to a “chain of financial bubbles” and ultimately to an “everything bubble,” has been accompanied by the massive purchase of financial market securities by central banks at least since the crisis hit in 2008. After the bursting of the great real estate bubble in the U.S. and Europe, the ECB, the Fed and the central banks of Great Britain and Japan initially bought up non-tradable mortgage securitizations in order to stabilize the paralyzed financial markets. After that, central banks increasingly bought up government debt to finance the gigantic government deficits and stimulus packages.

Governments supported the economy with massive stimulus packages, while the central banks bought up more and more government debt to keep interest rates low. With these purchasing programs, the central banks effectively became dumping grounds for the junk that burdened the financial sector. At the same time, the mass purchase of financial securities and government debt injected massive amounts of liquidity into the financial system. The whole thing resembles a money printing operation conducted via the financial markets. The basic principle is simple: The central banks pumped fresh liquidity into the financial markets through purchasing programs, which led to “inflation,” an increase in the prices of financial market goods – and created the liquidity bubble, the lamented “everything bubble” of recent years.

The concrete figures impressively reflect this long-term trend toward outright central bank capitalism.[27] Before the bursting of the great transatlantic real estate bubble, in early 2007, the balance sheets of the central banks of the U.S., the EU and Japan totaled just over three trillion dollars – by the end of 2008, they had already reached almost seven trillion dollars. By 2017, various purchase programs by these central banks had gradually swelled their balance sheets to a total of about $15 trillion. The pandemic triggered the next major wave of purchases – and, in effect, money printing – which catapulted the central bank balance sheets of the three aforementioned central states to a staggering $25 trillion.[28]

Dr. Jekyll and Mr. Hyde – Monetary Schizophrenia in the Crisis Trap

The world system, choking on the hyper-productivity of its commodity production, is increasingly running on credit through demand generated in the financial sphere. The money printing of the central banks plays an increasingly important role in the formation of corresponding speculation and credit bases. This has come to an end with the onset of worldwide inflationary dynamics.[29] Not only must interest rates be raised, but the central banks must also reduce their purchases of government and financial securities in order to at least curb inflation, thereby depriving the financial sphere of its most important “fuel” for the formation of ever new bubbles. The financial market turmoil in the spring of 2023, the banking crisis in the U.S., is precisely the consequence of the withdrawal of liquidity by the central banks.

Bourgeois monetary and economic policy is thus caught in a crisis trap: it would have to lower interest rates and continue printing money to support the economy and the unstable financial markets. At the same time, however, the central banks would have to raise interest rates and switch to a restrictive monetary policy in order to contain inflation – to the extent that this is possible at all through monetary policy alone.[30] In order to square this circle, at least to some extent, central banks seem to be resorting to a kind of monetary policy schizophrenia, in which the general tendency to reduce banks’ balance sheets turns into short episodes of expansionary monetary policy in times of crisis. The reduced purchases of government and financial securities by central banks[31] turn into the expansionary crisis policy of “whatever it takes” described above in the event of a crisis, with trillions being spent to stabilize the financial system.

The hope of monetary policy seems to be that the balance sheet totals of the central banks can be reduced in the longer term, despite the short-term interventions in the financial markets, which are, as it were, in withdrawal. This shift in monetary policy from the “sensible” Dr. Jekyll mode of fighting inflation to the wild Mr. Hyde mode, in which money is just being thrown around, is very well illustrated by the crisis surge of spring 2023 mentioned at the beginning of this article.[32] The Fed reduced its balance sheet from about $8.9 trillion in April 2022 to about $8.38 trillion in February 2023. When this liquidity withdrawal triggered the March 2023 banking quake, the Fed’s total assets shot up to $8.73 trillion (the monetary policy Mr. Hyde followed the motto of “whatever it takes”). The stabilization was successful – at least temporarily – and since then the Fed’s total assets have gradually fallen to $8.12 trillion.

So, after a few weeks of gigantic monetary expansion, the Fed has gone back to restrictive monetary policy, to Dr. Jekyll mode, as it were. And this is not just an American anomaly. The reduction in the balance sheet total, interrupted by episodes of expansionary monetary policy, has also been taking place at the ECB and, to a somewhat lesser extent, at the Bank of Japan since 2022,[33] with the result that the combined balance sheet of all three central banks has shrunk from around $25 trillion at the end of 2021 to around $21 trillion in August 2023. This calculation thus seems to be working – as long as the financial sphere is not shaken by another crisis surge, which would in turn make a money glut necessary.

Outlook: End of the Liquidity Bubble and Permanent Stagflation

The March 2023 banking quake thus marks a decisive turning point in the historical unfolding of the crisis, as the financial sphere is no longer in the liquidity bubble that emerged after the collapse of Lehman Brothers in the course of crisis management starting in 2009. The financial sphere has been dependent on central bank asset purchase programs since 2009, and this can be empirically verified. Since 2009, there has been a clear correlation between the rise in the S&P 500 index and the size of central bank balance sheets.[34] The stock boom, as part of the liquidity bubble, was fueled by central bank money printing during a long upward phase until a decoupling occurred in the spring of 2023: Central bank balance sheets shrank, while stock markets went through a recovery phase after the 2022 slumps, when the end of this expansionary monetary policy shook the financial sphere.

What drives the stock markets? A look at past speculative cycles can provide clues. For one thing, the current bull market is reminiscent of the dot-com bubble at the beginning of the 21st century, when the spread of the Internet was accompanied by hopes of a new regime of accumulation and by a speculative mania for high-tech stocks that collapsed in the second half of 2000. This time, it is speculation about breakthroughs in the development of artificial intelligence that is fueling a similar stock boom.[35] Moreover, high interest rates have an ambivalent effect – especially in the U.S., which, despite all the erosion processes, is still considered a safe haven for capital in times of crisis. High interest rates destabilize the over-indebted financial system, but they also lead to capital inflows that can partially counteract this. This is especially true for the U.S., which is currently engaged in a hegemonic struggle with China over the dollar’s position as the world’s money. Capital that was safely parked in the last crisis surge is now trying to make another quick buck in the big AI boom – before this bubble bursts, too.

Consequently, this speculation-driven stock boom cannot be sustained unless it is supported by renewed expansionary monetary policy, as was the case in the 12 years prior to the onset of inflation. The current renaissance of the stock markets, many of which have already reached their pre-crisis levels of late 2021, cannot be sustained without permanent support from monetary policy. Again, it is helpful to look at the history of the great liquidity bubble, where there were also periods when booming stock markets were decoupled from the phased stagnation of central bank balance sheet growth. This usually happened on the eve of a crisis surge, such as in 2019, shortly before the pandemic once again sent the overheated global financial house of cards into crisis mode. The current, fleeting stock market boom is also isolated; it is – at least in Europe – no longer part of a general liquidity bubble, the aforementioned “everything bubble.” The real estate markets in Germany and the UK are in crisis, and even in the U.S. the stagnating housing market is no longer driving the economy.[36]

The end of this short-term stock market boom will trigger the usual monetary policy reaction to crisis outlined above, which in turn will open the monetary floodgates of the central banks wide in order to prevent a meltdown of the world financial system. This contradictory compulsion of the crisis policy[37] of late capitalism results in a persistent tendency toward stagflation, i.e., severe currency devaluation in a stagnating economy.[38] Stagflation will become the “new normal” for the further unfolding of the crisis. Depending on the current crisis, and indeed on whether money is being printed or interest rates are being tightened, different moments of stagflation are likely to prevail: stagnation in phases of restrictive monetary policy, acceleration of inflation in the wake of expansionary monetary policy crisis measures.

Protectionism and Increasing Economic Divergences

Moreover, the new phase of the crisis will lead to an accelerated socioeconomic divergence even within the Western centers of the world system, caused by increasing protectionism. The United States is in the process of reorganizing its industrial base at the expense of its competitors through protectionist measures, especially in the context of its stimulus packages.[39] It is no longer just about punitive tariffs. In response to the pandemic, Biden passed the American Rescue Plan, a $1.9 trillion economic flash in the pan. This was followed by $52.7 billion in subsidies for the microchip industry (the CHIPS bill), and finally the $500 billion Inflation Reduction Act, which provides for investments in infrastructure and “green industries” – and is peppered with “Buy American” clauses, as the FAZ lamented.[40] And it is probably precisely such provisions that favor U.S. manufacturers in stimulus packages that have led to the doubling of industrial investment in the U.S. since 2021.[41]

The turn to state capitalism and protectionism in response to crisis episodes is not new. The crisis phase now underway is reminiscent of the 1930s, when the great crash of 1929 triggered a turn to state dirigisme, protectionism and nationalism in almost all metropolitan countries – with the familiar economic and political consequences. These historical lessons, which were still present in the reaction to the crisis surge of 2007/2008, have now been forgotten due to the increasing social contradictions. The global tower of debt created by means of deficit cycles is collapsing, which will intensify the competition between “locations.” The stimulus measures and investment policies of the Biden administration have been partially successful precisely because they have the protectionist component lamented by the EU – and because this protectionism has not yet been generalized.

The growing economic divergence between the resurgent U.S. and the faltering eurozone is due precisely to U.S. protectionism, to the Biden administration’s reindustrialization efforts, which are hitting the export-dependent German economy particularly hard. And they will inevitably lead to a corresponding response from the EU. U.S. protectionism may temporarily succeed in passing on the consequences of the crisis to the competition – that is, until the latter follows suit in terms of protectionism.







[7] https://www.untergrund-blä

[8] See also: Der Linke Blodheitskoeffizient.




















[28] Yardeni Research, Inc: Central Banks:Fed, ECB & BOJ Weekly Balance Sheets, (Chart 1),



[31] To a certain extent, balance sheet reduction is a “passive” process: Central banks simply buy less new paper after the bonds on their balance sheets mature. No sovereign debt or mortgage securities are actively moved into the markets by the banks.


[33] Yardeni Research, Inc: Central Banks: Fed, ECB & BOJ Weekly Balance Sheets, (Graphs 2 and 3),

[34] Yardeni Research, Inc: Central Banks: Fed, ECB & BOJ Weekly Balance Sheets, (charts 13, 14),








Originally published in Ökumenisches Netz on 09/07/2023

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