Author Nomi Prins discusses her new book about how actions by central banks after the financial crisis have set the stage for another fall.

The financial crisis that started more than a decade ago still reverberates through the United States and the world. During the crisis, central bankers gained more powers, which they used to stabilize the financial system, but in doing so they have triggered other unintended consequences. A new book, Collusion: How Central Bankers Rigged the World, looks at just how much influence central bankers have gained since the meltdown and what it has meant — not just for the big banks, but also for small and medium-sized businesses, individuals and the economy in general.

Author Nomi Prins is a former banker with Goldman Sachs and Bear Stearns who is critical of the Fed and other central banks. She takes them to task for how she believes they mishandled the 2008 crisis. Three years ago, Prins was invited to address a joint meeting of the Federal Reserve, the International Monetary Fund and the World Bank after characterizing central bank policies as “insane.” She contacted the Fed to ask if the invitation was a mistake. They replied, “We’re looking forward to hearing what you have to say.”

In the author’s note in her new book, she writes that the world is headed for another epic financial fall: The question is not if, but when. Prins recently joined the Knowledge@Wharton radio show on SiriusXM to talk about her book. (Listen to the podcast at the top of this page.)

An edited transcript of the conversation follows.

Knowledge@Wharton: This has been an important topic for you over the last decade or so. How do you believe central bankers made mistakes and set us up for the next fall?

Nomi Prins: You mentioned the conference that the Federal Reserve, IMF and World Bank have every year in Washington, D.C., where they invite other central bankers from around the world. At the time, the topic that is relevant to your question was, “How come Wall Street isn’t helping Main Street?” That was the topic they chose, not me.

The idea was that we have offered so much help to the financial system, and to financial assets and markets around the world, how come this isn’t trickling down into the real economy? How come it’s not instilling sustainable growth figures? That’s one of the main concepts within the book. There has been up to $22 trillion worth of subsidization for the financial system, for banks, for the markets, and that hasn’t really produced sustainable growth. Yes, we had in the last quarter in the U.S. growth of more than 4.1%, but that was largely due to the soybean sector, as well as a lot of debt that has been amassed by consumers, which is now nearing another record high.

“The Federal Reserve is supposed to be watching for crises that are building, not ignoring them.”

But over the last 10 years, despite this conjuring of quantitative easing, low rates, and easy money policy by the major central banks in particular, there’s been relatively little sustainable growth. Certainly not more than 2% for any one year in any major economy in the last 10 years. Certainly not with respect to wages. There has been growth in debt, there has been growth in stock markets, and there has been growth in the health of banks because they receive this money. But it has not necessarily been in a sustainable manner for the true productive economy.

Knowledge@Wharton: That theme comes through in every part of the book because the chapters are broken down by country — you talk about Mexico, Brazil, China, Europe, Japan. You call the central banks “money conjurers” and say the results are economies that look healthy on the surface, but the foundation underneath is rotting. Can you talk more about that?

Prins: We see that from some of the volatility in the market. We see that from looking into some of those countries that I go through in the book. I call them “pivot countries” because some are more on the emerging market side and some are part of the G7. And some, like China, have entered the superpower status from an economic and geopolitical perspective in these last 10 years as a result of how some of this money was conjured by their central bank, as well as the other major G7 central banks.

The fact is that there is a direct correlation and causation, so there is a straight line between the amount of quantitative easing or asset buying that was conducted. I use the term “collusion” as the title of the book because the Feds required — or sort of colluded — with some of the other major G7 banks to keep this policy going globally, relative to the stock markets in these individual countries. And the money that was manufactured or conjured largely went into purchasing different kinds of asset or debt in the different areas, depending on what the needs were.

For example, in the United States, the Fed at its height conjured $4.5 trillion in order to purchase two things. [One is] U.S. government debt from the banks, because they are the major brokers of that government debt in general. So, the Fed provided them money in return for those bonds to come from the Treasury Department to the banks — and back to the Fed. The other thing is $1.75 trillion, as part of that $4.5 trillion, of buying mortgage-related assets. Mortgages were at the crux of the financial crisis 10 years ago, as were manifestations of mortgages throughout various [kinds of] engineering of the banks that were involved.

As a result, banks were able to receive money in return for effectively rotting assets. And as a result of that, those assets could be valued higher than they actually should have been because you have the source, the Fed, buying them. You have demand, you have a source. Therefore, other assets, besides the ones that are bought at a higher level than they should be, also get to be marked higher. There was a lot of finagling from that perspective.

Taking that globally, quantitative easing in Japan looked like purchasing exchange-traded funds (ETFs). More money was going into the stock of companies that the Bank of Japan and the Japanese government deemed worthy, which were generally the bigger companies in the country. Within Europe, the European Central Bank did the same thing and predominantly bought government debt as well as corporate bonds of the bigger companies they deemed worthy of having that subsidy.

What that resulted in was more inequality from the standpoint of corporate debt; emerging market versus developed country debt; stock markets being propelled higher because of money going into them; and, as a result of money being rendered so cheap, the interest payments on debt being so low and government securities being so low that stocks were the best place to invest. They continue to be the best place because this policy actually continues. And that propelled a bubble in the stock markets throughout those nations.

Knowledge@Wharton: Right now, the U.S. economy is doing great by virtually any yardstick. Unemployment is near a two-decade low. The stock market is strong and has been setting records recently. Corporate profits are at record highs. But a report from the Urban Institute finds that almost half of Americans are having trouble paying for basic needs such as food and housing. Are those underlying problems part of what you’re trying to highlight in the book?

Prins: That’s right. That unevenness, that inequality economically, financially, asset-wise, is pervasive. The household debt in the country is extremely high. It was at the same level in the last quarter relative to how it had been before the financial crisis hit. Except then, household debt had a bit more of a weighting towards actual homes. Now it’s more credit card debt, auto loan debt, student loan debt and so forth.

Citizens are having to borrow to meet those costs. And when you’re borrowing to meet those costs, it’s temporary borrowing. That temporary borrowing could extend for a while, but the reality is that it’s requiring extra money to come in to make ends meet.

“The central bankers don’t have a true exit plan because it means that markets would implode.”

At the top end, about 10% of Americans own 85% of the stock market. So, the participation rate in what has increased the most over these 10 years — stock levels — is actually quite low throughout the country. The companies that have been able to borrow cheaply and purchase their own stock, for example, or to buy back their own shares in record amounts, look better.

They’ve had the benefit of cheaper money coming in because rates have been so low, and the benefit of being able to utilize that money into their own shares, which propels their shares up, which makes them look better, which makes their participation in GDP look better. However, all of those people who are not involved in the stock market, as well as those people who are borrowing and living paycheck to paycheck, whose benefits aren’t as secure, are the ones struggling.

This is a situation that exists in many countries throughout the world because of the outpouring of money that central banks have created and brought into only a fraction of the markets and of people and of companies. It’s also in the relationship between emerging market countries and the developed countries.

What’s made that relationship more unequal is that money has gone zooming out to find places to invest. Because with rates low, investors go into the stock market, into emerging markets, into riskier corporates and so forth to find that return. Emerging markets have been a recipient of this over the last 10 years. But the downside of being a recipient is that money goes out, too.

Knowledge@Wharton: That’s the so-called “hot money,” right?

Prins: That’s exactly right – it’s literally hot. You take your hands off it because you’ll burn them, and you do that quickly. That’s what happens with speculative capital.

Knowledge@Wharton: How do you view the actions taken at that time by then-Fed Chairman Ben Bernanke, and Mario Draghi, president of the European Central Bank?

Prins: That was where the collusion happened. If we go back 10 years ago … the Fed did not have enough wherewithal — because the financial crisis in the banking community was so much worse than was even recorded — to simply plug those gaps and help just the U.S. banks and leave it alone. It required other major central banks to collude, to work together in order to precipitate the same quantitative easing and cheap money atmosphere throughout the world.

In some of the earlier statements he was making in Congress and so forth, (Bernanke) tried very quickly to move away from the cause of the financial crisis being the U.S. financial system, over which the Federal Reserve is supposed to have regulatory authority. It’s supposed to be watching for crises that are building, not sort of ignoring them. He tried to very quickly push the idea that there was a global crisis that was somehow independent of the financial crisis that had been caused predominantly by U.S. banks.

Why was it caused by U.S. banks? Because they were the ones who largely manufactured the mortgage-related or toxic assets leading up to the financial crisis. They produced them in the highest quantity, and they distributed and sold them throughout the world in the highest quantity. They lent money to buyers, to communities, to municipalities and so forth throughout the world in order to buy and continue to buy these assets as they were deteriorating. They caused the financial crisis.

Bernanke tried to walk that back and say, “Well, maybe we did, but we fixed it. And look at Mexico. They’re hemorrhaging. You know, China’s not doing great things.” He tried to defuse the role that the Fed had played. The only way he could do that monetarily, beneath those speeches, was to require the rest of the central banking community to produce or conjure record amounts of money as well.

That kept the cost of money globally — which it still is — at about 0%. Even now, with the Fed raising rates, they still have a situation where the European central banks have negative rates and the Bank of Japan has negative rates. Net-net, nothing has changed in the world. They are still propelling this same policy forward on a global basis.

“Quantitative easing has globally continued to rise.”

Knowledge@Wharton: There are two other important points you make in the book. One is that banks were given all that money but failed to provide loans to small and medium-sized businesses that help the economy. Second, keeping interest rates so low hurt retirees and pensioners who depend on interest rates to fund their retirement. That’s partly why there’s a looming $4.4 trillion shortfall in the public pension systems.

Prins: That $4.4 trillion is just the national figure. If you expand that globally, all our economies and markets are interconnected, so it becomes significantly higher. The result was pension funds — or long-term life insurance-type of investments — trying to compete with cheap money when they used to invest in government bonds that had higher rates and were more secure than corporate bonds.

There’s more risk in terms of any individual corporation or the stock market. Yes, the stock market has gone higher over these years. That’s because a lot of money has been artificially created, which has enabled it to continue to go higher. Because of both of those factors, the rates that retirees were used to getting aren’t there anymore.

As a result, a lot of these pension funds and so forth have had to increase their holdings in the stock market — which is another reason why it is higher — in order to even keep up with these shortfalls, instead of doing it in a more secure manner that was more historic and legacy to pension funds.

That’s a problem because not only is that also a ticking time bomb, but what if the markets do go down, what if there is a reversal of policy? Rates are still zero throughout the world. The central bankers don’t have a true exit plan because it means that markets would implode, and that would be another source of real pain for pensioners.

“Net-net, nothing has changed in the world.”

Knowledge@Wharton: You talk about the high risk of another major financial crisis, which will be difficult to recover from because we haven’t fully recovered from this one. What could trigger it? What can be done to prevent it?

Prins: When I was asked this question a number of years ago, I used to somewhat believe some of the leaders of these central banks who were saying they will stop quantitative easing, that we’ll gradually shift into something else. Mario Draghi was famous for saying, “We’re going to stop this policy in the middle of 2016. No, we’re going to stop in 2017. We’re reducing the amount of purchasing we’re doing each month, but we’re extending the lengths of months through which we’re purchasing.” There were all these bits of illusions that boiled down to, “We’re going to continue doing what we’re doing because we have no choice.”

Quantitative easing has globally continued to rise. It was down a little bit last month. But for the most part, even as the Fed had stopped purchasing assets, the rest of the major central banks have increased their purchasing. Now, there’s a higher global quantitative easing, and a same average interest rate, that continues to propel the illusion to an extent of health economically.

The reality of financial assets like the stock market continuing to reach new heights, particularly in the U.S. — that’s where these wrinkles are going to start to show in a more pronounced way. There are problems, for example, in Turkey, Argentina, in the Latin American emerging markets. And all of these problems start to create wrinkles or splinters.

When does that stop? It’s a situation, like in any liquidity crisis, where money starts to be afraid of going places; it starts to return to home base. We’re seeing that with respect to money coming out of emerging markets and into the U.S. That becomes real money for the economies. For speculators, it’s just moving stuff around. But when it starts to come out of stock markets in order to make up for the shortfalls that now corporations might show or pensioners might need, it starts to deflate.

The Fed is talking about raising rates and selling some of their assets, which they’ve done slowly because they know the reality is that if you sell too many assets off of the Fed’s book, bonds start to deflate. That starts to cause money to come out of the stock market. So, they’re being very careful. As a result, it won’t look like a crisis for a while.