The decision of the European Central Bank to keep interest rates during 2017 in the Eurozone under their historical minimum, with the key reference rate at zero, as well as to leave their substantial public and private debts accumulated since 2015 operational was followed by this institution’s decision to leave the marginal lending rate at 0.25 percent, allowing banks to borrow for 24 hours.

The central financial institution of the United States, the Federal Reserve, directs global finance, as well as a significant portion of the global economy. This is the reason why financial markets worldwide seemingly reflect unreservedly qualified prices, as they are entirely under the Fed’s control.

The highest position in the Fed’s regulatory system is the way it controls access to the American dollar, as currency is nothing more than credit. Therefore, money has become nothing more than an additional alarming factor in the flow. In processes such as these, ready money is guaranteed by the government, while credit is guaranteed by the banks. Hence, the Fed regulates the price of credit by setting the policy rate, and banks, Wall Street, and financial markets depend on these proceedings.

The regulations of the Dodd-Frank Act have altered their way of functioning, resulting in certain very specific changes. The Dodd-Frank Act, adopted after the 2008 financial crisis, aims to enforce capital inflow and annual stress tests on large banks. These tests are conducted to prevent risks to the global financial system by ensuring that these banks can withstand financial shocks. However, this act is currently under disapproval from the new American administration, which condemns the banking business guidelines it imposes.

President of the U.S., Donald Trump, stated that he hopes his administration will significantly reduce Dodd-Frank’s regulations because “some of his friends with beautiful companies cannot borrow money”. He explained that banks do not want to lend them money “because of the rules of the Dodd-Frank law”.

The entire process represents a significant challenge. Although the current administration does not have a strong stance on many of these issues, apart from trade and overcoming the Dodd-Frank Act on financial regulation, there is still a chance to achieve a compromise. The Dodd-Frank Act, on the contrary, provides a comprehensive framework that allows the Securities Exchange Commission and its commodity equivalent, the Commodity Futures Trading Commission, to assume responsibility for these financial instruments.

Since Trump became president and began talking about deregulation, the shares of the six major banks saw their prices rise by more than a third, led by the Bank of America with a spectacular 48.8% increase in one quarter. The exceptional debt of U.S. non-financial corporations rose to more than 13 trillion dollars, including around $3 trillion in debt since this act was passed in July 2010, though not all of it comes from bank loans.

As the Fed has trimmed interest rates to zero, the cost of borrowing has become extremely low in the capital markets. This situation encourages the use of ready money available. However, even if some of these debts come from the bond market, the guarantee of the debt itself is often controlled by the biggest banks.

There are several things that occurred this month that lead to wrong conclusions regarding plans of Trump’s administration. It does not act like a nation-state and is unwilling to correct its own mistakes, creating an apprehension of huge self-destruction. There is also a fear that, as is the case in many other developed countries, the middle class will be further downgraded, especially because growth is based on indebtedness. Thus, only credit sellers see the benefits of such “potential” where thousands of billions have been unsuccessfully redistributed.

From the Fed’s standpoint, there is a change in approach where, instead of using speed-up tools to stimulate the economy, they now let it step up, limiting it to the point where it completely holds up the accelerator. This practice still allows a sufficient amount of control, as well as the possibility to exploit market potential to strengthen the financial sector rather than truly stimulating growth. It is yet unclear at what phase of this process the American economy is at the moment, but it unquestionably took one more step towards the ultimate devastation when it started to practice Quantitative Easing programs and everything that was later meant to be the substitute.

The situation after those programs ended was led with a fictive increase in interest rates, which has caused even more confusion since the lower the rate, the more credit is available, while at times of higher rates, less ready money is available, allowing only banks to recover. These credits were primarily given to institutions significant for Fed’s success, combining the policies of the U.S. government and the leading banks, who then redistribute it to their partners at higher or lower prices, such as multinational corporations with top credit ratings, oil producers, other banks, and other governments, etc.

In a situation where Congress is not in a position to balance the budget or cut spending substantially, it is not even possible for the Fed to let monetary policy return to standard, since a huge amount of artificial credit facilitated by this monetary system flooded all tools of regulations, making them dysfunctional. Years of development of a financial system as such allowed cheap credit to go first to those with debt capabilities, such as the richest subjects, big corporations, and Wall Street magnates, instead of to those whose wealth stimulates spending, i.e. consumers. Since an average worker gives one hour of their limited time, where only 25 dollars could be brought, while a Wall Street insider could get unlimited credit at a price that is under the actual rate of inflation.

A huge concentration of these credits made them become bad debts which have a significant reflection on the Fed’s balance sheet. To solve that problem, there is a thought that they should be put back on the market, which created a remarkable concern since the collection of credit up to that point grew relatively fast. In the situation where the Fed revisits debt selling, it continues in return for the money, and therefore the amount of credit or currency diminishes instead of growing constantly. By doing so, the Fed risks the explosion of the bond bubble, as there will be fewer buyers for bonds so rates will go up.

One of the key arguments that Trump’s administration suggests is withdrawing all or part of the Dodd-Frank Act, besides the fact that it was created by the administration of Barack Obama is that it reduces bank loans. For the current American administration, this represents an obstacle to economic recovery. According to the Fed, all loans and leases over the last three years granted by US banks increased by 6.9 percent each year, while during seven years before the crisis, that rate was 7.9 percent. The central U.S. financial institution still preserves the option to restore a possibility for monetary discourse, indirectly showing that it will never take a chance of disturbing the markets.

There are several implications of such policies on the current financial policies of the U.S. that reflect on other central banks worldwide. One implication is that banks lent the companies about 80 billion dollars every year, where corporations had approximately two billion dollars of ready money that they could use to expand employment or growth. However, instead, they borrowed larger amounts of money than ever to convert their shares or to reimburse dividends. During this process, companies supported by banks disfigured the market equity by not allowing it to boost through actual investment or reasonable assessment of their companies.

Conditionally, and if the Fed keeps on with these policies, the equity markets will witness distractions, since there are many cases where trading items have seen an upward march. While reforms and major investments are slow to occur, they could take the threats very seriously. There is also a fear about the decline of many debt-dependent economies, keeping in mind that central banks have established themselves as major consumers of all kinds of bonds, but also as backers of available credit, both for the business sector and for governments. So, if they give up this position, the whole situation will be very difficult.

Besides that, banks involved in this process are mandatory to maintain an assured quantity of reserve requirements with the Fed. Having in mind that the quantity of reserves deposited with the central bank of the U.S. was close to the required reserves, but since the 2008 crisis, the amount of reserves overload deposited has reduced and it now stands at around two billion dollars. This means that it is not the Fed regulations on minimum reserves that bound bank lending, but that those are the banks that are limiting themselves because they fear future defaults.

This means that the Fed no longer performs quantitative easing officially in terms of not printing money to buy Treasury bills. However in reality, when a requirement it holds matures, they are buying another to roll the debt. Therefore, the Fed can reduce its financial statement, since its balance sheet would be subject to easier regulation. For the current U.S. administration, that is not a satisfying outlook because the Fed was certainly a shock absorber regarding its purchase of Treasury bills at times when the government became dependent on borrowing.

Another thing is that Fed figures demonstrate that business lending action has been stronger than it was supposed to be and that is why it is beginning to weaken. There was an immense credit spreading-out cycle with low-priced money created by central banks and ultra-accommodative monetary policies. However, the failures to pay and complexities in the credit sector were increasing.

At this moment, it is Trump’s administration that could relieve tension by transferring supremacy and money from one section to another. This, of course, would not be sufficient to change the system, and neither the Congress nor the Fed could stop the credit cycle at this moment. Unlike actual money, borrowed money is subject to the credit cycle that causes its boosts and falls. At times when the reduction is acceptable, the whole system is under threat.

This article is part of the academic publication Dividing by Zero by Ana Nives Radovic, Global Knowledge 2018