Spitfire List Web site and blog of anti-fascist researcher and radio personality Dave Emory.

News & Supplemental  

The New World Ordoliberalism Part 4: Meet the New Plan. Same as the Old Plan. Deregulated.

There have been quite a few devel­op­ments in the euro­zone recent­ly with major pos­si­ble pol­i­cy changes announced in recent weeks. But per­haps the most sig­nif­i­cant devel­op­ment is that the world has final­ly dis­cov­ered what it takes to open Bun­des­bank chief Jens Wei­d­man­n’s mind up to the pos­si­bil­i­ty of allow­ing the Euro­pean Cen­tral Bank (ECB) to do what oth­er cen­tral banks around the world nor­mal­ly do dur­ing an emer­gency. Things like buy­ing bonds to shore up mar­kets and stim­u­late the econ­o­my (“quan­ti­ta­tive eas­ing”). Quan­ti­ta­tive eas­ing is nor­mal cen­tral bank stuff that has been effec­tive­ly shoved off the table of ECB pol­i­cy options by the Bun­des­bank’s unortho­dox eco­nom­ic the­o­ries this entire time. At least up until now.

Some­thing changed in the euro­zone that end­ed up chang­ing the Bun­des­bank’s mind too: The inevitable hap­pened. That deep dark defla­tion­ary abyss that’s been threat­en­ing to gob­ble up the euro­zone ‘periph­ery’ nations like Greece and Spain is start­ing to threat­en the euro­zone ‘core’:

The Tele­graph
Monks recant: Bun­des­bank opens the door to QE blitz

By Ambrose Evans-Pritchard Eco­nom­ics Last updat­ed: March 25th, 2014

The last bas­tion is tum­bling. Even the ven­er­a­ble Bun­des­bank is edg­ing crab­like towards quan­ti­ta­tive eas­ing.

It seems that tum­bling infla­tion in Ger­many itself has at last shak­en the mon­e­tary priest­hood out of its ide­o­log­i­cal cer­tain­ties.

Or put anoth­er way, the Pfen­nig has dropped that euroland is just one Chi­nese shock away from a defla­tion trap, an out­come that would play hav­oc with the debt dynam­ics of south­ern Europe, ren­der the euro unwork­able, and ulti­mate­ly inflict mas­sive dam­age on Ger­many.

Bun­des­bank chief Jens Wei­d­mann was not exact­ly pant­i­ng for QE in com­ments to Mar­ket News pub­lished this morn­ing, it has to be said, but the tone marks a clear shift in pol­i­cy.

“The uncon­ven­tion­al mea­sures under con­sid­er­a­tion are large­ly unchart­ed ter­ri­to­ry. This means that we need a dis­cus­sion about their effec­tive­ness and also about their costs and side­ef­fects”, he said.

Notice that Jens Wei­d­mann was not “exact­ly pant­i­ng for QE”. The Bun­des­bank is sig­nalling that it’s con­sid­er­ing quan­ti­ta­tive eas­ing (QE). It’s like promis­ing to try to try.


“This does not mean that a QE pro­gramme is gen­er­al­ly out of the ques­tion. But we have to ensure that the pro­hi­bi­tion of mon­e­tary financ­ing is respect­ed”.

At least we can put to rest the bogus argu­ment that EU Treaty law (Arti­cle 123) pro­hibits QE by the Euro­pean Cen­tral Bank. This claim was always a smoke­screen.

Bond pur­chas­es are what used to be known as open mar­ket oper­a­tions, a tool of cen­tral banks dat­ing back into the mist of mon­e­tary his­to­ry. Pur­chas­ing bonds across the board (not just the bonds of insol­vent states) is a plain vanil­la liq­uid­i­ty man­age­ment tool.


When Ambrose Evans-Pritchard says “At least we can put to rest the bogus argu­ment that EU Treaty law (Arti­cle 123) pro­hibits QE by the Euro­pean Cen­tral Bank. This claim was always a smoke­screen”, keep in mind that this appar­ent­ly EU Treaty law that pro­hibits the ECB from engag­ing in QE is due to the argu­ment that the EU treaty pre­vents the ECB from ever help­ing to finance a mem­ber nation’s gov­ern­ment. So if the ECB bought Span­ish bonds direct­ly from the gov­ern­ment in very large amounts over an extend­ed peri­od (which could be nec­es­sary for a real stim­u­lus pro­gram for a large coun­try like Spain), that could be seen as help­ing Spain finance itself and the Bun­des­bank has con­sis­tent­ly argue that this would vio­late the EU treaty. That’s a cen­tral argu­ment that’s con­sis­tent­ly been used to explain­ing why “QE” can nev­er be used even when defla­tion threat­ens the the region. Although now that the ‘core’ nations are threat­ened with out­right defla­tion that oppo­si­tion is chang­ing. Maybe.


Mr Wei­d­mann says he prefers neg­a­tive inter­est rates as the first resort. This is an admis­sion that the ECB is alarmed by the strength of the euro as it hov­ers near the pain bar­ri­er of $1.40, since neg­a­tive rates are a sure-fire way to dri­ve down the cur­ren­cy.

If you want­ed to counter the con­se­quences of a strong appre­ci­a­tion of the euro for the infla­tion out­look, neg­a­tive rates would, how­ev­er, appear to be a more appro­pri­ate mea­sure than oth­ers”, he said. Quite so.


Make a men­tal note of this last state­ment by Wei­d­mann:
If you want­ed to counter the con­se­quences of a strong appre­ci­a­tion of the euro for the infla­tion out­look, neg­a­tive rates would, how­ev­er, appear to be a more appro­pri­ate mea­sure than oth­ers.

He’s not refer­ring to the nor­mal ECB “refi” rate going neg­a­tive. That rate is being held at 0.25%. Wei­d­mann was refer­ring to the ‘overnight’ rate, or how much the ECB pays banks to park cash at the bank overnight. When cen­tral banks want more lend­ing they tend to low­er the ‘overnight’ rate to encour­age banks to park less at the cen­tral bank and vice ver­sa when cred­it con­di­tions needs to be tight­ened. Neg­a­tive inter­est rates, how­ev­er, are very dif­fer­ent in that the banks are now pay­ing the ECB to park assets there. This is some­thing the ECB would only do when it real­ly wants banks to take their assets back from the ECB and use them to instead lend to the econ­o­my.

It’s also some­thing the ECB might do if it wants to do “some­thing” with­out actu­al­ly doing quan­ti­ta­tive eas­ing (QE). So before we see any QE from the ECB, we should prob­a­bly expect a peri­od of neg­a­tive overnight rates and “let’s wait and see”. That’s what Wei­d­mann was sug­gest­ing.


The IMF’s Chris­tine Lagarde says the defla­tion risk in Europe may be as high as 20pc, which is remark­able giv­en how much dam­age it would do. Indeed, as one IMF paper explains, the trou­ble is already enor­mous even at ultra-low lev­els of infla­tion.

We all know what could push Europe over the edge. Chi­na invest­ed $5 tril­lion in fixed cap­i­tal last year – as much as the US and Europe com­bined – cre­at­ing a fur­ther over­hang of excess capac­i­ty in the world econ­o­my. This is send­ing a defla­tion­ary impulse into Europe, the more so since Chi­na has deval­ued the yuan by 2pc this year.


It is an inter­est­ing ques­tion whether the Bun­des­bank can eas­i­ly back QE after the Ger­man con­sti­tu­tion­al court ruled last month in impe­ri­ous lan­guage that the ECB’s bond res­cue plan for Italy and Spain (OMT) is prob­a­bly “Ultra Vires”.

It stat­ed that the OMT “exceeds the ECB’s mon­e­tary pol­i­cy man­date, infringes the pow­ers of the Mem­ber States, and vio­lates the pro­hi­bi­tion of mon­e­tary financ­ing of the bud­get”.

The rul­ing does not pro­hib­it ECB bond pur­chas­es as such – and is not final in any case – but it rais­es the polit­i­cal bar for quan­ti­ta­tive eas­ing to a near impos­si­ble lev­el.

The irony is that the Bundesbank’s Mr Wei­d­mann is him­self respon­si­ble for the feroc­i­ty of the Court’s rul­ing. It was he who tes­ti­fied so tren­chant­ly – though polite­ly, as always – against the ECB’s poli­cies at the Court hear­ings.

Will he now be hoist­ed by his own petard?

Yes, the Bun­des­bank is open to “QE” options now that it’s on the edge of the abyss, although before it goes down that road, neg­a­tive ‘overnight’ rates should be tried first. At least that’s the course for the ECB the head of the Bun­des­bank was sug­gest­ing.

Still, this is pret­ty big news, although, as the arti­cle points out at the end, Ger­many’s con­sti­tu­tion­al court hint­ed that it thinks the use OMTs (“Out­right Mon­e­tary Trans­ac­tions”, i.e. bond buy­ing for quan­ti­ta­tive eas­ing) is prob­a­bly uncon­sti­tu­tion­al. So even if the Bun­des­bank real­ly is open to the idea of QE, the Ger­man con­sti­tu­tion­al court isn’t (and the Bun­des­bank clear­ly isn’t thrilled about the idea either). So it’s good news that QE is being con­sid­ered by the Bun­des­bank, but giv­en all the caveats we’re hear­ing it’s about as bad as good news gets. When your poli­cies involve play­ing ‘Chick­en’ with the abyss, the ol’ “baby, we won’t be so crazy”-“two steps(back from the brink)”-“maybe” pol­i­cy shuf­fle is a com­mon tune to hear a cen­tral banker sud­den­ly start whistling. It’s time­less because it keeps chang­ing and yet always sticks to the same theme.

High Times for the euro­zone. Depress­ing­ly High Exchange Rate Times
So the defla­tion­ary abyss is still threat­en­ing to con­sume the euro­zone, but on top of that, the euro’s exchange rate has also been surg­ing and is remain­ing at a con­sis­ten­ty unhelp­ful­ly high rate that threat­ens the very export-led recov­er that the euro­zone ‘periph­ery’ nations need to drag them­selves out of the abyss. When QE is tak­en off the table, exports are about the only real option left. And you can’t count on exports to stim­u­late the econ­o­my when the cur­ren­cy keeps ris­ing:

Draghi says a stronger euro would trig­ger loos­er ECB pol­i­cy

By Jan Strupczews­ki and Krista Hugh­es

WASHINGTON Sat Apr 12, 2014 4:54pm EDT

(Reuters) — The Euro­pean Cen­tral Bank will ease mon­e­tary pol­i­cy fur­ther if the euro keeps strength­en­ing, Pres­i­dent Mario Draghi said on Sat­ur­day as world finance chiefs ramped up pres­sure on Europe to ward off defla­tion.

In the clear­est sig­nal yet the ECB was pre­pared to launch a stim­u­la­tive asset-pur­chase pro­gram, Draghi said the euro’s exchange rate had become increas­ing­ly impor­tant to pol­i­cy and would act as a trig­ger.

“The strength­en­ing of the exchange rate would require fur­ther mon­e­tary pol­i­cy accom­mo­da­tion. If you want pol­i­cy to remain as accom­moda­tive as now, a fur­ther strength­en­ing of the exchange rate would require fur­ther stim­u­lus,” he told a news con­fer­ence.


Over the past 12 months, the euro has strength­ened by near­ly 5.5 per­cent against the dol­lar and by near­ly 10 per­cent against the yen. In recent weeks, it has reached lev­els against the dol­lar not seen since late 2011. It end­ed last week at just below $1.39.

Draghi said on Sat­ur­day that euro appre­ci­a­tion over the last year was an impor­tant fac­tor in bring­ing infla­tion in the cur­ren­cy bloc down to its cur­rent low lev­els, account­ing for as much as a half per­cent­age point of the decline in the annu­al rate, which stood at only 0.5 per­cent year-on-year in March. The ECB aims to keep infla­tion close to but under 2 per­cent.

I have always said that the exchange rate is not a pol­i­cy tar­get, but it is impor­tant for price sta­bil­i­ty and growth,” Draghi said. “What has hap­pened over the last few months is that it has become more and more impor­tant for price sta­bil­i­ty.

Here’s a trans­la­tion for this gem from ECB chief Mario Draghi:
I have always said that the exchange rate is not a pol­i­cy tar­get, but it is impor­tant for price sta­bil­i­ty and growth” =
“I rec­og­nize that an appre­ci­at­ing exchange rate is both increas­ing the risk of defla­tion and harm­ing the economies that have been rav­aged by aus­ter­i­ty and need to export their way of the eco­nom­ic dol­drums”.

And “What has hap­pened over the last few months is that it has become more and more impor­tant for price sta­bil­i­ty.” =
“But the ECB does­n’t actu­al­ly care about nations being stuck in the dol­drums. What it does care about is main­tain­ing low infla­tion with­out out­right defla­tion(except maybe in Spain). And because there’s now a risk of defla­tion in the euro­zone core, the ECB now cares about the euro’s ris­ing exchange rates”.

That’s basi­cal­ly what he was say­ing in the lan­guage of Cen­tral-Banker-ese. It’s say­ing things that sup­posed to sound kind of dovish, but aren’t actu­al­ly very dovish when you trans­late them.

Also, notice how “Over the past 12 months, the euro has strength­ened by near­ly 5.5 per­cent against the dol­lar and by near­ly 10 per­cent against the yen. In recent weeks, it has reached lev­els against the dol­lar not seen since late 2011. It end­ed last week at just below $1.39″. That’s real­ly not help­ful for coun­try try­ing to pull them­selves up by their exports.


The euro’s recent strength has baf­fled many play­ers in the glob­al cur­ren­cy mar­ket giv­en Europe’s low inter­est rates, tepid growth prospects and near-zero infla­tion. In fact, most cur­ren­cy ana­lysts expect­ed an improv­ing out­look for the U.S. econ­o­my and the wind­ing down of the U.S. Fed­er­al Reserve’s mas­sive stim­u­lus pro­gram to dri­ve the dol­lar up against the euro this year.

Some of the invest­ment flows sup­port­ing the euro are reflect­ed in the strong per­for­mance of sov­er­eign debt from sev­er­al of south­ern Europe’s bailed-out nations, which until recent­ly had fea­tured sub­stan­tial­ly high­er yields. On Thurs­day, for instance, an auc­tion for 3 bil­lion euros of five-year bonds sold by Greece drew more than 20 bil­lion euros in orders.


Quan­ti­ta­tive eas­ing was some­thing pre­vi­ous­ly con­sid­ered high­ly unde­sir­able by some euro zone cen­tral bankers, and only to be con­sid­ered if prices were falling out­right.

But pol­i­cy­mak­ers in recent weeks pub­licly broached cut­ting deposit rates below zero — effec­tive­ly charg­ing banks that hold excess cash at the ECB — or embark­ing on bond pur­chas­es as have the Unit­ed States, Japan and Britain, if the threat of defla­tion became more acute.

Draghi said two things would dri­ve any deci­sion: “One is an unwant­ed tight­en­ing of mon­e­tary finan­cial con­di­tions, and the sec­ond is dete­ri­o­ra­tion of our medi­um term out­look.”

“I don’t want to give you a lev­el where we will act or not. I am giv­ing you an ori­en­ta­tion,” he said of euro strength.


Here’s anoth­er Cen­tral-Banker-ese trans­la­tion:
Draghi said two things would dri­ve any deci­sion: “One is an unwant­ed tight­en­ing of mon­e­tary finan­cial con­di­tions, and the sec­ond is dete­ri­o­ra­tion of our medi­um term out­look.”=
“If we’re going to use ‘Quan­ti­ta­tive Eas­ing’ (bond or asset buy­ing to shore up a mar­ket or asset-class and manip­u­late inter­est rates), it will be because some asset is col­laps­ing and it’s an emer­gency or if it looks like medi­um term defla­tion is like­ly. Things like high unem­ploy­ment don’t real­ly fac­tor into our deci­sion-mak­ing”.

So in the pre­vi­ous Draghi quote had him indi­cat­ing that ‘some­thing’ would be done if the defla­tion specter arose, and then in this quote he seems to be indi­cat­ing ‘medi­um term’ defla­tion is what will get the ‘quan­ti­ta­tive eas­ing’ going. So is short term defla­tion ok? Will a rate cut do the trick? Neg­a­tive ‘overnight’ rates? We’ll see.



In July 2008, the cur­ren­cy’s rise to an all-time high of $1.60 did not trig­ger an ECB response, even though euro zone finance min­is­ters tried to talk down the cur­ren­cy. But infla­tion was near an all-time high at 4 per­cent, serv­ing the ECB’s need to keep price growth in check.


In a rare move for the usu­al­ly soft-spo­ken Japan­ese, Finance Min­is­ter Taro Aso — draw­ing on Japan’s own expe­ri­ence of a pro­tract­ed peri­od of defla­tion — direct­ly warned the euro zone about the dan­gers of falling prices.

“Based on our expe­ri­ence, once a defla­tion­ary mind­set takes hold, it is easy to fall into a vicious cycle, where­by peo­ple start to post­pone con­sump­tion and invest­ment, lead­ing to fur­ther defla­tion­ary pres­sures,” he told the IMF pan­el.

There are strik­ing par­al­lels between 1990s Japan and the euro zone’s plight now: weak bank lend­ing, frag­ile eco­nom­ic growth, a ris­ing exchange rate, and the cen­tral bank’s insis­tence that defla­tion is not on the hori­zon.


Ouch. When Japan is lec­tur­ing your cen­tral bankers about repeat­ing their defla­tion­ary mis­takes your cen­tral bankers have clear­ly already made a large num­ber of defla­tion­ary mis­take. Yes, the self-made tightrope acts that the ECB has cre­at­ed for itself is some­thing to behold. By emu­lat­ing Bun­des­bank-style poli­cies and basi­cal­ly tak­ing “quan­ti­ta­tive eas­ing” off the table (until now, sort of), the ECB has cre­at­ed an unnec­es­sary ten­sion between a falling euro (which is help­ful for the ail­ing euro­zone economies) and the need to shore of the sov­er­eign bond mar­kets of those same ail­ing economies. For­eign bond investors may not be enthused about a depre­ci­at­ing euro in a stag­nant econ­o­my because that might depre­ci­ate their euro-denom­i­nat­ed sov­er­eign bonds and yet a low­er euro is exact­ly what is need to stim­u­late exports.

A Ris­ing Euro is Good For Low Yields. Low Yields Aren’t Nec­es­sary A Good Thing.
If the ECB was a nor­mal major cen­tral bank it could buy sov­er­eign bonds up itself and fight against a falling euro trans­lat­ing into falling bond prices. That’s what quan­ti­ta­tive eas­ing allows, pol­i­cy flex­i­bil­i­ty like buy­ing sov­er­eign bonds to sta­bi­lize that crit­i­cal bond mar­kets. And when you’re a huge bank like the ECB, you have major clout to do that exten­sive­ly. Not doing so is a choice. It’s not man­dat­ed by the mar­kets. But that quan­ti­ta­tive eas­ing option has always been effec­tive­ly off the table ever since the finan­cial cri­sis start­ed. And then we get sto­ries like this:

Bloomberg Busi­ness­week
Low Bond Yields in Europe Could Sig­nal Defla­tion
By Peter Coy, Craig Stir­ling, and Mark Deen April 10, 2014

News flash: Spain is now able to bor­row almost as cheap­ly as the U.S. Yes, Spain, a nation with 26 per­cent unem­ploy­ment, red ink in the nation­al bud­get, and an econ­o­my that has shrunk in 17 of the last 23 quar­ters, has five-year gov­ern­ment bond yields of just over 1.7 per­cent. Italy’s bor­row­ing cost is only un po’ più ele­va­to. Even Por­tu­gal has a gov­ern­ment bond yield mere­ly a per­cent­age point high­er than that of the U.S.

Now for the aster­isk, because things are nev­er sim­ple in Europe. It’s unques­tion­ably good that the periph­er­al nations of Europe have stepped back from the brink of default, embold­en­ing investors to accept low­er yields on their gov­ern­ment bonds. The prob­lem is that the very aus­ter­i­ty mea­sures that less­ened the risk of default may have con­tributed to a new dan­ger in Europe: defla­tion. To use a metaphor from Greece, whose gov­ern­ment bor­row­ing costs have also plunged, Europe man­aged to steer clear of the rocks of Scyl­la only to head for the whirlpool of Charyb­dis.

It’s not real­ly the case that the aus­ter­i­ty mea­sures “less­ened the risk of default” as described above. They exac­er­bat­ed the sit­u­a­tion by send­ing the economies into depres­sions. The par­tic­u­lars var­ied by nation, but when “default” was an issue, it gen­er­al­ly involved bail­ing out some big domes­tic banks which were typ­i­cal­ly ail­ing due to the impact of aus­ter­i­ty and the plum­met­ing val­ue of the sov­er­eign bonds the banks held. This bank bailouts would in turn allow them to buy sov­er­eign bonds and keep the sov­er­eign bond mar­ket from com­plete­ly col­laps­ing. But it came at the cost of the ‘Troi­ka’ com­ing in and impos­ing aus­ter­i­ty to pay for the bank bailouts. And the cycle would begin anew.

The ECB also start­ed buy­ing sov­er­eign bonds on the sec­ondary mar­kets in order to sta­bi­lize the sit­u­a­tion in 2010, although these have been only large enough to keep crises con­tained.

Anoth­er impor­tant turn­ing point that helped avoid default in was Draghi’s intro­duc­tion of the pos­si­bil­i­ty of unlim­it­ed bond buy­ing back in Sep­tem­ber 2012. This was dur­ing one of the pre­vi­ous peri­ods of cri­sis when it looked like Spain was going to implode. Because the bond mar­kets actu­al­ly want the ECB to act like a nor­mal cen­tral bank — and not the weird Ordolib­er­al exper­i­ment that it actu­al­ly is — the impact of that yet-unful­filled promise to buy bonds direct­ly was mut­ed by the real world impact of the aus­ter­i­ty mea­sures. But it helped. Promis­es to help (with­out actu­al help) can some­times still help. Espe­cial­ly when you’re a cen­tral bank.

The ris­ing val­ue of the euro has also clear­ly helped deflate con­cerns over defaults because investors that bought the “periph­ery” bonds have been mak­ing out like ban­dits this year. And it’s the ris­ing euro that’s been a big part of that ral­ly. And, of course, mar­ket expec­ta­tions that Draghi will final­ly be forced to do quan­ti­ta­tive eas­ing — because all of the poli­cies so far have push the euro­zone to the brink of defla­tion — have also been fuel­ing the strong bond ral­ly all year. The bond ral­ly is root­ed in expec­ta­tion that things are only going to get worse and the ECB will be forced to act.

And then there were the three-year “LTRO” loans the ECB made to euro­zone banks in 2011 and 2012 that help pump over $1 tril­lion euros into the finan­cial sys­tem while aus­ter­i­ty poli­cies remained in place. The banks swapped col­lat­er­al, like asset-backed secu­ri­ties, with the ECB for fresh cash. As we’ll dis­cuss lat­er, in June of 2012, the rules for that col­lat­er­al were dra­mat­i­cal­ly relaxed to allow for tox­ic asset-backed secu­ri­ties (like mort­gage backed secu­ri­ties or auto loans or pos­si­bly cor­po­rate debt) to get swapped for cash. So that was cer­tain­ly help­ful, although most­ly to the banks.

The aus­ter­i­ty mea­sures did help in the tech­ni­cal sense that they dra­mat­i­cal­ly reduced gov­ern­ment spend­ing. But that suc­cess­ful inter­ven­tion in sov­er­eign bond mar­kets came at the cost of blud­geon­ing the economies and gut­ting their long term poten­tial. That’s why we have record high unem­ploy­ment in the ‘periph­ery’ with still very high debt lev­els and record low sov­er­eign bond yields.

Over­all, the ECB’s toolk­it for emer­gency respons­es to a cri­sis is sim­ply to wait for a cri­sis to erupt in a coun­try’s sov­er­eign bond mar­kets, which will man­i­fest as a big domes­tic bank implod­ing or some­thing, and then bail out the bank, inter­vene in the mar­kets just enough to avoid a larg­er cri­sis, and impose aus­ter­i­ty to pay for it. That’s basi­cal­ly the ECB’s pol­i­cy response: be reac­tionary, wait for a cri­sis, inter­vene in the bonds mar­kets and banks, and then aus­ter­i­ty. Proac­tive stim­u­lus is always off the table.

This is the kind of pol­i­cy you get when you pur­sue the Bun­des­bank’s gold-stan­dard-lite ambi­tions in your eco­nom­ic union. A bunch of bankers get rich and the gold­en goose gets trau­ma­tized. Mind­less aus­ter­i­ty does­n’t help.


Past a cer­tain point, falling inter­est rates go from being help­ful to a lit­tle scary. An extreme­ly low inter­est rate can sig­nal that investors have no faith in a country’s abil­i­ty to grow on its own and that they expect cen­tral banks to keep offi­cial rates super low for a long time to gin up eco­nom­ic activ­i­ty. One thing that con­tin­ues to depress Euro­pean economies is fis­cal pol­i­cy: the com­bi­na­tion of spend­ing cuts and tax increas­es that helped gov­ern­ments prove they were seri­ous about bal­anc­ing bud­gets and win­ning back investors’ con­fi­dence.

The debate over whether Europe’s aus­ter­i­ty was too harsh may nev­er be set­tled, but it’s clear that the euro zone as a whole hasn’t been able to climb out of its rut. Its infla­tion rate slowed to 0.5 per­cent in March, the low­est lev­el in more than four years. That’s well below the Euro­pean Cen­tral Bank’s infla­tion goal of just below 2 per­cent. In Japan, cycles of econ­o­my­wide price declines known as defla­tion have been endem­ic since 1990. When prices fall, debt bur­dens become heav­ier, and com­pa­nies and con­sumers are afraid to bor­row. Low inter­est rates on gov­ern­ment bonds don’t help. “The euro zone faces a creep­ing dan­ger: the risk that allow­ing infla­tion to run so far below the ECB’s own def­i­n­i­tion of price sta­bil­i­ty for so long will even­tu­al­ly top­ple the mon­e­tary union into out­right defla­tion,” wrote Janet Hen­ry, chief Euro­pean econ­o­mist of HSBC (HSBC), in a note to clients on April 7.

Regard­ing the state­ment “The debate over whether Europe’s aus­ter­i­ty was too harsh may nev­er be set­tled, but it’s clear that the euro zone as a whole hasn’t been able to climb out of its rut”, a major rea­son the debate over whether or not Europe’s aus­ter­i­ty was too harsh may nev­er be set­tled is because the debate over Europe’s aus­ter­i­ty is in a rut. An undead rut. That’s why the debate nev­er ends and why Paul Krug­mans columns on the euro­zone have become so time­less. The sit­u­a­tion nev­er seems to change!


In France, five-year gov­ern­ment bor­row­ing costs are 0.9 per­cent, which is well into dan­ger­ous ter­ri­to­ry. French Pres­i­dent François Hol­lande is try­ing to get per­mis­sion from the Euro­pean Union to slow the country’s deficit-reduc­tion effort, which he believes is part­ly respon­si­ble for France’s eco­nom­ic weak­ness. The coun­try hasn’t had growth of 1 per­cent or bet­ter since 2011. He dis­patched two min­is­ters to seek the sup­port of their Ger­man coun­ter­parts on April 7.

Note that France has a 0.9% bor­row­ing cost and has­n’t grown more than 1% since 2011 and it has to go to Ger­many to get EU per­mis­sion to engage in stim­u­lus spend­ing instead of just using record low bor­row­ing rates to stim­u­late its econ­o­my? That’s kind of messed up.


Inter­est rates fall when the demand for fund­ing is weak because of a big “out­put gap,” the slack between what the econ­o­my is capa­ble of pro­duc­ing and what it’s actu­al­ly putting out, says Angel Ubide, a senior fel­low at the Peter­son Insti­tute for Inter­na­tion­al Eco­nom­ics in Wash­ing­ton. Believ­ers in aus­ter­i­ty argue that sta­bi­liz­ing gov­ern­ment finances will give busi­ness­es the con­fi­dence to expand, shrink­ing that out­put gap, but it’s a painful process, says Mau­ro Guil­lén, direc­tor of the Laud­er Insti­tute at the Uni­ver­si­ty of Penn­syl­va­nia in Philadel­phia. Speak­ing main­ly of Spain, he says: “Of course the aus­ter­i­ty mea­sures will even­tu­al­ly work, but it’s going to take them a long time.”

See that? Even aus­ter­i­ty advo­cates acknowl­edge that “of course the aus­ter­i­ty mea­sures will even­tu­al­ly work, but it’s going to take them a long time.” As you can see, Europe’s Lost Gen­er­a­tion is being lost casu­al­ly. Yikes.



Spec­u­la­tion is a big fac­tor in the lat­est decline in bond yields in Spain, Italy, Por­tu­gal, and Greece. Bond prices rose anoth­er notch—and yields fell—after ECB Pres­i­dent Mario Draghi said on April 3 that the cen­tral bank was con­sid­er­ing uncon­ven­tion­al, i.e., more extreme, mea­sures to stim­u­late growth and stave off defla­tion. He said the bank’s Gov­ern­ing Coun­cil was “unan­i­mous” on explor­ing tools includ­ing pur­chas­es of debt, a Euro­pean echo of the Fed­er­al Reserve’s quan­ti­ta­tive eas­ing (QE) pro­gram.

Notice the point made here: “Spec­u­la­tion is a big fac­tor in the lat­est decline in bond yields in Spain, Italy, Por­tu­gal, and Greece. Bond prices rose anoth­er notch—and yields fell—after ECB Pres­i­dent Mario Draghi said on April 3 that the cen­tral bank was con­sid­er­ing uncon­ven­tion­al, i.e., more extreme, mea­sures to stim­u­late growth and stave off defla­tion”.

What does that say? Again, it says that the bond mar­kets want the ECB to engage in quan­ti­ta­tive eas­ing. That’s what’s been dri­ving the ral­ly in euro­zone bonds this year: expec­ta­tions that the ECB has to step in and do some­thing before defla­tion takes hold. That’s why there’s record low inter­est rates for Greece, Ire­land, Italy, Por­tu­gal and Spain. Yes, Greece is issu­ing bonds again even though its econ­o­my is still a mess with a high­er debt load than when the cri­sis start­ed and 25% unem­ploy­ment. Yay. But the mar­ket inter­est in those bonds isn’t dri­ven by a sense that the fun­da­men­tals are get­ting bet­ter. It’s dri­ven by a con­vic­tion that the ECB will even­tu­al­ly have to pay the piper and go down the QE path. If you’re a bond hold­er, QE poten­tial­ly involves the ECB buy­ing your bonds.


But quan­ti­ta­tive eas­ing wouldn’t be as easy for Draghi to car­ry out as it has been for the Fed. The ECB’s found­ing treaty pro­hibits it from financ­ing gov­ern­ments, which is essen­tial­ly what a cen­tral bank does when it buys gov­ern­ment bonds. Even if it got around that rule, the ECB would have to make polit­i­cal­ly fraught deci­sions about which coun­tries’ bonds to buy. To avoid that issue, it might instead buy pri­vate debt secu­ri­ties such as mort­gage-backed bonds. “If you think the ECB is about to launch a mean­ing­ful QE oper­a­tion, you’ll be dis­ap­point­ed,” wrote Erik Nielsen, UniCredit’s (UCG:IM) chief glob­al econ­o­mist, in a client note on April 6.

If the ECB suc­ceed­ed in its mis­sion to stim­u­late the Euro­pean econ­o­my, inter­est rates would go up, not down. Stronger growth would increase the demand for loans, and infla­tion would pick up, both of which would raise the rates lenders and bond buy­ers demand to let go of their mon­ey. So when inter­est rates fall, it’s a sign that investors expect the ECB to do a lot more to get growth going—and, at least ini­tial­ly, to fail. That, in a nut­shell, is why the news flash out of Madrid is not entire­ly good news.

Notice the key point made at the very end: “So when inter­est rates fall, it’s a sign that investors expect the ECB to do a lot more to get growth going—and, at least ini­tial­ly, to fail. That, in a nut­shell, is why the news flash out of Madrid is not entire­ly good news”. Again: The record low inter­est rates we’re see­ing across the euro­zone and espe­cial­ly in the most aus­ter­i­ty-wracked coun­tries are not dri­ven by con­fi­dence the the ECB is going to turn the econ­o­my around. They’re dri­ven by the bond mar­ket’s grow­ing con­fi­dence that the ECB has messed things up so bad­ly that an extend­ed peri­od of ultra-low rates and even­tu­al ECB bond buy­ing will have to hap­pen in the future. It’s an extend­ed ‘Dooms­day’ play that’s dri­ving this ral­ly in the bond mar­kets. That’s not a sign of con­fi­dence.

And why, again, has­n’t the ECB engage in quan­ti­ta­tive eas­ing yet? Ah yes, because “the ECB’s found­ing treaty pro­hibits it from financ­ing gov­ern­ments, which is essen­tial­ly what a cen­tral bank does when it buys gov­ern­ment bonds”, and there is no way that is chang­ing with present day atti­tudes (in par­tic­u­lar, the Bun­des­bank’s atti­tude). This is espe­cial­ly after the Ger­many Con­sti­tu­tion­al Court’s rul­ing that main­tained ‘doubts’ over the ECB’s pro­posed unlim­it­ed bond buy­ing pro­pos­als.

Wei­d­man­n’s loop­hole
Sure, last week even Bun­des­bank chief Jens Wei­d­mann has sud­den­ly opened his mind to pos­si­ble future sov­er­eign bond buy­ing by the ECB. But, tech­ni­cal­ly, he’s only open to the idea in the future if gov­ern­ment bond buy­ing found to not be in vio­la­tion in EU law. So, in real­i­ty, Jens Wei­d­mann and the Bun­des­bank are prob­a­bly not very open to future sov­er­eign bond buy­ing:

Finan­cial Times
March 25, 2014 6:35 pm
Bun­des­bank hawk sig­nals back­ing for QE

By Claire Jones in Frank­furt

One of the biggest bar­ri­ers to the Euro­pean Cen­tral Bank buy­ing gov­ern­ment bonds to save the euro­zone from defla­tion was removed on Tues­day, after the head of Germany’s Bun­des­bank offered his first sign of sup­port for quan­ti­ta­tive eas­ing.

In a rad­i­cal change of stance, Jens Wei­d­mann, the Bun­des­bank pres­i­dent who is viewed as the ECB’s pol­i­cy hawk, said a QE pro­gramme was not “gen­er­al­ly out of the ques­tion”.

While he was clear he would pre­fer pur­chas­es of pri­vate-sec­tor assets to gov­ern­ment debt, he sig­nalled he could back sov­er­eign bond-buy­ing if it con­formed with EU law, which pro­hibits the financ­ing of gov­ern­ments by its mon­e­tary author­i­ty.

It should be clear that my assess­ment [of whether QE vio­lates EU law] will be a strict one,” he told the finan­cial news ser­vice Mar­ket News Inter­na­tion­al. “Buy­ing not just periph­er­al bonds but Ger­man and French ones as well does not auto­mat­i­cal­ly solve the prob­lem of mon­e­tary financ­ing.”

Nei­ther Mr Wei­d­mann nor the bulk of the ECB’s rate-set­ting gov­ern­ing coun­cil are like­ly to call for buy­ing pub­lic or pri­vate-sec­tor bonds just yet. But the Bun­des­bank chief’s remarks indi­cate Mario Draghi, ECB pres­i­dent, could push through QE with­out alien­at­ing the eurozone’s eco­nom­ic pow­er­house – should the risk of a bout of Japan­ese-style defla­tion height­en.

Mr Wei­d­mann had in the past object­ed to the ECB buy­ing gov­ern­ment bonds. He was the only pol­i­cy mak­er to vote against its “out­right mon­e­tary trans­ac­tions” pro­gramme, through which it can buy poten­tial­ly unlim­it­ed quan­ti­ties of sov­er­eign debt.

Now, with the ECB grap­pling with infla­tion of less than half its tar­get of just below 2 per cent, the Bun­des­bank pres­i­dent appears to have soft­ened his posi­tion. Ken Wat­tret, an econ­o­mist at BNP Paribas, said: “The com­ments sound some­what more open-mind­ed to the idea of addi­tion­al pol­i­cy action from the ECB, includ­ing uncon­ven­tion­al mea­sures, though with lit­tle sense of urgency.”

Notice that Wei­d­mann was the only pol­i­cy mak­er to vote against the “out­right mon­e­tary trans­ac­tions” pro­gram. That’s the pledge to engage in “unlim­it­ed bond buy­ing” that Draghi made back in 2012 if the sit­u­a­tion got worse. And it’s that unlim­it­ed bond buy­ing poten­tial (which is nor­mal for a major cen­tral bank) which the Ger­man Con­sti­tu­tion­al Court has lin­ger­ing doubts over. So even if Wei­d­mann even­tu­al­ly accepts the idea of unlim­it­ed sov­er­eign bond buy­ing for the ECB, it might be moot if Ger­many’s court does­n’t agree.


Low euro­zone infla­tion has stoked calls for the cen­tral bank to buy gov­ern­ment bonds and embark on oth­er uncon­ven­tion­al pol­i­cy options, such as neg­a­tive rates on deposits parked in its cof­fers. The ECB has so far par­ried the calls, opt­ing to keep pol­i­cy on hold ear­li­er this month despite unveil­ing fore­casts show­ing infla­tion would remain well below its tar­get the year after next at 1.5 per cent.

Mr Wei­d­mann made clear the cur­rent pol­i­cy stance was “appro­pri­ate”. And even if the risk of a bout of falling prices rose sub­stan­tial­ly, he indi­cat­ed the ECB would have to buy a host of assets, includ­ing not just the bonds of gov­ern­ments but also pri­vate-sec­tor secu­ri­ties, to win his approval.


And then there’s that last demand by the Bun­des­bank: In exchange for sov­er­eign bond pur­chas­es, It also has to include oth­er types of bond pur­chas­es. Keep in mind that there’s noth­ing wrong with buy­ing a mix pub­licly and pri­vate­ly held bonds.

QE Isn’t Just About Gov­ern­ment Bonds
But what if the plans ends up being only pri­vate­ly held bonds and no sov­er­eign bonds at all? Is that pos­si­ble? Yes. It’s not just pos­si­ble. It’s what the euro­zone’s cen­tral bankers are now call­ing for as the detail of their plans con­tin­ue to drib­ble out. Asset-backed secu­ri­ty pur­chas­es (and no gov­ern­ment debt buys) is what the ECB real­ly has in mind:

12:12 pm ET
Apr 11, 2014
The Wall Street Jour­nal
cen­tral bank­ing
ECB’s Nowot­ny: Addi­tion­al ECB Eas­ing Steps ‘Clear­ly Pos­si­ble’

By Bri­an Black­stone

Fresh stim­u­lus mea­sures from the Euro­pean Cen­tral Bank are “clear­ly pos­si­ble” to guard against the risks of exces­sive­ly low infla­tion, but the bank should wait until its June meet­ing to con­sid­er whether to take them, Aus­tri­an cen­tral bank gov­er­nor Ewald Nowot­ny said in an inter­view.

Mr. Nowot­ny, who is a mem­ber of the ECB’s gov­ern­ing coun­cil, sig­naled that his pref­er­ence would be for any ECB stim­u­lus to be geared toward Europe’s asset-backed secu­ri­ties mar­ket, which may in turn boost the flow of cred­it to the econ­o­my. He said he is open to set­ting a neg­a­tive rate on bank deposits parked at the ECB, but raised doubts about the effec­tive­ness of such a move.

“We are prepar­ing all the tech­ni­cal aspects of a range of pos­si­ble inter­ven­tions,” Mr. Nowot­ny told The Wall Street Jour­nal on the side­lines of meet­ings of the Inter­na­tion­al Mon­e­tary Fund.


One pos­si­bil­i­ty if the cen­tral bank does act, Mr. Nowot­ny, said, would be for the ECB to pur­chase asset-backed secu­ri­ties in the cap­i­tal mar­kets, a move that could help kick-start this seg­ment of the mar­kets and help steer more cred­it to the pri­vate sec­tor.

The asset-backed secu­ri­ties mar­ket is much small­er in Europe than it is in the U.S., mak­ing it dif­fi­cult for the ECB to pur­chase large amounts of these secu­ri­ties. But the sig­nal­ing effect from the cen­tral bank could be sig­nif­i­cant even if the amounts of the pur­chas­es aren’t, Mr. Nowot­ny said.

Even if the vol­umes may be not that large, I think as soon as the ECB announces that they are pre­pared to become active in this mar­ket, mar­ket par­tic­i­pants would have a huge incen­tive to pro­vide mate­r­i­al for this mar­ket,” he said.

Note the state­ment by Aus­tri­a’s cen­tral banker Ewald Nowot­ny, who’s pref­er­ences for asset-backed secu­ri­ties pur­chas­es over sov­er­eign bond buy­ing is what Draghi also has in mind: Even if the vol­umes may be not that large, I think as soon as the ECB announces that they are pre­pared to become active in this mar­ket, mar­ket par­tic­i­pants would have a huge incen­tive to pro­vide mate­r­i­al for this mar­ket.

That trans­lates to “Banks are going to be will­ing to sell the ECB asset backed secu­ri­ties despite of there not being many asset-backed secu­ri­ties out there because the ECB’s buy is going to jack up the prices so much banks won’t be able to resist sell­ing”.

There’s noth­ing intrin­si­cal­ly wrong with this aspect of the plan. This is a poten­tial­ly rea­son­able way to inject cash into banks. It’s the fact that this is the only plan the ECB appar­ent­ly has in mind that’s wrong, espe­cial­ly since it’s unclear how much extra cash for euro­zone banks is real­ly going to help economies with record high unem­ploy­ment. Maybe the gov­ern­ments have bet­ter used for it.

Well, ok, buy­ing asset-backed secu­ri­ties (ABS) isn’t the only part of the plan. There’s also talk of neg­a­tive ‘overnight’ inter­est rates to try to force banks to take back more of all that cash they have parked with the ECB, although Mr. Nowot­ny did­n’t seem as con­fi­dent in the idea as Wei­d­mann.

And yet all this talk we hear about maybe allow­ing ‘quan­ti­ta­tive eas­ing’ — with the imlpic­it idea that gov­ern­ment bond pur­chas­es are com­ing (remem­ber the incred­i­bly bond ral­ly this year) — is now turn­ing into QE for only asset-backed secu­ri­ties. No gov­ern­ment debt. In oth­er words, stim­u­lus through gov­ern­ment spend­ing is still being shunned. But stim­u­lus by pri­vate sec­tor debt? That’s fine!

Loos­er Mon­ey? Eh. Loos­er Cred­it Stan­dards? Sure! Just as Long as No Gov­ern­ment Debt is Involved
And then there’s the oth­er new big devel­op­ment the ECB has in mind: Dra­mat­i­cal­ly expand­ing the size of Europe’s asset-backed secu­ri­ties mar­ket by loos­en­ing lend­ing and secu­ri­ti­za­tion stan­dards. When the ECB loans to gov­ern­ments in the midst of a depres­sion that’s very prob­lem­at­ic. But rely­ing on con­sumer debt to fuel the recov­ery and low­er­ing those cred­it stan­dards to achieve that goal is seen as sound pol­i­cy. Will this help con­sumers? Maybe, if they want to take out a loan in the mid­dle of a qua­si-depres­sion. But the banks should love it no mat­ter what hap­pens:

Bloomberg Busi­ness­week
ECB Unites With BOE in Call to Ease Asset-Backed Bond Rules (1)
By Jen­nifer Ryan, Jana Randow and Alessan­dro Spe­ciale April 11, 2014

The Euro­pean Cen­tral Bank and the Bank of Eng­land said reg­u­la­tors must sup­port and pro­mote the asset-backed bond mar­ket, ensur­ing that rules to safe­guard the finan­cial sys­tem don’t unnec­es­sar­i­ly impair the secu­ri­ties’ use.

Offi­cials “respon­si­ble for the reg­u­la­to­ry treat­ment can change incen­tives to par­tic­i­pate in the ABS mar­ket,” the cen­tral banks said in a joint paper pub­lished today. “It would be impor­tant that the author­i­ties seek to ensure that new reg­u­la­tions at glob­al and EU lev­els do not act to the detri­ment of the secu­ri­ti­za­tion mar­ket.”

Here’s a trans­la­tion for “Offi­cials ‘respon­si­ble for the reg­u­la­to­ry treat­ment can change incen­tives to par­tic­i­pate in the ABS mar­ket’ ”.

“We’re mak­ing it more prof­itable for the banks to get into the asset-backed secu­ri­ties mar­ket because bank­ing prof­its are the foun­da­tion of this econ­o­my”.


The Euro­pean Union’s 1.5 tril­lion-euro ($2 tril­lion) asset-backed secu­ri­ties mar­ket has tak­en cen­ter stage as ECB Pres­i­dent Mario Draghi con­sid­ers a plan to ward off defla­tion through quan­ti­ta­tive eas­ing. Pol­i­cy mak­ers have pushed to make it eas­i­er for banks to cre­ate the debt, putting them at odds with inter­na­tion­al reg­u­la­tors wary of com­plex prod­ucts because of the role they played in the glob­al finan­cial cri­sis.

Today’s paper said rules to address short­com­ings in the assets revealed by the tur­moil may be “undu­ly con­ser­v­a­tive. The state­ment was pre­pared for cen­tral bank offi­cials and finance min­is­ters from the Group of 20 nations gath­ered in Wash­ing­ton for an Inter­na­tion­al Mon­e­tary Fund meet­ing. It assess­es the cur­rent state of the mar­ket in the EU, and says a “longer, more sub­stan­tive” joint paper will be pub­lished in May.

Wait, what? The IMF is at odds with the ECB’s new plan to save the euro­zone by by dereg­u­lat­ing the asset-backed secu­ri­ties mar­ket and get­ting rid of ‘undu­ly con­ser­v­a­tive’ reg­u­la­tions. That’s prob­a­bly not a good sign.


Big­ger Pool

Draghi sig­naled last week that ECB pol­i­cy mak­ers are dis­cussing a QE pro­gram that may include a mix of pub­lic and pri­vate debt. That would bol­ster a mar­ket he once described as “dead” and help rekin­dle euro-area lend­ing that has been con­tract­ing for almost two years.

“The ‘high-qual­i­ty’ seg­ment of the secu­ri­ti­za­tion mar­ket should aim to be more resis­tant to mar­ket stress, there­by pro­vid­ing banks with a resilient form of fund­ing,” accord­ing to today’s state­ment. “But it is also impor­tant to sup­port more junior tranch­es of safe and robust secu­ri­ti­za­tion,” and offi­cials should improve avail­abil­i­ty of data and ana­lyt­ics to improve stan­dards and broad­en the investor base, it said.


Again, note that there isn’t real­ly any indi­ca­tion that the ECB is seri­ous­ly look­ing at pub­lic debt(sovereign bonds). That’s just hap­py talk for now. It’s all pri­vate debt via ABSs for the fore­see­able future giv­en these kinds of sig­nals.

Also note that when the offi­cial says
But it is also impor­tant to sup­port more junior tranch­es of safe and robust secu­ri­ti­za­tion
what he’s real­ly say­ing is
“The plan is to get the banks to ‘secu­ri­tize’ a lot of new asset backed secu­ri­ties so the riski­er ‘junior’ assets need to be made eas­i­er to pack­age and sell to the mar­kets”. That’s why stan­dards have to be loos­ened. Grow­ing the euro­zone ABS mar­ket is clear­ly part of the plan. Is that a good plan?


Draghi told reporters on April 3 at his month­ly press con­fer­ence that the ECB could access a big­ger pool of secu­ri­tized bank loans if only there was a more liq­uid mar­ket in which to do so. The total stock of out­stand­ing loans in the euro area was 17 tril­lion euros at the end of 2013, accord­ing to ECB data.

Small­er Mar­ket

If we are able to have these loans being cor­rect­ly priced and rat­ed, and trad­ed, like it would hap­pen, like it used to hap­pen in the ABS mar­ket before the cri­sis then we nat­u­ral­ly have a very large pool of assets,” Draghi said.

ECB Vice Pres­i­dent Vitor Con­stan­cio reit­er­at­ed the idea yes­ter­day in Wash­ing­ton.

“Pri­vate assets will be includ­ed in any deci­sion that may be tak­en” on QE, he said. “That would make a slight dif­fer­ence with oth­er poli­cies in oth­er cen­tral banks.”

The 1.5 tril­lion euros of out­stand­ing ABSs in the EU is about one quar­ter of the size of the U.S. mar­ket, the doc­u­ment shows. Since its peak in 2009, the out­stand­ing amount in the EU has decreased by a third, or 750 bil­lion euros.

Sales of asset-backed secu­ri­ties fell to $102.5 bil­lion in Europe last year, down from $449 bil­lion in 2007 and less than the $174 bil­lion of issuance in the U.S., accord­ing to data com­piled by JPMor­gan Chase & Co. Many of the ABSs cre­at­ed by euro-area lenders are pledged as col­lat­er­al against cen­tral-bank liq­uid­i­ty, and so would be unavail­able for any ECB pur­chase pro­gram.

When Draghi says says “If we are able to have these loans being cor­rect­ly priced and rat­ed, and trad­ed, like it would hap­pen, like it used to hap­pen in the ABS mar­ket before the cri­sis then we nat­u­ral­ly have a very large pool of assets”,

he’s say­ing

“I want to go back to rules back to the bub­ble era rules”.

And when Draghi says
Many of the ABSs cre­at­ed by euro-area lenders are pledged as col­lat­er­al against cen­tral-bank liq­uid­i­ty, and so would be unavail­able for any ECB pur­chase pro­gram.
this is a ref­er­ence to one of the oth­er rare instances when the ECB actu­al­ly did some­thing help­ful: In June of 2012, when Spain was tee­ter­ing, the ECB loos­ened the rules for the col­lat­er­al banks could use as col­lat­er­al in exchange for an emer­gency loan. This allowed banks to basi­cal­ly tem­porar­i­ly swap out the tox­ic under­wa­ter asset-backed secu­ri­ties sit­ting on their bal­ance sheets for cash that banks can use for oth­er pur­pos­es. This rare, help­ful move was, of course, vig­or­ous­ly opposed by the Bun­des­bank.

Con­trast that to the cur­rent plan, which is basi­cal­ly the oppo­site of the above sce­nario(and which the Bun­des­bank is not oppos­ing): All those asset-backed secu­ri­ties still parked at the ECB as part of the $1 tril­lion LTRO 3‑year loan pro­gram are going to mature this year or next year. So euro­zone banks are going to have grow­ing stock­piles over the next year of the ABSs that they used as col­lat­er­al 2–3 years ago. That’s prob­a­bly part of what this scheme is prepar­ing far: What to do about the return of the LTRO col­lat­er­al? And the answer is “fuel a con­sumer debt boom”. Extend­ing anoth­er round of LTRO’s could con­ceiv­ably hap­pen but it sure look like the ECB and Bun­des­bank would pre­fer the “con­sumer debt boom” approach.

Again, there’s noth­ing inher­ent­ly wrong with the ECB shoring up the ABS mar­ket. These things depend on con­text, and stim­u­lat­ing the ABS mar­ket can fuel con­sumer loans which the euro­zone econ­o­my could cer­tain­ly use. Some of these ABS pur­chas­es by the ECB for QE could be used for financ­ing small and medi­um-sized busi­ness loans and that could cer­tain­ly be help­ful. Mov­ing all those asset-backed secu­ri­ties out of the ECB, into a new grow­ing ABS mar­ket, and then back onto the ECB’s bal­ance sheet (via the QE) is a pret­ty clever way to clean up banks’ bal­ance sheets if it works!

But, of course, the euro­zone econ­o­my could also use con­sumer demand and in the larg­er con­text (aus­ter­i­ty poli­cies) the prospect for surg­ing con­sumer demand (which is sort of required for this scheme to work) are not very promis­ing. Unem­ployed peo­ple don’t take out con­sumer loans. And NOTHING in the ECB’s plan or the large EU’s plans real­ly seem to address this. Recall how France has the crawl to Berlin to get per­mis­sion to ask the EU if it can bor­row at 0.9% rates to engage in gov­ern­ment stim­u­lus spend­ing. THAT’s what would help demand. France bor­row­ing and spend­ing. And that, of course, is just not some­thing the euro­zone allows. At least not thus far.

The oth­er way this plan could poten­tial­ly (in the­o­ry, but not real­is­ti­cal­ly) help the sit­u­a­tion is if grow­ing con­sumer cred­it in the wealth­i­er ‘core’ nations like Ger­many trans­late into more imports from Greece or Spain or Italy? Because, at the end of the day, the euro­zone ‘periph­ery’ needs more exports if their economies are going to heal. So that’s how a plan like this could work, but is there any rea­son to believe that’s going to be the case?

And what hap­pens if there is a real cred­it boom that results in more con­sumer spend­ing but the aus­ter­i­ty poli­cies are still in place? As the argu­ment goes, the ABS mar­ket is tied more close­ly to the econ­o­my than oth­er assets so if you can stim­u­late ABS lend­ing your also pro­mot­ing things like mort­gages and auto-loans and actu­al con­sumer goods. And there’s noth­ing wrong with that...unless the rest of your poli­cies pro­mote aus­ter­i­ty. Why? Because the same eco­nom­ic boost you get from ABS lend­ing turns into a bust if those loans go sour because peo­ple go broke. That’s part of what trig­gered the 2008 finan­cial cri­sis in the first place. The ABS mar­kets, espe­cial­ly the mort­gage mar­kets in the US, implod­ed. Let’s hope the euro­zone learned a les­son there.


Too Puni­tive

Andy Hal­dane, the BOE’s exec­u­tive direc­tor for finan­cial sta­bil­i­ty who will become chief econ­o­mist from June, said ear­li­er this month that the insti­tu­tion intends to “sup­port active­ly” ini­tia­tives inter­na­tion­al­ly for ABSs and in Europe to design secu­ri­ti­za­tions that would fit in this new class.

“If suc­cess­ful, the prize for reg­u­la­tors and asset man­agers is a big one,” he said.

“The reg­u­la­tors have been par­tic­u­lar­ly puni­tive on ABS due to the expe­ri­ence of the cri­sis, but there is a grow­ing appre­ci­a­tion of the mer­its of secu­ri­ti­za­tion because it pro­vides a direct link to the real econ­o­my,” said Ruben van Leeuwen, an ana­lyst at Rabobank Groep in Utrecht. “It can help fund mort­gages or auto loans, which is espe­cial­ly impor­tant now with bank fund­ing chan­nels blocked.


Did you see that admis­sion by the Bank of Eng­land’s upcom­ing chief? This plan “If suc­cess­ful, the prize for reg­u­la­tors and asset man­agers is a big one”. Some­how it seems like the asset man­agers are going to make out bet­ter than the reg­u­la­tors under this deal. When the going gets tough in the euro­zone, the ECB gets weird and clingy with the banks and then real­i­ty gets weird and awful. That’s what hap­pens when your cen­tral banker puts on Ordolib­er­al blind­ers. Wel­come to planned stagde­fla­tion and enjoy the weird, awful ride. We have record high unem­ploy­ment in coun­tries with record low bond yields and the ECB’s response is to stim­u­late a con­sumer loan binge while still stick­ing to aus­ter­i­ty. Amaz­ing!

If this feels famil­iar, it should. And yet it keeps get­ting weird­er. It’s almost awe­some in how dys­func­tion­al it is.

And like so much of what emanates from the ECB, it’s only sort of sur­pris­ing and we should have prob­a­bly expect poli­cies like this by now. Because the one real pol­i­cy of the ECB is quite sim­ple: It’s the Field of Dreams approach. Bankster dreams. And the Bun­des­bank’s dreams. And Sov­er­eign Bond Hold­er’s dreams, although they might be dis­ap­point­ed with ECB nev­er expands it QE to those sov­er­eign bonds. Peo­ple who detest the idea that gov­ern­ment could be of use dur­ing a time like this would also find this sit­u­a­tion kind of dreamy. That’s seri­ous­ly the ide­ol­o­gy at work here.

That Light at the End of the Tun­nel is Get­ting a lot Clos­er, and We’re Not Mov­ing...

Wait, but what’s this? Could there be an end to aus­ter­i­ty around the cor­ner?

Well yes, the Nether­lands, an ear­ly staunch sup­port­er of aus­ter­i­ty, has had enough. Aus­ter­i­ty in the Nether­lands has got to go:

The Wall Street Jour­nal
Meet­ing EU Deficit Tar­get, Nether­lands Freezes Aus­ter­i­ty
Finance Min­is­ter Jeroen Dijs­sel­bloem Says Bud­get Deficit Will Stay Below 3% of GDP in 2014 and 2015

Updat­ed April 11, 2014 2:50 p.m. ET
AMSTERDAM—Dutch Finance Min­is­ter Jeroen Dijs­sel­bloem on Fri­day said he sees no need for addi­tion­al aus­ter­i­ty in the com­ing years as the Nether­lands con­tin­ues to com­ply with Euro­pean Union bud­get rules.

Mr. Dijsslbloem said in a let­ter to Par­lia­ment that the coun­try’s bud­get deficit will stay below the EU thresh­old of 3% of gross domes­tic prod­uct in 2014 and 2015. As a result, the gov­ern­ment “won’t imple­ment addi­tion­al aus­ter­i­ty mea­sures,” he said.

The Nether­lands, a staunch sup­port­er of bud­getary dis­ci­pline through­out the cri­sis in the euro zone, for years strug­gled to com­ply with the bud­get rules due to a weak econ­o­my at home and a pub­lic back­lash against aus­ter­i­ty.

The recov­er­ing econ­o­my and recent improve­ment in pub­lic finances sug­gest that the euro zone’s fifth-largest econ­o­my is slow­ly draw­ing a line under years of unpop­u­lar belt-tight­en­ing.

In 2013, the deficit was below 3% of gross domes­tic, mark­ing the first time in five years that the Nether­lands was com­pli­ant with the EU rules.

Could hap­py days be here again? Hap­pi­er days could be here for the Nether­lands, but is it a sign that the ECB is and the broad­er EU and euro­zone com­mu­ni­ty is going to lay off the aus­ter­i­ty mad­ness? After all, if ever there was a time to end the aus­ter­i­ty mad­ness it would be right now when the ECB is try­ing to trig­ger a con­sumer debt boom. So is change in the air?

Well, that’s dif­fi­cult to say because the Nether­land did meet its deficit tar­gets and there­fore tech­ni­cal­ly the Nether­lands is able to ditch the aus­ter­i­ty, for now, with­out break­ing the EU deficit rules. So this was­n’t nec­es­sar­i­ly a sign that the gen­er­al aus­ter­i­ty poli­cies are shift­ing. Noth­ing changed except the fact that the Nether­lands final­ly eeked past the 3% deficit goal­post and imme­di­ate­ly declared “enough!”.

Also, Angela Merkel was just in Greece doing a “vic­to­ry lap” of sorts after Greece, with over 25% unem­ploy­ment, suc­cess­ful­ly reen­tered the bonds mar­kets for the first time since it was thrown into the euro­zone’s dog­house. She had a few choice words about the aus­ter­i­ty poli­cies Greece should expect:

Merkel, In Athens, Prais­es Greek Reform Progress

by The Asso­ci­at­ed Press
April 11, 2014 2:03 PM ET

ATHENS, Greece (AP) — Greece won praise Fri­day from Ger­man Chan­cel­lor Angela Merkel — the lead advo­cate of euro­zone aus­ter­i­ty — for its painful eco­nom­ic turn­around and suc­cess­ful return to mar­kets.

But Merkel added a polite reminder that the bailed-out coun­try still was­n’t out of the woods.

“Greece has hon­ored its pledges,” Merkel said at a news con­fer­ence with Greek Prime Min­is­ter Anto­nis Sama­ras in Athens. “I hope that pol­i­cy is con­tin­ued.”

Merkel’s brief vis­it, her sec­ond since Europe’s debt cri­sis erupt­ed in Greece more than four years ago, came amid Greek gov­ern­ment eupho­ria over the coun­try’s suc­cess­ful re-entry to inter­na­tion­al bond mar­kets on Thurs­day. The land­mark five-year issue was Greece’s first since 2010, when it was saved from bank­rupt­cy by a mas­sive bailout from its Euro­pean part­ners and the Inter­na­tion­al Mon­e­tary Fund.


Merkel remains a divi­sive fig­ure in Greece because of her insis­tence on eco­nom­ic pain. Dur­ing a vis­it in 2012, she was greet­ed by mass anti-aus­ter­i­ty protests that turned vio­lent, and about 5,000 police offi­cers were deployed Fri­day to guard areas on Merkel’s itin­er­ary and enforce a ban across most of cen­tral Athens on planned protests.

Secu­ri­ty was tight­ened fur­ther after a pow­er­ful car bomb explod­ed ear­ly Thurs­day out­side the Bank of Greece, caus­ing dam­age but no injuries. No group claimed respon­si­bil­i­ty, but police sus­pect domes­tic anar­chist mil­i­tants.

About 1,000 peo­ple held peace­ful demon­stra­tions out­side the pro­hib­it­ed area, but dis­persed under heavy rain.

The aus­ter­i­ty mea­sures that have helped sta­bi­lize pub­lic finances have exact­ed a hor­ri­fy­ing social toll. The econ­o­my has shrunk by about a quar­ter dur­ing the cri­sis and unem­ploy­ment is near 27 per­cent.

I believe that after all these nec­es­sary reforms have been car­ried out — with more remain­ing — that Greece will have more oppor­tu­ni­ties than dif­fi­cul­ties,“Merkel said at the start of her vis­it.


Mean­while, Fitch rat­ings agency warned the suc­cess­ful bond issue did­n’t mean an end to Greece’s finan­cial prob­lems. In a report Fri­day it said the issue showed the coun­try’s progress but does­n’t mean it will be able to finance itself on its own when the bailout pro­gram ends lat­er this year. It also high­light­ed risks that polit­i­cal sup­port for reforms might wane.

Greece has hon­ored its pledges...I hope that pol­i­cy is con­tin­ued.

I believe that after all these nec­es­sary reforms have been car­ried out — with more remain­ing — that Greece will have more oppor­tu­ni­ties than dif­fi­cul­ties,”

Oh dear. So it’s a con­tin­u­a­tion of poli­cies as they stand which means aus­ter­i­ty for basi­cal­ly every­one. Except the Nether­lands and Ger­many. Plus asset-backed secu­ri­ties. Oh, and there’s the one oth­er part of the plan. The neg­a­tive inter­est ‘overnight’ inter­est rates that the Bun­des­bank would pre­fer get imple­ment­ed before and QE at all takes place. That’s basi­cal­ly the plan going for­ward to boost the euro­zone: Euro­zone banks are going to be super incen­tized to pack­age and sell asset backed secu­ri­ties in the hopes of dra­mat­i­cal­ly expand­ing that mar­ket in time for the return of all the asset-backed secu­ri­ties that will get returned as col­lat­er­al for the 3‑year emer­gency loans that expire will expire over the next year. The ECB then buys those new asset-backed secu­ri­ties, free­ing up mon­ey for more loans. It’s a vir­tu­ous cycle. With gov­ern­ment aus­ter­i­ty that will max­i­mize the like­li­hood that these new loans will sour.

Aus­ter­i­ty and con­sum­ber debt. That’s the plan. Although the plan could change. There’s noth­ing stop­ping that. For instance, Mario Draghi just hedged a bit on the plan. First he acknowl­edged that the plan to focus on the ABS mar­ket alone in the QE real­ly does­n’t make sense at the moment because the ABS mar­ket is just not big enough yet to be a mean­ing­ful source of stim­u­lus for the euro­zone economies, adding “We may need to con­sid­er oth­er uncon­ven­tion­al mea­sures” with­out spec­i­fy what those oth­er mea­sures might be.

Hmmm....what could he have in mind...


24 comments for “The New World Ordoliberalism Part 4: Meet the New Plan. Same as the Old Plan. Deregulated.”

  1. Paul Krug­man stum­bled onto a some­what iron­ic find­ing about the “Con­fi­dence Fairies”: For the Con­fi­dence Fairies to work their mag­ic no one can crit­i­cize them:

    The New York Times
    The Con­science of a Lib­er­al
    Blam­ing the Mes­sen­gers, Euro Edi­tion
    Paul Krug­man
    April 15, 2014, 3:27 pm

    Aha. I missed this, from Jür­gen Stark, which is one of the most amaz­ing things I’ve ever seen writ­ten by a for­mer cen­tral banker:

    It is like­ly we are liv­ing in an extend­ed peri­od of price sta­bil­i­ty. This is good news. It boosts real dis­pos­able income and will even­tu­al­ly sup­port pri­vate con­sump­tion. Infla­tion expec­ta­tions are well anchored, and there is no evi­dence house­holds and com­pa­nies are delay­ing pur­chas­es because of neg­a­tive expec­ta­tions. Warn­ings about out­right defla­tion and calls for ECB action are mis­guid­ed and irre­spon­si­ble. The longer this dis­cus­sion con­tin­ues, and the more intense it becomes, the more like­ly the risk of a self-ful­fill­ing prophe­cy.

    So, Stark begins by assert­ing that low infla­tion boosts real dis­pos­able income. That’s a zero-cred­it answer on any under­grad­u­ate exam: yes, low infla­tion makes income gains high­er for any giv­en rate of increase in nom­i­nal income, but low infla­tion reduces the rate of nom­i­nal income growth one for one. The notion that an influ­en­tial for­mer mon­e­tary offi­cial doesn’t under­stand this is breath­tak­ing.

    Now, it’s not true that low infla­tion has no effect; it increas­es the real val­ue of debt, which is con­trac­tionary because debtors cut spend­ing more than cred­i­tors raise it, and it rais­es real inter­est rates when nom­i­nal rates are near the zero low­er bound. But these are both demand-depress­ing effects.

    Oh, and low over­all Euro­pean infla­tion makes the adjust­ment prob­lem of debtor coun­tries much worse, which Stark doesn’t even men­tion.

    But the real kick­er is the claim that even talk­ing about the pos­si­bil­i­ty of defla­tion is irre­spon­si­ble, because that can turn into a self-ful­fill­ing prophe­cy. That’s right: if inad­e­quate ECB action leads Europe into a Japan-style lost decade or two, it’s the fault of all those crit­ics who warned that this might hap­pen; if only every­one had kept clap­ping, every­thing would have been OK.

    I can under­stand why some pol­i­cy­mak­ers would like to live in a world like that — a world in which, if crit­ics say that their poli­cies will fail, and then they do fail, it’s the crit­ics’ fault. But it’s hard to imag­ine the state of mind of some­one who would actu­al­ly state that view in the FT.

    It’s too bad the fairies the ECB prays to aren’t filled with more self-con­fi­dence. Then again, giv­en what an incred­i­bly avoid­able mess that the euro­zone has become in recent years, some of the ECB’s pre­ferred fairies might be swoon­ing with pride these days. After all, no one said the ECB has to only wor­ship the Con­fi­dence Fairies. There are oth­ers...

    Posted by Pterrafractyl | April 16, 2014, 7:54 pm
  2. Time jour­nal­ist Michael Schu­man wrote an great piece last year, “Karl Marx’s Revenge: Class Strug­gle Grows Around the World”, about the grow­ing pres­sures of wealth inequal­i­ty, job­less­ness, and glob­al­iza­tion that are caus­ing many around the globe to ques­tion whether or not Karl Mark’s cri­tiques of cap­i­tal­ism had a point. It also dis­cussed the grow­ing back­lash amongst the glob­al elites against the spread of these sen­ti­ments.

    Schu­man has a new arti­cle Time out today, “Here’s How You Help the Poor With­out Soak­ing the Rich”. And it does look like a plan that could par­tial­ly work. While the plan prob­a­bly won’t do too much to help the poor, it will indeed avoid a soak­ing of the rich...although their boots might get a lit­tle moist while the rest of us are lick­ing them:

    Here’s How You Help the Poor With­out Soak­ing the Rich
    Michael Schu­man @MichaelSchuman

    4/18/2014 11:24 AM ET

    We have to clear our minds of a fal­la­cy about pover­ty alle­vi­a­tion: Help­ing the poor does not mean wel­fare. This isn’t to say that we don’t need wel­fare. Ignor­ing the unfor­tu­nate who can’t put enough food on the table or afford prop­er edu­ca­tion or health­care is not just cru­el, it’s bad eco­nom­ics. The impov­er­ished make either good con­sumers or pro­duc­tive work­ers.

    But gov­ern­ment aid can only reduce the suf­fer­ing of the poor; it usu­al­ly can’t make them escape pover­ty per­ma­nent­ly. We know that from watch­ing what has hap­pened in the devel­op­ing world over the past half cen­tu­ry. Those coun­tries that have tried to use wide-scale state pro­grams to alle­vi­ate poverty—such as India—have not achieved results as quick­ly as nations that did not, such as Sin­ga­pore and South Korea. (See my recent piece on this sub­ject.) Gen­er­al­ly, the high-per­for­mance economies of East Asia didn’t fight pover­ty by play­ing Robin Hood—soaking the rich and hand­ing out cash to the poor. There is no rea­son why we’d have to do that today.

    Instead we have to give the down­trod­den bet­ter jobs, more oppor­tu­ni­ties, more tools to improve their incomes and fair­er treat­ment in eco­nom­ic pol­i­cy.

    That means we must improve the cli­mate for invest­ment. I’m pret­ty sure you didn’t expect me to write that when you start­ed read­ing. There is a wide­spread assump­tion that what’s good for com­pa­nies is bad for the lit­tle guy. But if Asia’s exam­ple teach­es us any­thing, it’s that there are two ways to end pover­ty: (1) cre­ate jobs and (2) cre­ate more jobs. The only way to do that is to con­vince busi­ness­men to invest more.

    That’s why it is imper­a­tive to make invest­ing eas­i­er. We should press ahead with free-trade agree­ments like the Trans-Pacif­ic Part­ner­ship to bring down bar­ri­ers between coun­tries and encour­age exports and cross-bor­der invest­ment. Though CEOs com­plain far too much about regulation—the sub-prime mort­gage dis­as­ter, the recent Gen­er­al Motors recall, or Beijing’s putrid air all show that we need to keep a close eye on business—we should also stream­line reg­u­la­to­ry pro­ce­dures, stan­dard­ize it across coun­tries and thus make it less oner­ous to fol­low.

    Sto­ries like this are a reminder that the EU’s bizarre new strat­e­gy of basi­cal­ly pray­ing at the Altar of the Busi­ness­man for any and all eco­nom­ic ills is a remark­ably con­ta­gious and endur­ing idea even when it real­ly should­n’t be. In today’s world, Eco­nom­ic Stock­holm Syn­drome can poten­tial­ly impact any soci­ety on the globe, rich or poor.

    In relat­ed news, Stock­holm real­ly needs to do some­thing about its Eco­nom­ic Stock­holm Syn­drome.

    Posted by Pterrafractyl | April 18, 2014, 7:27 pm
  3. Researchers at Deutsche Bank pub­lished their own pre­dic­tions on what we should expect from the ECB’s quan­ti­ta­tive eas­ing (QE) ambi­tions. The ver­dict? No sov­er­eign bond/public debt pur­chas­es (unless all oth­er options have already been tried) as expect­ed. And in terms of the asset-backed secu­ri­ties (ABSs) the ECB might have in mind, the researchers are expect­ing a focus on buy­ing asset backed secu­ri­ties tied to loans to small and medi­um enter­pris­es (SMEs). So, to sum­ma­rize via acronym abuse: It’s going to be SME ABSs for the ECB’s QE:

    Busi­ness Insid­er
    Why QE Won’t Work As Well In Europe As It Does In The Unit­ed States
    Matthew Boesler

    Apr. 14, 2014, 4:41 AM

    Researchers at Deutsche Bank have pub­lished a new pre­sen­ta­tion explor­ing the pos­si­bil­i­ty that the Euro­pean Cen­tral Bank will launch a pro­gram of quan­ti­ta­tive eas­ing (QE) lat­er this year in a bid to pro­vide fur­ther mon­e­tary stim­u­lus to the belea­guered euro zone econ­o­my.

    They expect ECB Pres­i­dent Mario Draghi to sig­nal “pri­vate QE” — pur­chas­es of secu­ri­tized loans to small and medi­um enter­pris­es — at the con­clu­sion of the ECB Gov­ern­ing Coun­cil’s June meet­ing, and launch the pro­gram at the con­clu­sion of the Sep­tem­ber meet­ing.

    “The ECB could also engage in full scale ‘pub­lic QE’ (i.e., pur­chas­es of sov­er­eign debt as in the U.S.),” write the researchers in the pre­sen­ta­tion.

    “How­ev­er, this would be far less effec­tive in Europe than in the U.S. while the polit­i­cal hur­dles remain high. We would only expect ‘pub­lic QE’ to mate­ri­alise if the infla­tion and growth out­look wors­en con­sid­er­ably.”


    “In Sep­tem­ber, we expect that the ECB will com­mit to ‘pri­vate QE’, tar­get­ed at SME cred­it,” the researchers write.

    “These pur­chas­es could focus sole­ly on secu­ri­tised assets. How­ev­er, because of the lim­it­ed scale of this mar­ket and reg­u­la­to­ry con­straints to its future devel­op­ment, the ECB may also tar­get cor­po­rate loans held direct­ly by banks. Irre­spec­tive of the choice of asset, it is cru­cial that the ECB sig­nals it will remain in the mar­ket for some time, in order to incen­tivise banks to under­write new loans thus under­pin­ning cred­it orig­i­na­tion and growth.”
    [see slide]

    So is a focus on SMEs good news or bad news? As with all things ECB-relat­ed, the answer is “maybe, but even if it is help­ful, it prob­a­bly won’t be as help­ful as it needs to be”. That’s just how things go with the ECB. But it still might be bet­ter than noth­ing, because with the EU’s bank­ing “stress test” com­ing up the avail­abil­i­ty of cor­po­rate loans for small and medi­um sized busi­ness­es in the EU might get rather tight. And tighter cred­it con­di­tions for busi­ness loans is the last thing the ‘periph­ery’ needs right now. That’s because it’s about to get ugly in the EU’s bank­ing sec­tor. The zom­bie-hunt is get­ting clos­er and clos­er...:

    Europe on the hunt for ‘zom­bie banks’
    — Feb. 3, 2014 2:19 PM EST

    FRANKFURT, Ger­many (AP) — In Europe, the zom­bie hunt is on.

    Not for undead humans, that is, but zom­bie banks — the walk­ing dead among lenders, too finan­cial­ly trou­bled to loan mon­ey to an econ­o­my that des­per­ate­ly needs invest­ment, growth and jobs.

    The Euro­pean Cen­tral Bank, the lead cri­sis-fight­er for the 18 coun­tries that use the euro, is embark­ing on an exten­sive search through the books of the biggest banks. It’s an arcane exer­cise — but one whose results will impact peo­ple’s jobs, busi­ness­es and lives. The idea is to restore the sys­tem’s abil­i­ty to lend by weed­ing out lame banks.


    Togeth­er with nation­al reg­u­la­tors and the Euro­pean Bank­ing Author­i­ty, the ECB will first go through thou­sands of files from 128 of Europe’s largest banks to hunt for hid­den, soured loans and invest­ments. That will be fol­lowed by stress tests that sim­u­late how a bank would fare in a reces­sion or cri­sis.

    Once the ver­dict is deliv­ered in Octo­ber, nation­al bank reg­u­la­tors will be asked to push prob­lem banks to raise cap­i­tal by sell­ing new shares to investors, restrict­ing div­i­dends — or even by being restruc­tured or bailed out. That should help the econ­o­my in the long run.

    But it’s tricky. Forc­ing banks to fix their prob­lems could tem­porar­i­ly desta­bi­lize finan­cial mar­kets and cost investors and gov­ern­ments more mon­ey.



    This is Europe’s lat­est try at sort­ing out the prob­lems in its bank­ing sys­tem left over by the glob­al finan­cial cri­sis and Europe’s ensu­ing tur­moil over gov­ern­ment debt. The Unit­ed States tack­led its bank­ing trou­bles ear­li­er, in 2008-09, push­ing banks to take new cap­i­tal from the gov­ern­ment. That helped the U.S. recov­er from the reces­sion.

    At the height of their debt cri­sis in 2012, Euro­pean lead­ers decid­ed to cre­ate a cen­tral­ized super­vi­sor to over­see banks. The idea was to take reg­u­la­tion away from nation­al offi­cials, who can be over­ly pro­tec­tive of their domes­tic finan­cial insti­tu­tions. They gave the job to the ECB, which now needs a clean slate in the bank­ing indus­try before its super­vi­so­ry board takes over the func­tion in Novem­ber.



    Because so many banks are still in finan­cial trou­ble, they are not able to lend much to busi­ness­es and house­holds. That’s pre­vent­ing the econ­o­my from grow­ing and reduc­ing unem­ploy­ment from a painful 12 per­cent.

    For instance, a bank that has made loans that aren’t being repaid may extend the loan or oth­er­wise take it easy on a strug­gling bor­row­er in hopes they’ll even­tu­al­ly pay. But that prac­tice means the bank may not have mon­ey to make new loans.

    In par­tic­u­lar, it is small- and medi­um-sized com­pa­nies that can’t get the cred­it they need. Yet it’s those com­pa­nies that pro­vide some 80 per­cent of the jobs.

    Bad loans are a par­tic­u­lar tar­get. The ECB and EBA say any­thing that’s more than 90 days over­due will be con­sid­ered a bad loan, whether the bank has declared it in default or not.


    ECB Pres­i­dent Mario Draghi has said banks “do need to fail” to under­line the exer­cise’s cred­i­bil­i­ty.

    If a bank can’t find more cap­i­tal from its share­hold­ers, it might have to turn to its gov­ern­ment for tax­pay­ers’ mon­ey. Or, the gov­ern­ment itself could turn to the euro­zone’s tax­pay­er-backed bailout fund — though polit­i­cal oppo­si­tion to that is high. The 2011 stress test of 90 banks found eight need­ed to raise 2.5 bil­lion euros in cap­i­tal, but not­ed that banks had scram­bled to raise 50 bil­lion euros just ahead of the test.

    Ana­lyst Nico­las Veron, who splits his time between Brus­sels think tank Bruegel and the Peter­son Insti­tute for Inter­na­tion­al Eco­nom­ics in Wash­ing­ton, says it’s dif­fi­cult to tell how much cap­i­tal is need­ed or how many banks might fail. Some banks have already start­ed rais­ing cap­i­tal ahead of time.

    The ECB test — for­mal­ly called the asset qual­i­ty review, or AQR — “is about killing the zom­bie banks,” he said.

    “The AQR is there to iden­ti­fy them — and to kill them.”

    Zom­bie hunts don’t always involve a catch-22, but cen­tral bank­ing and catch-22s are like peas in a pod since eco­nom­ic sys­tems, in gen­er­al, are filled with catch-22’s. It’s why cen­tral banks are poten­tial­ly so use­ful and why treat­ing an econ­o­my like some exquis­ite self-cor­rect­ing machine is such a hope­less cause: Cen­tral banks get to pick a win­ning side in these inevitable catch-22 sit­u­a­tions that would oth­er­wise take “the long run” to resolve on their own. In this case, the catch-22 is the sit­u­a­tion where “a bank that has made loans that aren’t being repaid may extend the loan or oth­er­wise take it easy on a strug­gling bor­row­er in hopes they’ll even­tu­al­ly pay. But that prac­tice means the bank may not have mon­ey to make new loans”. In oth­er words, the “zom­bie banks” are uphold­ing the “zom­bie busi­ness­es” in the hopes that the busi­ness will find a cure for zom­bi­i­ism and thus cure the banks too. And, in doing so, the zom­bie banks are pre­vent­ing a fur­ther melt­down in the busi­ness sec­tor (by fore­stalling cut­ting on the loans need­ed to keep the busi­ness alive), but at the cost of restrict­ing cred­it to non-zom­bie busi­ness­es. That’s the catch-22.

    There are dif­fer­ent ways to resolve this catch-22, but the tried and true meth­ods almost all involve the kind of gov­ern­ment actions the ECB (and espe­cial­ly the Bun­des­bank) are ide­o­log­i­cal­ly opposed to. Gov­ern­ment stim­u­lus spend­ing, for instance, could break this catch-22 by pro­vid­ing the cure for the zom­bie busi­ness­es. Sure, some busi­ness may not be viable even in a recov­ered econ­o­my, but many oth­ers are sim­ply going to need a bet­ter econ­o­my to cure them­selves of their zom­bie-sta­tus and gov­ern­ment stim­u­lus can be that out­side force for trig­ger­ing the heal­ing process.

    But, again, gov­ern­ment stim­u­lus spend­ing is not an ide­o­log­i­cal option for the ECB. So, instead, we’re see­ing a dif­fer­ent kind of catch-22 res­o­lu­tion strat­e­gy. It’s the par­tial-catch-22 res­o­lu­tion: By buy­ing up asset-backed secu­ri­ties tar­get­ed at the SME ABS mar­ket (or pos­si­ble buy­ing cor­po­rate loans direct­ly off of banks’ bal­ance sheets) the ECB is help­ing to decou­ple the fates of the zom­bie busi­ness­es and zom­bie banks under the hopes that the loos­ened cred­it con­di­tions will cure both busi­ness and banks of their zomb­i­fi­ca­tion. And with the EU’s bank­ing stress-test com­ing up, this decou­pling of the fates between banks and busi­ness will also allow for the shut­ter­ing of “bad banks” with that bleed­ing into the cred­it mar­kets.

    So the big plan now appears to be using the bank stress tests for a big “zombie-hunt”/cleansing in the bank­ing sec­tor involv­ing the weak­est banks get­ting shut down, with the ECB hop­ing to offload some of the inevitable cred­it stress­es on the EU’s busi­ness­es result­ing from the bank­ing cleanup onto itself. The ECB will act as a kind of life­line to the SMEs cred­it mar­kets while the zom­bie banks are hunt­ed down and killed and the ECB attempts to per­ma­nent­ly expand the ABS sec­tor for SME cred­it to larg­er ‘shad­ow bank­ing’ mar­ket. Oh yeah, and the aus­ter­i­ty poli­cies con­tin­ue. That’s the plan. Kill off the weak­est banks. Strength­en the sur­vivors. Keep busi­ness on a life­line if pos­si­ble. And con­tin­ue the aus­ter­i­ty that is pre­vent­ing any real heal­ing.

    Will it work? Well, that will prob­a­bly depend on the par­tic­u­lars of each econ­o­my. The rel­a­tive­ly healthy Ger­man econ­o­my would prob­a­bly ben­e­fit. But how about in a coun­try like Ire­land, where a large num­ber of busi­ness are still sad­dled with large debts that they’ve nev­er real­ly been able to pay off? Will the ECB’s SME cred­it life­line be enough to heal the zom­bie busi­ness or will it end up killing them too? As with all things involv­ing the ECB, it remains unclear what to expect, but there will be blood. That’s all we get to know for sure.

    Posted by Pterrafractyl | April 19, 2014, 6:09 pm
  4. It’s time for anoth­er ride on the ECB’s not-very-mer­ry-go-round of unre­al­ized action

    Draghi, wor­ried by strong euro, says ECB poised to act as soon as June

    By Jan Strupczews­ki and John O’Don­nell

    BRUSSELS Thu May 8, 2014 12:00pm EDT

    (Reuters) — The Euro­pean Cen­tral Bank is ready to take action next month to boost the euro zone econ­o­my if updat­ed infla­tion fore­casts mer­it it, its pres­i­dent said on Thurs­day, warn­ing out­siders not to pres­sure the bank into action.

    Stress­ing that the euro’s strength was “a seri­ous con­cern”, ECB chief Mario Draghi said the exchange rate would have to be addressed, adding that the bank’s pol­i­cy­mak­ers held a dis­cus­sion about “all instru­ments” at their meet­ing in Brus­sels.

    Euro zone infla­tion ticked up to 0.7 per­cent in April from March’s 0.5 per­cent, but remains far below the ECB’s tar­get of just under 2 per­cent, and Draghi said: “There is con­sen­sus about being dis­sat­is­fied with the pro­ject­ed path of infla­tion.”

    “The gov­ern­ing coun­cil is com­fort­able with act­ing next time but before we want to see the staff pro­jec­tions that will come out in ear­ly June,” he told a news con­fer­ence after the ECB left inter­est rates on hold, as expect­ed.

    Draghi did not spec­i­fy what pol­i­cy action the ECB could take beyond say­ing Thurs­day’s coun­cil dis­cus­sion touched on the pol­i­cy instru­ments the cen­tral bank has men­tioned pre­vi­ous­ly.

    These have includ­ed inter­est rate cuts, liq­uid­i­ty mea­sures and even quan­ti­ta­tive eas­ing — cen­tral-bank speak for mon­ey print­ing to buy assets, a pol­i­cy already pur­sued by the U.S. Fed­er­al Reserve, the Bank of Japan and the Bank of Eng­land.

    “With today’s press con­fer­ence it will be hard for the ECB to take a ‘mañana mañana’ atti­tude,” ING econ­o­mist Carsten Brzes­ki said.

    “With his com­ments on the exchange rate and hints at pos­si­ble June action, Draghi has pushed the ECB into a cor­ner from which it will be very hard to escape,” Brzes­ki added.

    The euro hit a 2–1/2 year high against the dol­lar while Draghi spoke before falling when he said the ECB was com­fort­able with tak­ing action in June.

    The ECB gov­ern­ing coun­cil met in Brus­sels against the back­drop of a Fran­co-Ger­man spat over ECB pol­i­cy regard­ing the strength of the euro — one fac­tor Draghi has iden­ti­fied as a poten­tial trig­ger for pol­i­cy action.

    “The strength­en­ing of the euro in the con­text of low infla­tion and still low lev­els of eco­nom­ic activ­i­ty, is a cause for seri­ous con­cern in the view of the Gov­ern­ing Coun­cil,” he said.

    But Draghi pushed back against the coun­tries — led by France — and insti­tu­tions that have been urg­ing the ECB to take action to boost the econ­o­my and counter low infla­tion.

    “We have received plen­ty of advice,” he said. “We are inde­pen­dent, so peo­ple should be aware that if this might be seen as a threat to our inde­pen­dence it could cause long-term dam­age to our cred­i­bil­i­ty.”


    Thurs­day’s strong sig­nal that the ECB is ready to act in June will height­en spec­u­la­tion about just what the ECB could do.

    Draghi raised the idea in an April 24 speech of a “broad-based asset pur­chase pro­gramme” if the infla­tion out­look wors­ens. But just a few days lat­er — at a meet­ing with Ger­man law­mak­ers — he played down the prospect of QE any time soon.

    The ECB chief did see “a prob­lem of ongo­ing low infla­tion rates, which could lead to mea­sures”, a source who attend­ed the meet­ing said, adding: “He men­tioned quan­ti­ta­tive eas­ing in this con­text but made clear that we’re still some way off QE.”


    Did you catch that? Draghi open­ly chid­ed coun­tries, France in par­tic­u­lar, for try­ing to influ­ence the ECB’s think­ing by point­ing out that the ris­ing euro, cur­rent­ly at a 2 1/2 year high vs the dol­lar, is screw­ing up their economies. “We have received plen­ty of advice...We are inde­pen­dent, so peo­ple should be aware that if this might be seen as a threat to our inde­pen­dence it could cause long-term dam­age to our cred­i­bil­i­ty.” Oh, ok, so euro­zone mem­ber nations and oth­er insti­tu­tions can’t make their wish­es known to the ECB because that might under­mine its inde­pen­dence? Well isn’t that fas­ci­nat­ing!

    Posted by Pterrafractyl | May 8, 2014, 11:41 am
  5. Every once in a while the Bun­des­bank has to remind the world that the years of depressed economies and man­dat­ed aus­ter­i­ty weren’t some “oops!” acci­den­tal pol­i­cy out­come. No, the Bun­des­bank just does­n’t think the euro­zone’s near eco­nom­ic col­lapse was real­ly all that big a deal because you can’t have “inter­nal deval­u­a­tion” with­out wage defla­tion and a gen­er­al decline in incomes and liv­ing stan­dards. Defla­tion is the goal:

    Bun­des­bank ready to sup­port ECB action if it is need­ed — sources

    FRANKFURT Tue May 13, 2014 12:31pm BST

    (Reuters) — The Bun­des­bank is ready to sup­port Euro­pean Cen­tral Bank pol­i­cy action if it is need­ed and this is not new, two Bun­des­bank sources said on Tues­day.

    Pol­i­cy­mak­ers are look­ing at all rel­e­vant data, and infla­tion fore­casts for 2016 are impor­tant but not the only deci­sive fig­ure, the sources said.

    ECB Pres­i­dent Mario Draghi said last Thurs­day the bank is ready to take action next month to boost the euro zone econ­o­my if updat­ed infla­tion fore­casts mer­it it.

    “We have always said that we are will­ing to act if this is real­ly need­ed,” a high rank­ing Bun­des­bank source said. The sec­ond source at the Ger­man cen­tral bank con­firmed this.

    Ear­li­er, The Wall Street Jour­nal, cit­ing a per­son famil­iar with the mat­ter, report­ed that the Bun­des­bank was will­ing to back an array of stim­u­lus mea­sures from the ECB next month, includ­ing a neg­a­tive rate on bank deposits and pur­chas­es of pack­aged bank loans if need­ed to keep infla­tion from stay­ing too low.

    And here’s a reminder that the Bun­des­bank isn’t the only major finan­cial insti­tu­tion try­ing to deflate the future:

    The New York Times
    The Con­science of a Lib­er­al
    Unbal­anced in Basel
    MAY 13, 2014, 4:04 AM

    Ambrose Evans-Pritchard draws our atten­tion to a speech by Jaime Caru­a­na, Gen­er­al Man­ag­er of the Bank for Inter­na­tion­al Set­tle­ments. It is indeed a quite remark­able speech — and I mean that in the worst way; it’s a per­fect illus­tra­tion of the way per­ma­hawks keep find­ing new argu­ments for their nev­er-chang­ing demand that we raise inter­est rates now now now.

    Some back­ground: the BIS has spent almost the whole peri­od since the finan­cial cri­sis struck call­ing for tighter mon­ey. Odd­ly, how­ev­er, it keeps chang­ing its jus­ti­fi­ca­tions for that call. At first it was dire warn­ings of infla­tion just around the cor­ner. Then it was finan­cial insta­bil­i­ty. Now, with low infla­tion and pos­si­ble defla­tion a grow­ing con­cern, Mr. Caru­a­na argues that (a) defla­tion is not so bad(b) we’re in a bal­ance sheet slump, and that means loose mon­ey is bad.

    On the first point, isn’t it quite remark­able how the BIS has slid from warn­ing about infla­tion — and dis­miss­ing con­cerns about defla­tion — to say­ing that defla­tion is OK? Beyond that, the main case for argu­ing that defla­tion is OK is eco­nom­ic growth dur­ing the late 19th cen­tu­ry. Is that real­ly a good mod­el? Just to take the most obvi­ous point: the late 19th cen­tu­ry was marked by rapid pop­u­la­tion growth in the “zones of recent set­tle­ment” (basi­cal­ly places where Euro­peans were mov­ing in, dis­plac­ing or wip­ing out the locals). In the Unit­ed States, pop­u­la­tion grew 2 per­cent a year from 1880–1910, sus­tain­ing high invest­ment demand. And the zones of recent set­tle­ment also offered an out­let for very large cap­i­tal out­flows from Europe. In oth­er words, the glob­al sit­u­a­tion was con­ducive to a high nat­ur­al real rate of inter­est, mak­ing mild defla­tion much more sus­tain­able than in today’s world.

    I’ll prob­a­bly want to write more about Gild­ed Age defla­tion. But for now, let me turn to the bal­ance-sheet thing. Mr. Caru­a­na draws a dis­tinc­tion between the view that we’re suf­fer­ing from inad­e­quate aggre­gate demand, and what he claims is a con­trast­ing view that the prob­lem is too much debt; and he claims that the excess debt/balance sheet approach implies that expan­sion­ary mon­e­tary pol­i­cy is unhelp­ful and coun­ter­pro­duc­tive.

    And I won­der what on earth he’s talk­ing about.


    So how does the bal­ance-sheet sto­ry turn into a case for tight mon­ey? I have no idea — there’s cer­tain­ly no clear expla­na­tion in the Caru­a­na speech.

    By all means let’s talk about bal­ance-sheet effects. But is it real­ly too much to demand a mod­el, or at least a care­ful­ly spelled-out mech­a­nism? Right now it looks as if the BIS is claim­ing that bal­ance sheets make the case for tight mon­ey because in Basel every­thing makes the case for tight mon­ey.

    Gild­ed Age defla­tion: Again, that’s the goal. And how do we get there? By doing every­thing we can to keep doing noth­ing:

    Insight — ECB hard­lin­er Wei­d­mann comes in from the cold as defla­tion threat­ens

    By Paul Car­rel

    FRANKFURT Thu Apr 17, 2014 12:24pm BST

    (Reuters) — As recent­ly as last Novem­ber, Jens Wei­d­mann stead­fast­ly opposed any move by the Euro­pean Cen­tral Bank to print mon­ey to buy assets and buoy the euro zone econ­o­my. No longer.

    The Bun­des­bank chief, known for his hard­line stances at the ECB and as head of the Ger­man cen­tral bank, is now ready to sup­port such quan­ti­ta­tive eas­ing (QE) if he and his ECB col­leagues deem it nec­es­sary.

    What has changed is that “the sit­u­a­tion has changed”, accord­ing to one per­son famil­iar with the Ger­man’s think­ing, speak­ing on con­di­tion of anonymi­ty.

    Euro zone infla­tion has slowed to 0.5 per­cent from 0.9 per­cent in Novem­ber, falling far below the ECB’s tar­get of just under 2 per­cent and stok­ing fears the bloc could become stuck in a pro­longed peri­od of so-called “low-fla­tion”, or even sink into out­right defla­tion.

    Such a sce­nario risks under­min­ing the efforts of cri­sis-hit coun­tries on the euro zone periph­ery to shape up their economies, and could ulti­mate­ly hit growth across the board if house­holds defer pur­chas­es in antic­i­pa­tion of low­er prices in the future.

    Seek­ing to head off such a drop in infla­tion expec­ta­tions, the ECB’s gov­ern­ing coun­cil said ear­li­er this month it was unan­i­mous in its com­mit­ment to use uncon­ven­tion­al tools — cen­tral bank-speak for things like QE — to counter a pro­tract­ed peri­od of low infla­tion.

    The una­nim­i­ty meant Wei­d­mann was on board. This mat­ters because as leader of the hawk­ish fac­tion on the 24-mem­ber coun­cil, he can shape debates and restrict pol­i­cy moves. Last May, for exam­ple, he pre­vailed in lim­it­ing the size of an inter­est rate cut.

    At the height of the euro zone cri­sis in 2012, Wei­d­mann was alone in oppos­ing a new, as-yet-unused ECB bond-buy plan, dubbed Out­right Mon­e­tary Trans­ac­tions (OMT), that tar­gets spe­cif­ic euro zone coun­tries in trou­ble and comes with reform strings.

    It can’t be point­ed out enough: Notice how Jens Wei­d­mann has wield­ed sole veto pow­er over the ECB’s deci­sion to “do what­ev­er it take”. And notice how that veto pow­er is effec­tive­ly still in place (which is why arti­cles about how momen­tous it is for Wei­d­mann to “come in from the cold” are writ­ten the first place)


    Some coun­cil mem­bers still lament that episode of iso­la­tion and would like to avoid a rep­e­ti­tion.

    With the straight­for­ward QE debate, Wei­d­mann has soft­ened his tone. Late last month, he said such a pro­gramme was not out of the ques­tion.

    On the face of it, this might look like an about-turn from his oppo­si­tion to the OMT. But under­pin­ning Wei­d­man­n’s posi­tion is a firm log­ic based both on prin­ci­ples and prag­ma­tism.

    For the Bun­des­bank chief, the OMT bond-buy plan agreed in Sep­tem­ber 2012 rep­re­sent­ed a clear move into the fis­cal are­na as it required eco­nom­ic pol­i­cy com­mit­ments from gov­ern­ments as a con­di­tion for ECB mar­ket inter­ven­tion.

    Attach­ing such strings to mon­e­tary pol­i­cy is anath­e­ma to the Bun­des­bank, which is deeply attached to “Ord­nungspoli­tik” — the idea that the role of a total­ly inde­pen­dent cen­tral bank is sole­ly to ensure sta­ble prices, not to pro­mote eco­nom­ic growth and employ­ment or to help gov­ern­ments with fis­cal prob­lems.


    And notice how the Bun­des­bank does­n’t hide the fact that it is ded­i­cat­ed to the idea that a cen­tral bank should do NOTHING to pro­mote eco­nom­ic growth and employe­ment. NOTHING. And this is no secret.



    With the OMT, Wei­d­mann was wor­ried about the ECB effec­tive­ly financ­ing gov­ern­ments. QE, free of any con­di­tions on coun­tries’ eco­nom­ic poli­cies, would be sole­ly for mon­e­tary pol­i­cy pur­pos­es.

    “I actu­al­ly think Wei­d­mann is quite prag­mat­ic, as long as he is con­vinced the bank is absolute­ly focus­ing on mon­e­tary pol­i­cy and not pur­su­ing objec­tives of gov­ern­ment financ­ing,” said Clemens Fuest, head of Ger­many’s ZEW eco­nom­ic insti­tute.

    “That was his con­cern with the OMT pro­gramme. But I think QE is anoth­er sto­ry,” added Fuest, who also advis­es the gov­ern­ment in Berlin. “Of course, draw­ing the line is not easy. But with quan­ti­ta­tive eas­ing, draw­ing the line is not impos­si­ble either.”

    After dig­ging in his heels as a mat­ter of prin­ci­ple over the OMT, Wei­d­man­n’s more prag­mat­ic side extends to the idea of show­ing qual­i­fied sup­port for QE before low infla­tion becomes entrenched.

    Wait­ing too long before show­ing a readi­ness for res­olute pol­i­cy action would risk infla­tion expec­ta­tions drift­ing low­er — an out­come that would require more dras­tic ECB action.

    By act­ing pre-emp­tive­ly, even just by talk­ing about QE at this stage, “the action itself does­n’t need to be as large”, said Beren­berg bank’s Chris­t­ian Schulz, a for­mer ECB econ­o­mist.

    Notice how Wei­d­man­n’s eco­nom­ic views — which have been the most extreme of the euro­zone’s cen­tral bankers — is char­ac­tized as “Quite Prag­mat­ic”. Why exact­ly? Who knows! Just pick a rea­son! It’s like jus­ti­fy­ing deflation...just pick an excuse and run with it. You can alway change it lat­er!


    Wei­d­mann, a past eco­nom­ics advis­er to Ger­man Chan­cel­lor Angela Merkel, can also point to a Bun­des­bank prece­dent. In the 1970s, the Ger­man cen­tral bank bought gov­ern­ment bonds to bring down inter­est rates, after its stan­dard tools stopped work­ing.

    Despite the prece­dent, Wei­d­man­n’s pre­de­ces­sor, Axel Weber, resigned in 2011 in protest at a pre­vi­ous ECB bond-buy­ing plan — the Secu­ri­ties Mar­kets Pro­gramme (SMP), which he saw as financ­ing gov­ern­ments. Juer­gen Stark, who had act­ed as Bun­des­bank pres­i­dent in 2004, fol­lowed Weber and quit as ECB chief econ­o­mist lat­er in 2011 — also in oppo­si­tion to the SMP.

    The res­ig­na­tions achieved lit­tle but showed the Ger­mans’ frus­tra­tion that the ECB was mor­ph­ing out of the Bun­des­bank cast in which it was forged: a mould based on ‘Ord­nungspoli­tik’.



    As well as poten­tial­ly pos­ing a risk to eco­nom­ic growth, very low infla­tion or even defla­tion aggra­vates the adjust­ment process of debt-sad­dled coun­tries on the euro zone periph­ery, which the Bun­des­bank has been press­ing to shape up.

    Low infla­tion across the euro zone gives the coun­tries on the periph­ery less scope for rel­a­tive price adjust­ment against more com­pet­i­tive economies like Ger­many, and also makes it hard­er for them to reduce their debt piles.

    Greece is already run­ning a neg­a­tive infla­tion rate.

    But the prob­lem is per­haps biggest for Italy, the euro zone’s third-largest econ­o­my, which is sad­dled with 2 tril­lion euros (1.64 tril­lion pounds) of pub­lic debt and is strug­gling with the com­pet­ing need both to cut costs and spark growth.

    The Euro­pean Com­mis­sion expects Italy’s debt to hit 134 per­cent of gross domes­tic prod­uct (GDP) this year.

    Even with a sol­id recov­ery and high­er infla­tion, Italy will take years to cut its debt to 100 per­cent of GDP, let alone reach an EU tar­get of 60 per­cent.

    Against this back­drop, pres­sure is mount­ing on the ECB, in par­tic­u­lar from the Inter­na­tion­al Mon­e­tary Fund, to do more to stave off the threat of defla­tion in the euro zone.


    Ex-ECBer Stark, one such con­ser­v­a­tive voice who is still active in Ger­man media, told Reuters the ECB would have to act deci­sive­ly if a sig­nif­i­cant risk of out­right defla­tion were to mate­ri­alise.

    “But in my view we are not in such a sce­nario,” Stark said.

    We are in a peri­od of benign dis­in­fla­tion and price sta­bil­i­ty rather than enter­ing a peri­od of bad defla­tion. Assum­ing the ECB does at present not have oth­er infor­ma­tion, it would be wrong to give in to the calls for action,” he added.

    “We are in a peri­od of benign dis­in­fla­tion and price sta­bil­i­ty rather than enter­ing a peri­od of bad defla­tion”. That’s the view of the guy that quit his post as the ECB’s chief econ­o­mist in 2011, along with ECB chief Axel Weber, in protest over the ECB pos­si­bly doing some­thing about the finan­cial cri­sis. And here we are, three years lat­er and a lot clos­er to defla­tion, and Stark is still say­ing that he sees no prob­lem and actu­al­ly views this as a peri­od of time of “benign dis­in­fla­tion”. And now we have the BIS push­ing the idea that defla­tion isn’t actu­al­ly all that bad because, hey, was the Gild­ed Age real­ly that bad? We can’t say they did­n’t warn us.

    Posted by Pterrafractyl | May 13, 2014, 9:06 am
  6. So you know how the ECB’s mini-QE strat­e­gy is to focus on encour­ag­ing banks to lend to con­sumers and busi­ness­es by facil­i­tat­ing the growth and sale of asset-backed secu­ri­ties (some of which would be pur­chased by the ECB)? It’s a strat­e­gy that inher­ent­ly assumes that banks and the rest of the shad­ow bank­ing sys­tem end up buy­ing those loans bun­dled up as asset-backed secu­ri­ties (ABS) so it’s basi­cal­ly an approach that focus­es on cred­it cre­ation to fuel a recov­er using two key steps: 1. Banks issue the loans to the to pri­vate sec­tor. And 2. Oth­er banks and finan­cial insti­tu­tions then buy those loans as an ABS.

    In oth­er words, the whole ECB scheme cen­ters around encour­ag­ing robust pri­vate sec­tor lend­ing to sec­tors to indi­vid­u­als and busi­ness­es that are cur­rent­ly lack­ing afford­able cred­it or cred­it at all. And this is as opposed to pub­lic sec­tor gov­ern­ment spend­ing in order to avoid the pos­si­bil­i­ty of the ECB’s QE actu­al­ly end­ing up financ­ing gov­ern­ments and irk­ing the Bun­des­bank. So the growth of pri­vate sec­tor debt is a major com­po­nent of the ECB’s whole game­plan going for­ward.

    With that in mind, check out the ECB’s recent utter­ings on the banks and their will­ing­ness to pur­chase pri­vate sec­tor debt:

    ECB Says Search for Yield May Harm Finan­cial Sta­bil­i­ty in Europe
    By Alessan­dro Spe­ciale May 28, 2014 8:00 AM CT

    The Euro­pean Cen­tral Bank said that finan­cial sta­bil­i­ty in the euro area is at risk as investors step up their search for high­er returns and weak eco­nom­ic growth weighs on banks’ bal­ance sheets.

    While “lega­cy” risks from the glob­al finan­cial cri­sis per­sist for both banks and sov­er­eigns, new threats are emerg­ing from “a con­tin­ued glob­al search for yield, which has left the finan­cial sys­tem more vul­ner­a­ble to an abrupt rever­sal of risk pre­mia,” the ECB said in its semi-annu­al Finan­cial Sta­bil­i­ty Review pub­lished today. Even so, “finan­cial stress indi­ca­tors have remained low and sta­ble” over the past half year, it said.

    Cen­tral banks across the world have kept inter­est rates at record lows to rekin­dle growth after the finan­cial cri­sis, depress­ing bond yields and leav­ing investors search­ing for more attrac­tive assets. At the same time, reg­u­la­tors have tight­ened rules and the ECB is con­duct­ing a bank bal­ance-sheet assess­ment to iden­ti­fy weak­ness­es before assum­ing super­vi­so­ry pow­ers in Novem­ber.

    Euro-area coun­tries have attract­ed cap­i­tal from emerg­ing mar­kets, with U.S. exchange-trad­ed funds record­ing net inflows to Spain of more than 1.3 bil­lion euros ($1.8 bil­lion) since the begin­ning of the year.

    “Such flows might prove to be fick­le, absent prospects of strong absolute returns dif­fer­en­ti­at­ed by under­ly­ing coun­try and bank-spe­cif­ic macro­eco­nom­ic prospects,” the ECB said. “Con­tin­ued action by sov­er­eigns is need­ed to address pub­lic debt sus­tain­abil­i­ty chal­lenges -– notably progress in restor­ing the sound­ness of pub­lic finances while work­ing to boost macro­eco­nom­ic growth prospects.”

    Slow Recov­ery

    The euro-area econ­o­my is strug­gling to turn what ECB Pres­i­dent Mario Draghi described this week as “a slow­ly con­sol­i­dat­ing recov­ery” into sol­id growth strong enough to boost infla­tion to the ECB’s goal of just under 2 per­cent. Annu­al con­sumer-price gains in the sin­gle-cur­ren­cy bloc have remained below 1 per­cent since Octo­ber. Offi­cials will take their next pol­i­cy deci­sion on June 5.


    The ECB said that while euro-area banks con­tin­ue to oper­ate in a “low prof­itabil­i­ty or loss-mak­ing envi­ron­ment,” they must con­tin­ue to work to “mit­i­gate” investors’ skep­ti­cism while at the same time ensur­ing that the delever­ag­ing process doesn’t “undu­ly” lead to a reduc­tion in cred­it to the econ­o­my.

    Although some ten­ta­tive signs of a lev­el­ing-off in the pace of non-per­form­ing loan for­ma­tion have emerged in some coun­tries, the turn­ing point does not appear to have been reached yet,” the ECB said. “Amid con­tin­ued down­side risks to a frag­ile euro-area eco­nom­ic recov­ery, high pri­vate-sec­tor indebt­ed­ness in many coun­tries, cou­pled with only slow­ly improv­ing income and earn­ings prospects, may weigh on bor­row­ers’ debt ser­vic­ing capa­bil­i­ties.

    So let’s see. Accord­ing to the ECB:
    1. A “con­tin­ued glob­al search for yield...has left the finan­cial sys­tem more vul­ner­a­ble to an abrupt rever­sal of risk pre­mia” = if bond investors decide to move their mon­ey out the euro­zone there could be prob­lems in that sec­tor. It’s the threat of the inter­na­tion­al “bond vig­i­lantes”.

    2. “Finan­cial stress indi­ca­tors have remained low and sta­ble” = but we don’t actu­al­ly see the threat of the bond vig­i­lantes.

    3. “Such flows might prove to be fick­le, absent prospects of strong absolute returns dif­fer­en­ti­at­ed by under­ly­ing coun­try and bank-spe­cif­ic macro­eco­nom­ic prospects” = One of the cat­a­lysts for the bond vig­i­lante threat could be ongo­ing under­ly­ing prob­lems in indi­vid­ual coun­tries based on “coun­try and bank-spe­cif­ic macro­eco­nom­ic prospects” (i.e. how their economies are doing and the health of the finan­cial sec­tor).

    4. “Con­tin­ued action by sov­er­eigns is need­ed to address pub­lic debt sus­tain­abil­i­ty chal­lenges -– notably progress in restor­ing the sound­ness of pub­lic finances while work­ing to boost macro­eco­nom­ic growth prospects.” = But gov­ern­ments need to con­tin­ue the very aus­ter­i­ty poli­cies that are neg­a­tive­ly impact­ing the “coun­try and bank-spe­cif­ic macro­eco­nom­ic prospects” any­ways because that’s just how the euro­zone rolls.

    5. The ECB said that while euro-area banks con­tin­ue to oper­ate in a “low prof­itabil­i­ty or loss-mak­ing envi­ron­ment,” they must con­tin­ue to work to “mit­i­gate” investors’ skep­ti­cism while at the same time ensur­ing that the delever­ag­ing process doesn’t “undu­ly” lead to a reduc­tion in cred­it to the econ­o­my. = Low inter­est rates are hurt­ing bank prof­itabil­i­ty, so bank had bet­ter deal with this although they also should­n’t shink their port­fo­lios too much because that remove need­ed cred­it for the econ­o­my to recov­er. Good luck try­ing to bal­ance this to all the banks fac­ing stress tests that will be forced to delever­age all sum­mer long.

    6. “Although some ten­ta­tive signs of a lev­el­ing-off in the pace of non-per­form­ing loan for­ma­tion have emerged in some coun­tries, the turn­ing point does not appear to have been reached yet” = BTW, the pri­vate sec­tor loans in some coun­tries are still get­ting worse.

    7. “Amid con­tin­ued down­side risks to a frag­ile euro-area eco­nom­ic recov­ery, high pri­vate-sec­tor indebt­ed­ness in many coun­tries, cou­pled with only slow­ly improv­ing income and earn­ings prospects, may weigh on bor­row­ers’ debt ser­vic­ing capa­bil­i­ties.” = If things con­tin­ue as they are, bor­row­ers might go broke.

    In oth­er words, what the ECB is telling us is that there could be a bond vig­i­lante prob­lem. Also, there are no observed prob­lems. But there could be prob­lems if neg­a­tive under­ly­ing trends con­tin­ue. Also, the aus­ter­i­ty poli­cies that are caus­ing the neg­a­tive under­ly­ing trends (and the chase for yield by the banks since oth­er asset class­es do poor­ly in a reces­sion) must also con­tin­ue. And the bank delever­ag­ing must also con­tin­ue too although banks should strive not to hurt their prof­its or restrict cred­it too much while doing so. And if things don’t change and these trends con­tin­ue, all those bonds banks are buy­ing might go sour which, obvi­ous­ly, would be real­ly bad.

    That’s basi­cal­ly what the ECB is say­ing.

    Posted by Pterrafractyl | May 28, 2014, 12:30 pm
  7. With Ger­many’s econ­o­my bare­ly show­ing any growth and the ECB low­er­ing their medi­um term infla­tion out­look (with infla­tion now expect­ed to reach 1.4% in 2016, well below the 2% tar­get) the ECB final­ly pulled the trig­ger. No, not the Quan­ti­ta­tive Eas­ing trig­ger. The small­er Rate Cut trig­ger and, lat­er this year, cheap loans to banks, but only to banks that can prove they are using the loans for lend­ing to the pub­lic(so the weak­est banks in the weak­est economies may not ben­e­fit). We still might see QE, but not this year accord­ing to ECB offi­cials because they’ll need to wait and see how well this cur­rent rate cut does at turn­ing the euro­zone economies around. So the big bank­ing stress test is still on the way this year along with some rate cuts and loans lat­er this year, but no QE:

    ECB will know by year-end if lat­est mea­sures have worked: Con­stan­cio

    By Marc Jones and Francesco Canepa

    LONDON Fri Jun 6, 2014 2:02pm EDT
    (Reuters) — The Euro­pean Cen­tral Bank will prob­a­bly not know until the end of the year, after banks have had the chance to take up its cheap loans, whether its lat­est actions have been effec­tive, its vice-pres­i­dent said on Fri­day.

    The ECB cut inter­est rates to record lows on Thurs­day, launched mea­sures to pump mon­ey into the slug­gish euro zone econ­o­my, and pledged to do more if need­ed to fight off the risk of Japan-like defla­tion.

    Speak­ing in Lon­don a day after the moves, the bank’s vice pres­i­dent Vitor Con­stan­cio said it would now take a step back to give the changes a chance to work, but that a broad asset pur­chase pro­gramme like those attempt­ed in the Unit­ed States, Britain and Japan remained an option for the 18-nation euro zone if its econ­o­my failed to gain trac­tion.

    “Only after the sec­ond tranche in Decem­ber of the ini­tial allowance of the new facil­i­ty will we then gauge the impact,” he said on the side­lines of an IIF con­fer­ence. “Because by then the com­pre­hen­sive assess­ment (AQR) will be com­plet­ed and banks will know what is their sit­u­a­tion,” he added, refer­ring to the ECB’s scruti­ny of banks’ bal­ance sheets.

    The ECB’s bold actions aroused dis­may in some Ger­man media which warned that dras­tic loos­en­ing of pol­i­cy could fuel U.S.-style asset bub­bles and dis­cour­age reform in cri­sis-hit euro states.

    Bun­des­bank chief Jens Wei­d­mann tried to cool the fears, say­ing there had been tough wran­gling with­in the ECB over the deci­sions and that it was absurd to dis­cuss fur­ther mea­sures already.

    “If the infla­tion rate is too low for too long, a devel­op­ment looms that could dam­age the econ­o­my and harm all of us,” Wei­d­mann said. “That’s why we act­ed. We wran­gled long and hard about the shape of the mea­sures. It was cer­tain­ly not an easy deci­sion.”

    He also empha­sized that he remained opposed to pur­chas­ing gov­ern­ment bonds. “The ECB can­not be allowed to become the ‘bad bank’ of the euro zone and my posi­tion on buy­ing gov­ern­ment debt has not changed,” he said.


    Despite the con­cern of Wei­d­mann and Ger­many, the ECB has left the door open for fur­ther action should infla­tion expec­ta­tions start falling or if the econ­o­my suf­fers a seri­ous set­back.

    “For the type of con­tin­gen­cies and chal­lenges we face now, what we did, we think, is enough. If some down­ward shock were to cre­ate a much dete­ri­o­rat­ed sit­u­a­tion then we will have to think about all sorts of uncon­ven­tion­al poli­cies,” Con­stan­cio said.

    Ear­li­er, he had told a ques­tion and answer ses­sion: “If we see a sort of vicious cir­cle emerge out of (low) infla­tion and an unan­chor­ing of expec­ta­tions and an out­ward shock that would cre­ate a reverse spi­ral, that would require a broad pro­gramme of asset pur­chas­es.”

    With finan­cial mar­ket-derived medi­um-term infla­tion expec­ta­tions still near to 2 per­cent, how­ev­er, Con­stan­cio said any large scale bond buy­ing was still some way away.

    Speak­ing at the ques­tion and answer ses­sion, the ECB vice pres­i­dent said inter­est rates would remain at cur­rent record low lev­els for some time as the euro zone need­ed infla­tion and growth rates to rise to help reduce a region­al debt over­hang.

    The bank’s main rate is now just 0.15 per­cent, while its deposit rate is minus 0.1 per­cent, mean­ing banks pay to keep cash with the ECB overnight.

    In Vien­na, Ewald Nowot­ny, gov­er­nor of Aus­tri­a’s cen­tral bank, said the ECB had bro­ken new ground by agree­ing to pro­vide long-term liq­uid­i­ty to banks that prove they are using the mon­ey for lend­ing, not just squir­rel­ing it away.

    He said the ECB’s lat­est for­mu­la­tion of for­ward guid­ance for inter­est rates meant rates were on hold and that they “reached qua­si the low­er bor­der,” though Con­stan­cio sug­gest­ed there might be some wig­gle room left with the deposit rate.


    In oth­er news, more invol­un­tary aus­ter­i­ty is on the way. Much more invol­un­tary aus­ter­i­ty. It’s part of the new social con­tract. It’s a legal con­tract:

    Irish Inde­pen­dent

    Bru­ton: We’re fac­ing anoth­er 10 years of aus­ter­i­ty
    Colm Kelpie

    Pub­lished 28/05/2014|02:30

    IRELAND faces at least a decade of aus­ter­i­ty because of strict Euro­pean rules on slash­ing debt, for­mer Taoiseach John Bru­ton has warned.

    Mr Bru­ton (inset), who was once Finance Min­is­ter and now speaks on behalf of Ire­land’s finan­cial ser­vices cen­tre, said we may not even be expe­ri­enc­ing aus­ter­i­ty yet.

    At present we are still bor­row­ing, adding to our already mas­sive debt moun­tain. Under Euro­pean Union rules, we will soon have to begin liv­ing with­in our means.

    The ex-Euro­pean Union ambas­sador to Wash­ing­ton said the Irish peo­ple had signed up to the strict bud­getary rules when we passed the Lis­bon Treaty in 2009.

    Under the Lis­bon Treaty, coun­tries must reduce their debt lev­els to 60pc of the val­ue of the econ­o­my. The nation­al debt in Ire­land peaked at almost 124pc of gross domes­tic prod­uct last year.

    Mr Bru­ton said Ire­land would have to take in more than it spends for sev­er­al years to meet the tar­gets laid down in the rules.

    “It’s only when you’re tak­ing in sub­stan­tial­ly more than you’re spend­ing that you’re expe­ri­enc­ing aus­ter­i­ty,” he said.

    “We haven’t reached that point yet. We will be doing that for about the next 10 or 15 years in accor­dance with the com­mit­ment that we made under the fis­cal com­pact,” he told the Dublin Cham­ber of Com­merce event.

    His com­ments came as Finance Min­is­ter Michael Noo­nan said the Gov­ern­ment would not ease back on cuts in Octo­ber’s Bud­get.

    Mr Noo­nan said it was too ear­ly to know whether he would imple­ment the €2bn in cuts agreed with our cred­i­tors. “We’ll have a bet­ter idea as the sum­mer goes by of what the quan­tum of adjust­ment nec­es­sary is,” Mr Noo­nan said.

    Ok, accord­ing to the def­i­n­i­tion of aus­ter­i­ty used by Ire­land’s ex-Finance Min­is­ter, Ire­land does­n’t have more aus­ter­i­ty on the way because what Ire­land has been expe­ri­enc­ing thus far isn’t tech­ni­cal­ly aus­ter­i­ty since Ire­land’s debt has been ris­ing. So the real aus­ter­i­ty is yet to come...!?!?

    Posted by Pterrafractyl | June 6, 2014, 1:50 pm
  8. Every once in a while an arti­cle comes along that inad­ver­tant­ly sum­ma­rizes a col­lec­tive mad­ness:

    ECB cre­at­ing ‘dan­ger­ous’ bub­bles: Ger­man think tank
    Matt Clinch | @mattclinch81

    The pol­i­cy actions announced by the Euro­pean Cen­tral Bank last week received major crit­i­cism on Tues­day, with the head of influ­en­tial Ger­man think tank ZEW detail­ing his con­cerns about surg­ing asset prices which he says are cre­at­ing dan­ger­ous bub­bles.

    Clemens Fuest, from the Mannheim-based orga­ni­za­tion best known for its wide­ly-watched eco­nom­ic sen­ti­ment index — told Ger­man busi­ness dai­ly Han­dels­blatt that the euro zone region could be at a “turn­ing point.”

    “I’ve got a bad feel­ing about this...I am con­cerned by the dan­ger that the ECB is pro­duc­ing new bub­bles with its pol­i­cy of cheap mon­ey,” he told the news­pa­per.

    “We have all the ingre­di­ents of a bub­ble: The prices of real estate and stock mar­kets con­tin­ue to rise, and on the bond mar­kets, yields are falling despite high risks.”

    With infla­tion at 0.5 per­cent in the euro zone, unem­ploy­ment at 11.7 per­cent and bank lend­ing fail­ing to trick­le down to the wider econ­o­my, the ECB deliv­ered one of its most com­pre­hen­sive pack­ages to date last week.

    The inter­est rate and deposit rates have been cut, prepa­ra­tions are begin­ning to pur­chase asset-backed secu­ri­ties, new cheap loans will also be made to banks and it is to cease “ster­il­iz­ing” its past pur­chas­es of sov­er­eign bonds.

    Fuest told Han­dels­blatt he now believes that there is a 95 per­cent prob­a­bil­i­ty that a quan­ti­ta­tive eas­ing pro­gram — under which gov­ern­ment bonds are pur­chased — will be launched fur­ther down the road as last week’s stim­u­lus mea­sures will be deemed as insuf­fi­cient.

    This asset pur­chase pro­gram, he said, would poten­tial­ly be the tip­ping point and lead stock mar­kets and oth­er asset class­es into dan­ger­ous ter­ri­to­ry. The pur­chase of gov­ern­ment bonds would only be accept­able if the ECB explic­it­ly claimed senior sta­tus rel­a­tive to pri­vate bond­hold­ers, he said, and were exempt from any write­down in case of an asset’s deval­u­a­tion.

    “To over­come the cri­sis, gov­ern­ments in Europe must act, the ECB alone can­not cope,” he added, imply­ing that gov­ern­ments need to con­tin­ue with struc­tur­al reforms to stim­u­late their own economies.

    Offi­cials from Ger­many, the eco­nom­ic pow­er­house of the euro zone, have been the most vocal crit­ics of ultra-easy mon­e­tary pol­i­cy in the run-up to the ECB’s lat­est mea­sures. Asset pur­chas­es and the cheap liq­uid­i­ty the bank pro­vides are seen by many as hav­ing the capa­bil­i­ty of stok­ing infla­tion, espe­cial­ly in Ger­many where con­sumer price growth is cur­rent­ly high­er than in most oth­er coun­tries in the region.


    So let’s see...this respect­ed think tank econ­o­mist, Clemens Fuest, has a “bad feel­ing” about the ECB’s quan­ti­ta­tive eas­ing pro­gram (which won’t hap­pen this year any­ways while the ECB waits to see how its oth­er mea­sures work) because he’s super con­cerned that it will result in asset bub­bles because the mon­ey being lent to banks so far isn’t trick­ling down to the real econ­o­my. And he’s con­vinced that there’s a 95 per­cent prob­a­bil­i­ty that a QE pro­gram will be launched because he does­n’t see the pro­grams launched last week (rate cuts and a new loan pro­gram for banks) as being a suf­fi­cient stim­u­lus.

    Now, this isn’t an unrea­son­able analy­sis because it real­ly is a giant waste to throw a bunch of a mon­ey at the banks with­out some­how ensur­ing that it actu­al­ly stim­u­lates the real econ­o­my. But what would Mr. Fuest pre­fer to see instead? Gov­ern­ment stim­u­lus pro­grams that could imme­di­ate­ly put that ECB mon­ey to work in the real econ­o­my? Nope. He appar­ent­ly wants more “struc­tur­al reforms” to “stim­u­late” local economies. That’s right, the wide­ly read expert that is wor­ried about the finan­cial stim­u­lus not trans­lat­ing into a real eco­nom­ic stim­u­lus thinks that stim­u­lus can best be achieved with more aus­ter­i­ty. No one escapes the con­sen­sus of the damned (It’s sort of a hostage sit­u­a­tion).

    Posted by Pterrafractyl | June 10, 2014, 8:24 am
  9. The ECB and Bank of Eng­land just took a stop clos­er towards “going it alone” and weak­en­ing asset backed secu­ri­ties (ABS) reg­u­la­tions below glob­al stan­dards (but only for “high qual­i­ty” assets) as part of the planned ABS quan­ti­ta­tive eas­ing designed to stim­u­late cred­it for small and medi­um sized busi­ness­es:

    ECB may buy ‘sim­ple and trans­par­ent’ ABS, says Mer­sch

    By Paul Day and Huw Jones

    BARCELONA Spain/LONDON Wed Jun 11, 2014 11:28am EDT

    (Reuters) — The Euro­pean Cen­tral Bank may buy “sim­ple and trans­par­ent” asset-backed secu­ri­ties (ABS) to help achieve its tar­get of deliv­er­ing price sta­bil­i­ty to the euro zone, ECB Exec­u­tive Board mem­ber Yves Mer­sch said on Wednes­day.

    Asset-backed secu­ri­ties are cre­at­ed by banks pool­ing loans like mort­gages or car loans into an inter­est-bear­ing bond that is sold to raise funds.

    The ECB includ­ed the pos­si­bil­i­ty of ABS pur­chas­es in a pack­age of mea­sures it announced last Thurs­day to pump mon­ey into the slug­gish euro zone economy.In a speech enti­tled “Next steps for Euro­pean secu­ri­ti­sa­tion mar­kets”, Mer­sch said the ECB want­ed a more holis­tic approach to the reg­u­la­to­ry treat­ment of ABS in Europe and greater trans­paren­cy of their treat­ment by rat­ings agen­cies.

    “There is a grow­ing con­sen­sus that an instru­ment once seen as part of the prob­lem could in fact be part of the solu­tion,” he said of talks about ABS in Euro­pean pol­i­cy­mak­ing cir­cles.

    Europe’s ABS mar­ket has not recov­ered from the stig­ma cre­at­ed by the glob­al finan­cial cri­sis, which was trig­gered by doubts about the qual­i­ty of assets in sup­pos­ed­ly rock-sol­id U.S. mort­gage-backed secu­ri­ties.

    The ECB and the Bank of Eng­land aim to get Euro­pean banks and investors to agree com­mon stan­dards for safer ABS, which could help build a stronger econ­o­my by pro­vid­ing cred­it to firms that are too small to raise invest­ment funds direct from cap­i­tal mar­kets.

    “We have to work in tan­dem with the mar­kets, see what the mar­ket reac­tion is,” Mer­sch said of ECB prepa­ra­tions to buy ABS.

    “Obvi­ous­ly we will not go into the area of buy­ing the equi­ty tranche. Any­thing else beyond has to be seen to be under dis­cus­sion,” he told a con­fer­ence organ­ised by Euro­pean bank­ing lob­by AFME.

    Sub­stan­tial efforts were under­way to improve trans­paren­cy and dis­clo­sure require­ments of ABS across the EU, Mer­sch said.

    Nomu­ra bank has said the Euro­pean secu­ri­ti­sa­tion mar­ket is about 650–700 bil­lion euros, half its pre-cri­sis size.

    Ear­li­er this week AFME said the ECB and BoE must turn talk of reviv­ing the ABS mar­ket into speedy action by eas­ing what they see as puni­tive cap­i­tal rules planned for the sec­tor.

    Sep­a­rate­ly on Wednes­day, Andreas Dom­bret, the Bun­des­bank board mem­ber respon­si­ble for bank­ing super­vi­sion, said it was up to the mar­ket and not pub­lic author­i­ties to revive the sec­tor.

    “First and fore­most it’s a job for the indus­try itself,” Dom­bret told reporters dur­ing a vis­it to Lon­don.

    “One should not always call for the pub­lic sec­tor to be in the fore­front when it should be in the inter­ests of the mar­ket itself to revi­talise that,” Dom­bret said.


    The ECB and BoE are seek­ing to cre­ate a clear­ly defined cat­e­go­ry of high-qual­i­ty ABS that would ben­e­fit from more lenient cap­i­tal charges for banks than planned under glob­al rules from the Basel Com­mit­tee of bank­ing reg­u­la­tors.

    Mer­sch said he did not believe that Basel would rush to define high-qual­i­ty ABS any time soon.

    Should it become clear that it would take too long to improve the reg­u­la­to­ry require­ments for ABS on a glob­al scale, Mer­sch said Europe could go it alone.

    “So if we see the glob­al approach will not be con­ducive to help­ing the recov­ery in the Euro­pean eco­nom­ic area, we would have to con­sid­er whether a more Euro­pean approach would be help­ful,” Mer­sch added.

    Andrea Enria, chair­man of the Euro­pean Bank­ing Author­i­ty, an EU watch­dog that writes rules for lenders, said Basel was in the “dri­ving seat” when it comes to cap­i­tal charges on ABS.

    “The point is not about bring­ing down the charges, it’s whether to dis­tin­guish between dif­fer­ent class­es of ABS and secu­ri­ti­sa­tion, whether this means that the cap­i­tal treat­ment can be adjust­ed accord­ing­ly,” Enria told reporters in Lon­don.

    The EBA will also give the EU advice by Sep­tem­ber on cap­i­tal treat­ment of secu­ri­ti­sa­tion, Enria added.

    Banks wor­ry that once a def­i­n­i­tion of “sim­ple and trans­par­ent” ABS is agreed then the rest of the mar­ket could be shunned by investors.

    So the plan appears to be for the ECB (and BoE) to cre­ate a “clear­ly defined cat­e­go­ry of high-qual­i­ty ABS” and then give this class of assets a “more lenient cap­i­tal charges for banks” than the Basel Com­mit­tee of bank­ing reg­u­la­tors (which sets the glob­al rules for banks) has in mind. And if the Basel com­mit­tee can’t “improve the reg­u­la­to­ry require­ments for ABS on a glob­al scale” (by dereg­u­la­tion), the ECB and Bank of Eng­land might go ahead and take “a more Euro­pean approach” by set­ting those lenient rules uni­lat­er­al­ly.

    And, of course, the Bun­des­bank oppos­es the plan, but not due to ques­tions about its effi­ca­cy. No, the oppo­si­tion is just in prin­ci­ple. Specif­i­cal­ly, “first and fore­most [stim­u­lat­ing the ABS mar­ket is] a job for the indus­try itself...One should not always call for the pub­lic sec­tor to be in the fore­front when it should be in the inter­ests of the mar­ket itself to revi­talise that”. It’s a reminder that the ordolib­er­al­ism pushed by the Bun­des­bank onto the euro­zone is basi­cal­ly syn­thet­ic neolib­er­al­ism.

    Still, there are rea­sons to be con­cerned about this plan. In addi­tion to the inher­ent unknowns and cat­a­stroph­ic poten­tial asso­ci­at­ed with finan­cial dereg­u­la­tions, part of what makes this plan some­what con­tra­dic­to­ry is that the whole idea behind the ABS QE plan is to make it eas­i­er for small and mid­sized busi­ness to access cred­it mar­kets by mak­ing it eas­i­er for banks to issue ABS for small and mid sized busi­ness­es. At least that’s the claim. But at the end of the arti­cle we hear about how banks are wor­ry­ing “that once a def­i­n­i­tion of ‘sim­ple and trans­par­ent’ ABS is agreed then the rest of the mar­ket could be shunned by investors”. So you have to won­der just how much dereg­u­lat­ing the “high-qual­i­ty ABS” mar­ket will result greater cred­it for small and mid sized busi­ness­es since those small­er busi­ness­es are inher­ent­ly riski­er and their ABSs prob­a­bly aren’t going to be “high qual­i­ty”. For instance, last year, when the ABS mar­ket was expe­ri­enc­ing a sup­ply squeeze, it was the rel­a­tive lack of high qual­i­ty ABS prod­ucts that was push­ing investors into buy­ing more of the riski­er small and medi­um sized busi­ness ABS:

    Finan­cial News
    Sup­ply squeeze forces ABS investors into riski­er ter­ri­to­ry
    Sarah Krouse View Social links for Sarah Krouse

    29 Apr 2013

    Investor inter­est in secu­ri­tised cred­it funds has rebound­ed since the finan­cial cri­sis as strate­gies invest­ing in the asset class have post­ed dou­ble-dig­it returns in recent years.

    But as that demand builds, the Euro­pean asset-backed secu­ri­ties mar­ket is expe­ri­enc­ing a squeeze in sup­ply that pos­es a fresh chal­lenge to funds invest­ing in the sec­tor.

    Euro­pean ABS vol­ume totalled just $5.9bn in the first quar­ter of 2013, accord­ing to data provider Dealog­ic. That is the low­est first quar­ter total since 2010 and a 35% drop on the same peri­od last year.

    ABS experts say that giv­en con­tin­u­ing quan­ti­ta­tive eas­ing efforts across the UK and Europe and rule changes that lessen the appeal of ABS under the Euro­pean Cen­tral Bank’s repur­chase agree­ment, this year is not set to be a bright one for issuance in the region.

    Gareth Davies, head of ABS and cov­ered bonds research at JP Mor­gan, said that giv­en the low-growth envi­ron­ment, the Euro­pean Cen­tral Bank’s long-term refi­nanc­ing oper­a­tion, and the UK’s fund­ing for lend­ing scheme: “I don’t think the tap is going to be turned on. I think this is going to be a qui­eter year.”

    More com­pet­i­tive

    Mar­ket experts say this means more investors will be com­pet­ing for few­er prod­ucts, par­tic­u­lar­ly the more secure AAA-rat­ed secu­ri­ties. And this will force many to take greater risks for high returns.

    Davies said: “In my mind there are three direc­tions you can go: down the [cap­i­tal] stack in terms of senior­i­ty, across the stack [in terms of the per­ceived sta­bil­i­ty of assets in dif­fer­ent geo­graph­ic areas] or a com­bi­na­tion of both.”

    An investor could seek greater upside by invest­ing in Ital­ian or Span­ish res­i­den­tial mort­gage-backed secu­ri­ties, instead of UK or Dutch RMBS.

    Ben Hay­ward, found­ing part­ner of Twen­ty­Four Asset Man­age­ment, and man­ag­er of the firm’s new ABS-focused fund, said: “Undoubt­ed­ly it’s hard­er to buy prod­uct now than it was a year ago. Do we still see oppor­tu­ni­ty? Absolute­ly, across the cap­i­tal struc­ture the sec­tor is still cheap to the lev­el of fun­da­men­tal risk, and we’re see­ing more investor appetite cur­rent­ly for the less liq­uid parts of the mar­ket.”

    That can mean mov­ing away from AAA-rat­ed secu­ri­ties to less liq­uid cor­ners of the mar­ket such as small and medi­um enter­prise loan-backed secu­ri­ties, cor­po­rate loans and MBS in periph­er­al Europe.


    If “high qual­i­ty” ABSs are get pre­ferred reg­u­la­to­ry treat­ment from the ECB and BoE, but the high­er risk ABS don’t also get a sim­i­lar reg­u­la­to­ry eas­ing, could­n’t that make the high qual­i­ty ABSs rel­a­tive­ly cheap­er for investors while expand­ing their sup­ply and pos­si­bly squelch the demand for the high­er risk ABSs that are sup­ply­ing small and medi­um sized busi­ness­es and achieve the exact oppo­site of the stat­ed goals for ABS QE? It could work if the ECB buys more of those “high qual­i­ty” ABSs as part of the QE plan than the banks end up cre­at­ing, but isn’t that a pret­ty big “if”? This is the ECB we’re talk­ing about.

    Posted by Pterrafractyl | June 11, 2014, 12:25 pm
  10. Remem­ber this from back in 2011?

    The New York Times
    The Con­science of a Lib­er­al
    Cat­a­stroph­ic Sta­bil­i­ty
    Sep­tem­ber 25, 2011 11:18 am
    Paul Krug­man

    I look a fair bit at bond mar­ket “breakevens” — the dif­fer­ence in inter­est rates between reg­u­lar bonds and infla­tion-pro­tect­ed bonds of the same matu­ri­ty, which give a mea­sure of infla­tion expec­ta­tions. It’s not a per­fect mea­sure by any means, since there are issues of risk and liq­uid­i­ty, and any­way what bond investors expect isn’t nec­es­sar­i­ly rea­son­able. But breakevens do give a quick read on the issue, and can be help­ful in think­ing about where we are.

    So, let’s look at Ger­man breakevens:

    The mar­ket seems to expect price sta­bil­i­ty for Ger­many — an infla­tion rate of 1 per­cent or so over the next 5 years. And that has a clear mes­sage: it’s sig­nal­ing cat­a­stro­phe for the euro.

    Why? I tried to lay this out a while ago. A rea­son­able esti­mate would be that Spain and oth­er periph­er­als need to reduce their price lev­els rel­a­tive to Ger­many by around 20 per­cent. If Ger­many had 4 per­cent infla­tion, they could do that over 5 years with sta­ble prices in the periph­ery — which would imply an over­all euro­zone infla­tion rate of some­thing like 3 per­cent.

    But if Ger­many is going to have only 1 per­cent infla­tion, we’re talk­ing about mas­sive defla­tion in the periph­ery, which is both hard (prob­a­bly impos­si­ble) as a macro­eco­nom­ic propo­si­tion, and would great­ly mag­ni­fy the debt bur­den. This is a recipe for fail­ure, and col­lapse.

    Anoth­er way to say this is that the euro is going to have a chance of work­ing only if the ECB deliv­ers much more expan­sion­ary and, yes, infla­tion­ary poli­cies than the mar­ket now expects. If you don’t think that’s a pos­si­bil­i­ty, say good­bye to the euro project.

    The worst part about cat­a­stroph­ic sta­bil­i­ty? Things keep chang­ing (for the worse). It’s just the rea­sons for why things are get­ting worse that nev­er seem to change. So it’s very painful and very frus­trat­ing:

    Finan­cial Times
    Mon­ey Sup­ply
    Krug­man gives Draghi some advice
    Claire Jones | May 27, 2014 12:26

    The Euro­pean Cen­tral Bank is not exact­ly renowned for stok­ing infla­tion. At 0.7 per cent, price pres­sures are now less than half its tar­get of below but close to 2 per cent — some­thing that the gov­ern­ing coun­cil has done noth­ing to cor­rect over the past six months.

    That did not stop Paul Krug­man today telling the ECB to raise its tar­get even high­er. The Prince­ton pro­fes­sor was stand­ing only meters away from Mario Draghi, in Sin­tra at an event that the eurozone’s mon­e­tary author­i­ty hopes to become its own ver­sion of the US Fed­er­al Reserve’s Jack­son Hole.

    As hard sells go, this is right up there.

    Krugman’s argu­ment is based on his prog­no­sis for “the new nor­mal” — a term which describes what the big advanced economies will look like after the cri­sis is con­signed to his­to­ry.

    His view is that, even if 2 per cent was appro­pri­ate in the 1990s (and he is not sure it was), there’s no way that it will be in the future. Why? Because a mix­ture of fac­tors, such as demo­graph­ic shifts and a lack of lever­age, are going to cre­ate a world where lev­els of aggre­gate demand are much low­er than before the crash.

    “We’re look­ing at a nat­ur­al aus­ter­i­ty pol­i­cy… it’s very easy to think it could push the real rate of inter­est to a lev­el where it’s per­sis­tent­ly neg­a­tive,” Prof Krug­man said.

    It is a view based on the idea that sec­u­lar stag­na­tion will befall Europe, per­ma­nent­ly low­er­ing the rate at which its economies can grow.

    A high­er tar­get would, Mr Krug­man argues, enable economies that suf­fer from low infla­tion (such as the eurozone’s) to escape that trap by boost­ing aggre­gate demand. The boost would come through the pol­i­cy eas­ing that a high­er tar­get would imply. He also notes that there was lit­tle ratio­nale for the deci­sion by the ECB — and pret­ty much every advanced econ­o­my cen­tral bank — to plump for 2 per cent. Pick­ing the fig­ure was, in his view, arbi­trary.


    The first ques­tion went to Otmar Iss­ing, for­mer ECB and Bun­des­bank board mem­ber, who was one of the most impor­tant fig­ures in set­ting the cen­tral bank’s tar­get. Unsur­pris­ing­ly, he was crit­i­cal, argu­ing that there were a lot of wel­fare effects asso­ci­at­ed with high­er infla­tion.

    Agustin Carstens, gov­er­nor of the Bank of Mex­i­co, warned of the Argen­tine expe­ri­ence, where infla­tion has risen rapid­ly in recent years.

    James Bullard, from the St Louis Fed, was more sup­port­ive, say­ing he liked the paper but thought hit­ting a high­er infla­tion tar­get was eas­i­er said than done. He also flagged the wel­fare effects cit­ed by Mr Iss­ing, say­ing that through­out his­to­ry infla­tion had hit the poor­est hard­est.

    Oth­ers ques­tioned whether a cen­tral bank that can­not even hit a tar­get of 2 per cent would be able to stoke infla­tion sim­ply by rais­ing its tar­get.

    Update: It only took a few hours for Mario Draghi to join the list of names at Sin­tra say­ing no to Prof Krugman’s calls for a high­er infla­tion tar­get.

    One of the rea­sons for Draghi’s reject­ing the Prince­ton economist’s idea was the large dif­fer­ences between infla­tion rates across the bloc.

    Accord­ing to the ECB pres­i­dent, if the cen­tral bank tar­get­ed infla­tion of 5 per cent, price pres­sures would have to be suf­fi­cient­ly stronger than this in the bloc’s health­i­est economies to tol­er­ate below-tar­get infla­tion in the weak­er areas.

    “What would it mean for Ger­many to have a 5 per cent lev­el? I wouldn’t want to think of that,” Mr Draghi said.

    Wow. Krug­man presents a paper to a bunch of cen­tral bankers sug­gest­ing that an aging pop­u­lace and the “nat­ur­al aus­ter­i­ty” that goes along with it might be lead­ing to a “new nor­mal” of low­er aggre­gate demand for much of the world and that cen­tral bank infla­tion “tar­gets” that are high­er than 2% might be the appro­pri­ate response to this “new nor­mal” in order to avoid­ed per­sis­tent­ly neg­a­tive real inter­est rates. In oth­er words, the “sec­u­lar stag­na­tion” fac­ing the euro­zone could lead to a cat­a­stroph­i­cal­ly sta­ble sit­u­a­tion, but only if we don’t adjust our poli­cies to the new nor­mal. And the respons­es from the cen­tral bankers appeared to be:
    1. That high­er infla­tion unfair­ly harms the poor (so let’s con­tin­ue with the aus­ter­i­ty in economies near­ing defla­tion, right?)

    2. A ref­er­ence to Argenti­na (Yep).

    3. If the ECB can’t get infla­tion to even 2% now, why both­er rais­ing the tar­get high­er?

    4. And, final­ly, Mario Draghi chimes in “What would it mean for Ger­many to have a 5 per cent lev­el? I wouldn’t want to think of that”.

    Non-super low infla­tion as a means to address the sec­u­lar stag­na­tion asso­ci­at­ed with aging pop­u­la­tions and demo­graph­ic shifts?! NO NO NO NO NOOOOOOOOOOOOOOOOOOO! We’re all gonna die! That’s basi­cal­ly argu­ment made by some of the most pow­er­ful and influ­en­tial peo­ple on the plan­et.

    Posted by Pterrafractyl | June 11, 2014, 1:17 pm
  11. Let’s hope the “dream team” talk in this arti­cle is just night­mar­ish spec­u­la­tion:

    June 12, 2014, 3:58 a.m. EDT
    The back­room deal that took bazooka out of ECB’s hands
    Opin­ion: Inside sto­ry of why Bun­des­bank gave OK for neg­a­tive inter­est rates

    By David Marsh, Mar­ket­Watch

    LONDON (Mar­ket­Watch) — The Bundesbank’s approval for last week’s Euro­pean Cen­tral Bank pack­age of liq­uid­i­ty mea­sures and inter­est-rate cuts into neg­a­tive ter­ri­to­ry appears to be part of a wider-rang­ing realign­ment of respon­si­bil­i­ties on the Euro­pean scene.

    A series of inter­linked ini­tia­tives could con­sol­i­date the posi­tion of reform-mind­ed lead­ers in key areas of Euro­pean pol­i­cy-mak­ing, rein­forc­ing eco­nom­ic and mon­e­tary union by even­tu­al­ly installing a Ger­man leader at the helm of the ECB.


    Keep in mind that the term “reform-mind­ed” is being used here in place of “pro-aus­ter­i­ty”.


    By lim­it­ing the cut in the ECB’s main inter­est rates to only 0.10 per­cent­age points, and agree­ing that rates have now reached their floor in Europe, Mario Draghi and Jens Wei­d­mann, the pres­i­dents of the ECB and the Bun­des­bank, have effec­tive­ly end­ed spo­radic skir­mish­ing that erupt­ed after they took their jobs in 2011.

    The con­clu­sion of hos­til­i­ties could pave the way for a still more dra­mat­ic rap­proche­ment if Wei­d­mann replaces for­mer Ban­ca d’Italia Gov. Draghi as ECB pres­i­dent in the next few years, as some observers believe is like­ly if Draghi takes over from 88-year-old Gior­gio Napoli­tano as Italy’s pres­i­dent in Rome.

    Mat­teo Ren­zi, the new Ital­ian prime min­is­ter, is emerg­ing as a piv­otal Euro­pean fig­ure fol­low­ing his more com­fort­able-than-expect­ed win in last month’s Euro­pean par­lia­men­tary elec­tions. Ger­man Chan­cel­lor Angela Merkel has fas­tened on Ren­zi as a poten­tial­ly reli­able ally in the swirling bat­tle for influ­ence caused by oscil­lat­ing pow­er strug­gles between Berlin, Paris, Lon­don and oth­er cap­i­tals.

    In par­tic­u­lar, Ren­zi has close rela­tions with Draghi, con­trast­ing to the ECB chief’s habit­u­al lean­ing to keep his dis­tance to Ital­ian politi­cians.

    Renzi’s sup­port for a reform-mind­ed pres­i­dent of the Euro­pean Com­mis­sion could prove cru­cial to attempts to pre­vent Jean-Claude Junck­er, the for­mer Lux­em­bourg prime min­is­ter and finance min­is­ter, who has been giv­en fluc­tu­at­ing back­ing by Ger­man Chan­cel­lor Angela Merkel, to take over the Brus­sels body lat­er this year.

    There is no love lost between the ECB and Junck­er, who as leader of the Euro group of finance min­is­ters tried to usurp some of the pow­er of Draghi’s pre­de­ces­sor Jean-Claude Trichet ear­li­er in the euro’s his­to­ry. In par­tic­u­lar, Junck­er tried to take over respon­si­bil­i­ty for the euro’s exchange rate, earn­ing from Trichet the rebuke that he as ECB pres­i­dent was “Mr. Euro” — a remark that rever­ber­at­ed against Trichet once the euro cri­sis came to the sur­face from 2010 onwards.

    Ren­zi will be cru­cial in machi­na­tions for the suc­ces­sion to Napoli­tano, pos­si­bly as ear­ly as around the time of his 90th birth­day in sum­mer 2015. Draghi is the front run­ner to take over, prob­a­bly before the end of his eight-year ECB term that runs to 2019. The tim­ing would depend on the open­ing of a rel­a­tive­ly calm peri­od in Ital­ian pol­i­tics and the Euro­pean econ­o­my, con­di­tions that can­not be guar­an­teed.

    A land­mark devel­op­ment for the Bun­des­bank pres­i­dent to lead the ECB would mark a more pro­pi­tious ver­sion of the foiled move in 2010-11 for Axel Weber, then-Bun­des­bank pres­i­dent, to suc­ceed Trichet, the ECB’s sec­ond pres­i­dent after Dutch­man Wim Duisen­berg.

    This plan was stymied by the then-Bun­des­bank chief’s uncom­pro­mis­ing nature and Merkel’s reluc­tance ful­ly to back the often iras­ci­ble Weber in the face of polit­i­cal reluc­tance, espe­cial­ly from France, to see a Ger­man head the ECB.

    Weber sub­se­quent­ly stepped down ear­ly from the Bun­des­bank and now chairs Swiss bank UBS. He was replaced by Wei­d­mann, Merkel’s for­mer eco­nom­ic advis­er, in May 2011, while Draghi took over from Trichet at the ECB six months lat­er.

    Wei­d­mann has tak­en a far more con­cil­ia­to­ry course than Weber towards oth­er mem­bers of the ECB gov­ern­ing coun­cil, refrain­ing from crit­i­cal state­ments and actions in recent months. In par­tic­u­lar, Wei­d­mann has made great efforts to patch up his rela­tions with Draghi after hav­ing opposed the latter’s ini­tia­tive in sum­mer 2012 for ECB gov­ern­ment-bond pur­chas­es under the effec­tive but uncon­sum­mat­ed out­right mon­e­tary trans­ac­tions (OMT) pro­gram.


    Also keep in mind that Axel Weber resigned as head of the Bun­des­bank in protest over the ECB’s will­ing­ness to buy lim­it­ed amounts of gov­ern­ment bonds in cri­sis hit coun­tries to pre­vent a down­ward spi­ral.


    A com­bi­na­tion of Draghi as the far-from-mere­ly-hon­orif­ic head of state of the coun­try often seen as the euro’s biggest long-term prob­lem, Wei­d­mann at the ECB (he would be replaced as Bun­des­bank pres­i­dent by ECB board mem­ber Sabine Laut­en­schläger) and a reformist leader of the Com­mis­sion could be a “dream team” for Europe.

    Last week’s ECB mea­sures, although super­fi­cial­ly a mon­e­tary oper­a­tion, bear all the hall­marks of a care­ful­ly craft­ed polit­i­cal com­pro­mise. The ECB launched a major strike against threat­ened defla­tion through the offer of up to €400 bil­lion in cheap, fixed-rate loans — known offi­cial­ly as tar­get­ed longer term refi­nanc­ing oper­a­tions (TLTRO).


    Draghi as pres­i­dent of Italy and Jens Wei­d­mann as head of the ECB. That’s the “dream team”, but it will require Italy’s pres­i­dent to leave office some time between now and 2019. The 88 year old pres­i­dent Gior­gio Napoli­tano. *gulp*

    Posted by Pterrafractyl | June 13, 2014, 12:46 pm
  12. And the beat­ings con­tin­ue:

    Ger­many’s Wei­d­mann rejects calls for euro deval­u­a­tion — mag­a­zine

    BERLIN Sun Jun 15, 2014 3:04pm BST

    (Reuters) — The head of Ger­many’s Bun­des­bank reject­ed calls from some Euro­pean coun­tries for the euro to be deval­ued to help exporters in a mag­a­zine inter­view pub­lished on Sun­day.

    In a pre-pub­li­ca­tion release, Ger­many’s Focus mag­a­zinereport­ed Jens Wei­d­mann as say­ing any move to weak­en the cur­ren­cy could lead oth­er cen­tral banks to fol­low suit, prompt­ing a “deval­u­a­tion race” that would only have losers.

    “Com­pet­i­tive­ness can­not be brought about through a deval­u­a­tion. It is gen­er­at­ed (by) com­pa­nies with attrac­tive prod­ucts that stand their ground on the mar­kets,” Wei­d­mann, seen as the most hawk­ish Euro­pean Cen­tral Bank pol­i­cy­mak­er, said.

    “A strong econ­o­my can also tol­er­ate a strong cur­ren­cy.”

    A strong cur­ren­cy makes exports more expen­sive.

    Yes, the guy that’s cham­pi­oned the notion of nation­al “inter­nal deval­u­a­tion” — which low­ers the costs of exports by slash­ing labor costs as the pri­ma­ry means of increas­ing “com­pet­i­tive­ness” — just said “com­pet­i­tive­ness can­not be brought about through a [cur­ren­cy] deval­u­a­tion”. Appar­ent­ly a “deval­u­a­tion race” to the bot­tom can only take place with cur­ren­cy deval­u­a­tions where­as races to deval­ue nation­al liv­ing stan­dards can nev­er get too com­pet­i­tive and only cre­ates win­ners.

    And, while “a strong econ­o­my can also tol­er­ate a strong cur­ren­cy”, what about weak economies stuck in a cur­ren­cy union that results in an arti­fi­cial­ly strong cur­ren­cy that makes their exports more expen­sive? Some­how that was­n’t addressed.



    Wei­d­mann, who on Thurs­day empha­sised his oppo­si­tion to the ECB buy­ing gov­ern­ment bonds, also appeared to dis­miss poten­tial pur­chas­es of oth­er assets by the euro zone cen­tral bank.

    “In some coun­tries — includ­ing in Ger­many — we see the dan­ger of a real estate bub­ble. And then we as the euro sys­tem should buy Dutch real estate loans?” he said.

    The ECB decid­ed unan­i­mous­ly this month to cut inter­est rates to record lows — tak­ing the rate on overnight deposits below zero — and to launch mea­sures to stim­u­late lend­ing to small and medi­um-sized com­pa­nies, the back­bone of the euro zone econ­o­my.

    Wei­d­mann said he had mis­giv­ings about the pack­age but had agreed to it because it was jus­ti­fi­able giv­en low infla­tion.

    He did not expect the neg­a­tive deposit rate would do much to boost loans in the euro zone, how­ev­er, argu­ing that banks pro­vid­ed few loans in south­ern regions because “many firms (there) hard­ly demand fresh mon­ey due to the weak econ­o­my”.

    So if Wei­d­mann “also appeared to dis­miss poten­tial pur­chas­es of oth­er assets by the euro zone cen­tral bank,” does­n’t that basi­cal­ly rule out the ECB’s pro­posed pur­chase of asset backed secu­ri­ties next year? Uh oh. Although he does make a valid point at the end:

    He did not expect the neg­a­tive deposit rate would do much to boost loans in the euro zone, how­ev­er, argu­ing that banks pro­vid­ed few loans in south­ern regions because “many firms (there) hard­ly demand fresh mon­ey due to the weak econ­o­my”.

    If banks are pro­vid­ing few loans in south­ern regions because “many firms (there) hard­ly demand fresh mon­ey due to the weak econ­o­my”, that would indeed raise ques­tions about the effec­tive­ness of the planned pur­chase of asset backed secu­ri­ties since the whole point of the plan was to make loans more acces­si­ble to small and medi­um sized busi­ness­es?

    But, of course, it also rais­es the same old ques­tion of what can soci­eties do when gov­ern­ment stim­u­lus is per­ma­nent­ly vetoed by the Wei­d­mann-fac­tion, and a drop in the euro (to trig­ger exports) is also deter­mined to be unnec­es­sary? Oh yeah, soci­ety can just con­tin­ue “inter­nal­ly devalu­ing” itself through aus­ter­i­ty until its prod­ucts get so cheap that rest of the world just can’t help but buy its prod­ucts. It should start work­ing any year now.

    Posted by Pterrafractyl | June 18, 2014, 11:02 am
  13. This is bare­ly news at this point, but look who just came out against the ECB’s QE plans to buy asset-backed secu­ri­ties:

    Bun­des­bank chief — do not turn ECB into Europe’s bad bank
    Reuters, 25/06 17:24 CET

    HALLE Ger­many (Reuters) – Germany’s top cen­tral banker has warned the Euro­pean Cen­tral Bank against buy­ing secu­ri­tised debt, say­ing that such a move could turn it into the bad bank of Europe.

    “The revival of the secu­ri­ti­sa­tion mar­ket is not a pri­ma­ry task of mon­e­tary pol­i­cy,” Euro­pean Cen­tral Bank pol­i­cy­mak­er Jens Wei­d­mann told an audi­ence in Halle in east­ern Ger­many.

    “The euro sys­tem must not become the bad bank of Europe by tak­ing risks off banks and pass­ing them onto the tax­pay­er.”

    Weidmann’s blunt remarks fol­low prepa­ra­tions by the ECB for pos­si­ble future pur­chas­es of asset-backed secu­ri­ties. It is a key plank in plans to revive lend­ing to small com­pa­nies.

    Now the oppo­si­tion from Ger­many pos­es an obsta­cle to its launch.

    The mar­ket is poten­tial­ly large. Banks have lent almost 4 tril­lion euros in loans of under 1 mil­lion euros.


    While the QE plan is rather ques­tion­able (due in large part to ongo­ing aus­ter­i­ty regimes that will neu­tral­ize its effects), this sto­ry is a reminder that the Bun­des­bank’s ide­ol­o­gy basi­cal­ly revolves around being a cen­tral bank that refus­es to do the things cen­tral banks are sup­posed to do. That’s the sup­posed mag­ic to Ger­many’s eco­nom­ic suc­cess accord­ing to Bun­des­bank lore, not the fact that Ger­many is a giant high tech man­u­fac­tur­ing hub that plays a key a role in the glob­al indus­tri­al sup­ply chain. In the minds of the Bun­des­bank, Ger­many’s eco­nom­ic suc­cess is heav­i­ly reliant on the Bun­des­bank doing noth­ing and that mod­el must now be per­ma­nent­ly export­ed to the ECB. Nice work if you can get it.

    Posted by Pterrafractyl | June 28, 2014, 5:01 pm
  14. FWIW, the IMF just told the ECB that not only should the ECB be engag­ing in QE, but it should be doing it via large scale gov­ern­ment bond pur­shas­es. While it’s pret­ty much guar­an­teed that this sug­ges­tion will go absolute­ly nowhere due to Bun­des­bank oppo­si­tion, the IMF should prob­a­bly get brown­ie points for at least try­ing:

    The Wall Street Jour­nal
    IMF Touts Quan­ti­ta­tive Eas­ing Ben­e­fits for ECB
    Fund Stops Short of Call for Imme­di­ate Imple­men­ta­tion

    By Bri­an Black­stone
    Updat­ed July 14, 2014 10:26 a.m. ET

    Large-scale pur­chas­es of gov­ern­ment bonds by the Euro­pean Cen­tral Bank would boost euro zone infla­tion and stim­u­late demand for bank cred­it, the Inter­na­tion­al Mon­e­tary Fund said Mon­day in its lat­est effort to tout the poten­tial ben­e­fits of quan­ti­ta­tive eas­ing in Europe.

    The IMF stopped short of call­ing on the ECB to imme­di­ate­ly embark on the pol­i­cy, which stirs deep skep­ti­cism in the euro zone’s largest mem­ber, Ger­many.

    But the com­ments from the Wash­ing­ton-based inter­na­tion­al lender—contained in a blog post address­ing the ques­tion: “would the juice be worth the squeeze”—largely come down in favor of quan­ti­ta­tive eas­ing as a means to lift infla­tion rates across the 18-mem­ber euro bloc.

    Quan­ti­ta­tive eas­ing “can push up infla­tion by rais­ing con­sump­tion and invest­ment across the euro area, and sup­port that trend by reviv­ing the sup­ply and demand for bank cred­it,” wrote Reza Moghadam, head of the IMF’s Euro­pean depart­ment, and the depart­men­t’s deputy direc­tor Ran­jit Teja.

    Annu­al infla­tion in the euro zone was just 0.5% in June, far below the ECB’s tar­get of a lit­tle under 2%. Last month, the ECB took a num­ber of steps to raise infla­tion, includ­ing a neg­a­tive rate on bank deposits parked at the ECB and a long-term loan pro­gram that would give banks cheap cred­it pro­vid­ed they boost lend­ing to busi­ness­es.

    The ECB did­n’t announce a broad-based asset pur­chase pro­gram, though offi­cials have said it remains an option if the out­look for infla­tion erodes fur­ther.

    If the ECB decides to go this route, it should focus on gov­ern­ment bonds as the “only viable option,” the IMF offi­cials wrote, not­ing that the mar­ket for bun­dled loans and cor­po­rate bonds is small in Europe.


    The IMF rebutted argu­ments made by skep­tics of quan­ti­ta­tive eas­ing: that gov­ern­ment bond yields are already super-low in Europe, lim­it­ing the poten­tial ben­e­fit; that the euro zone’s bank-based econ­o­my is less sen­si­tive to QE; and that the pol­i­cy could cre­ate desta­bi­liz­ing asset bub­bles.

    “A decline in Euro­pean yields of 50 basis points at mid-matu­ri­ties, and more at the longer end, is entire­ly plau­si­ble,” the authors wrote. And Euro­pean finan­cial mar­kets are rough­ly as bank-based as Japan’s, where quan­ti­ta­tive eas­ing has been suc­cess­ful since last year, they not­ed.

    And while reduc­ing gov­ern­ment bond yields may spur riski­er lend­ing, “it is also the point” of the pol­i­cy, they observed. “While risk-tak­ing and cred­it growth may grow exces­sive, this is not an imme­di­ate risk, cer­tain­ly not next to that of too low infla­tion,” they wrote.

    Still, the bar for quan­ti­ta­tive eas­ing appears high in the euro zone. ECB offi­cials have sig­naled they want to gauge the effect of June’s eas­ing steps before weigh­ing addi­tion­al moves.

    A Ger­man mem­ber of the ECB’s exec­u­tive board, Sabine Laut­en­schlaeger, said last week that while quan­ti­ta­tive eas­ing is an option, “such an instru­ment could only be con­sid­ered in a true emer­gency, for exam­ple in the case of immi­nent defla­tion” and that these risks “are cur­rent­ly nei­ther dis­cernible nor expect­ed.”

    Such hes­i­ta­tion would have to be shed in order for quan­ti­ta­tive eas­ing to be effect­ing, the IMF com­ments sug­gest.

    “It would not help if the ECB went for QE with any­thing less than full con­vic­tion,” the authors wrote.

    Touch­ing on this top­ic, ECB Coun­cil mem­ber Ewald Nowot­ny recent­ly stat­ed that if the ECB can’t come up with a QE plan it can agree on by the end of the year it should just drop the idea of QE entire­ly. As Nowot­ny put it, “if we’re not able to come up with some kind of plan this year, the con­clu­sion should be that, unfor­tu­nate­ly, it is too dif­fi­cult for Europe, giv­en the mate­r­i­al dif­fer­ences, and that it would make no sense...This is in Europe much more dif­fi­cult than in the U.S. and the U.K. because of strong diver­gences, not least on the legal side.”

    In oth­er news, the con­fi­dence fairies of the mar­ket­place don’t appear to have very much con­fi­dence in the ECB. Imag­ine that.

    Posted by Pterrafractyl | July 17, 2014, 12:45 pm
  15. The good news: main­stream macro­econ­o­mists are over­whelm­ing­ly sup­port­ive of real fis­cal stim­u­lus poli­cies when the econ­o­my needs it. The bad news: no one cares:

    The New York Times
    The Con­science of a Lib­er­al

    Use­less Exper­tise
    Paul Krug­man
    Jul 30 2:05 pm

    Justin Wolfers calls our atten­tion to the lat­est IGM sur­vey of eco­nom­ic experts, which revis­its the ques­tion of the effi­ca­cy of fis­cal stim­u­lus. IGM has been try­ing to pose reg­u­lar ques­tions to a more or less bal­anced pan­el of well-regard­ed econ­o­mists, so as to estab­lish where a con­sen­sus of opin­ion more or less exists. And when it comes to stim­u­lus, the con­sen­sus is fair­ly over­whelm­ing: by 36 to 1, those respond­ing believe that the ARRA reduced unem­ploy­ment, and by 25 to 2 they believe that it was ben­e­fi­cial.

    This is, if you think about it, very depress­ing.

    Wolfers is encour­aged by the degree of con­sen­sus — eco­nom­ics as a dis­ci­pline is not as quar­rel­some as its rep­u­ta­tion. But I think about pol­i­cy and polit­i­cal dis­course, and note that pol­i­cy has been dom­i­nat­ed by pro-aus­ter­i­ty views while stim­u­lus has become a dirty word in pol­i­tics.

    What this says is that in prac­ti­cal terms the pro­fes­sion­al con­sen­sus doesn’t mat­ter. Alber­to Alesina may be lit­er­al­ly the odd man out, the only mem­ber of the pan­el who doesn’t believe that the fis­cal mul­ti­pli­er is pos­i­tive — but back when key deci­sions were being made, it was “Alesina’s hour” in Europe and among Repub­li­cans.

    You might want to say that the pro­fes­sion­al con­sen­sus was reject­ed because it didn’t work. But actu­al­ly it did. Main­stream macro­eco­nom­ics made some pre­dic­tions — deficits wouldn’t dri­ve up inter­est rates in a depressed econ­o­my, “fiat mon­ey” wouldn’t be infla­tion­ary, aus­ter­i­ty would lead to eco­nom­ic con­trac­tion — that drew wide­spread scorn; Stephen Moore at the WSJ (which was pre­dict­ing soar­ing rates and infla­tion) dis­missed “fan­cy the­o­ries” that “defy com­mon sense.” The fan­cy the­o­rists were, of course, right — but nobody who reject­ed the con­sen­sus has changed his mind. Oh, and Moore became the chief econ­o­mist at Her­itage.

    So, two thoughts. One is a point I think I’ve made before. You fair­ly often hear peo­ple describe the very poor track record of pol­i­cy since 2008 as an indict­ment of econ­o­mists, who clear­ly didn’t have the right answers. But actu­al­ly main­stream macro has a pret­ty decent track record since 2008 — the prob­lem was that what it said about pol­i­cy was dis­re­gard­ed by the pol­i­cy­mak­ers, who went with what they want­ed to believe.

    The oth­er is that you have to won­der what good we’re all doing. If pol­i­cy­mak­ers ignore pro­fes­sion­al con­sen­sus, and if views about how the world works are com­plete­ly insen­si­tive to evi­dence and results, does knowl­edge mat­ter. If a tree falls in the aca­d­e­m­ic for­est, but nobody in Brus­sels or Wash­ing­ton hears it, did it make a sound?

    If a tree falls in the aca­d­e­m­ic for­est, but nobody in Brus­sels or Wash­ing­ton hears it, did it make a sound? Of course it does! It makes the sound of roots get­ting torn out (until Paul Krug­man runs out of hair).

    But even if DC or Brus­sels did hear a tree cry­ing out “stimuu­u­u­u­lu­u­ussss!” as it fell, the term “stim­u­lus” has just been rede­fined to include only mon­e­tary stim­u­lus poli­cies (i.e. loose mon­ey poli­cies for the banks). And yes, those kinds of poli­cies cer­tain­ly have their place, but the kind of stim­u­lus Krug­man is refer­ring to, where the gov­ern­ment actu­al­ly spends mon­ey mak­ing new invest­ments in areas like infra­struc­ture and research in order to stim­u­late the econ­o­my while doing use­ful things, has become com­plete­ly unper­son­ed. The idea just isn’t dis­cussed any­more. So whether or not pol­i­cy-mak­ers hear about the grow­ing con­cen­sus amongst econ­o­mists that the “stim­u­lus” was help­ful and need­ed, it’s prob­a­bly not going to mat­ter very much. Con­tem­po­rary pol­i­cy-mak­ers only speak mon­e­tary-ese, and the term “stim­u­lushas a very lim­it­ed def­i­n­i­tion in mon­e­tary-ese:

    ECB Patience Test: Euro-Area Infla­tion Seen Stick­ing Low
    By Ste­fan Riech­er and Gio­van­ni Salzano Jul 28, 2014 6:58 AM CT

    When the Euro­pean Cen­tral Bank unleashed a stim­u­lus bar­rage in June, it cau­tioned that the econ­o­my would take some time to respond. Data due this week may test its patience.

    The infla­tion rate remained at 0.5 per­cent for a third month in July, accord­ing to the medi­an fore­cast of 42 econ­o­mists in a Bloomberg sur­vey. The unem­ploy­ment rate remained unchanged at 11.6 per­cent in June, a sep­a­rate sur­vey shows. That may fuel pol­i­cy mak­ers’ con­cern that annu­al price gains will become entrenched at a frac­tion of the ECB’s goal of just under 2 per­cent, and increase calls for fur­ther action.

    The ECB unveiled a range of mea­sures includ­ing a neg­a­tive deposit rate and tar­get­ed long-term loans last month. While the pack­age has helped push the aver­age yield on bonds from Europe’s most-indebt­ed nations to a record low and bol­stered man­u­fac­tur­ing and ser­vices in a vote of con­fi­dence, it has yet to show its impact on prices, growth and lend­ing, as geopo­lit­i­cal ten­sions threat­en to under­mine the recov­ery.

    “Spec­u­la­tion about an asset-pur­chase pro­gram from the ECB is like­ly to gain fur­ther trac­tion,” said Ben­jamin Schroed­er, an inter­est-rates strate­gist at Com­merzbank AG in Frank­furt. “The crises in Ukraine and the Mid­dle East should remain a dri­ving fac­tor” for the euro-area econ­o­my, he said.

    The Euro­pean Union’s sta­tis­tics office is due to release infla­tion and job­less data on July 31 at 11 a.m. in Lux­em­bourg. These releas­es will be pre­ced­ed on July 30 by reports on euro-area busi­ness con­fi­dence at 11 a.m. and Ger­man infla­tion at 2 p.m.

    Eco­nom­ic Des­tiny

    The des­tiny of the euro area hinges on Europe’s largest econ­o­my, which saw gross domes­tic prod­uct grow­ing 0.8 per­cent in the first quar­ter, four times the cur­ren­cy bloc’s rate.

    The Bun­des­bank has warned that polit­i­cal uncer­tain­ty in some of the country’s export mar­kets may weigh on busi­ness and said that the econ­o­my may have stag­nat­ed in the sec­ond quar­ter. Sen­ti­ment as mea­sured by the Ifo research insti­tute dropped more than econ­o­mists pre­dict­ed in July to the low­est lev­el in nine months.

    Even so, gauges of Ger­man man­u­fac­tur­ing and ser­vices out­put sig­nal a rebound in activ­i­ty to lev­els seen at the begin­ning of the year, Mark­it Eco­nom­ics said last week. Sim­i­lar mea­sures for the euro area also strength­ened this month in a sign of con­fi­dence that ECB stim­u­lus will even­tu­al­ly sup­port the recov­ery.


    “The com­bi­na­tion of mon­e­tary pol­i­cy mea­sures decid­ed last month has already led to a fur­ther eas­ing of the mon­e­tary pol­i­cy stance,” Draghi said on July 3.

    The rate banks charge each oth­er for overnight lend­ing has aver­aged at 0.04 per­cent so far this month, com­pared with 0.26 per­cent in May, before the pack­age was announced. The rate was at 0.043 per­cent on July 25.

    Fresh stim­u­lus has also fueled a ral­ly in bonds that cut Span­ish 10-year bor­row­ing costs to a record 2.524 per­cent last week and helped Ital­ian debt of the same matu­ri­ty drop for the most con­sec­u­tive days since 2005.

    Bank Lend­ing

    Lend­ing to com­pa­nies and house­holds, which the ECB has iden­ti­fied as key imped­i­ment to the region’s recov­ery, hasn’t yet improved. Loans shrank 1.7 per­cent in June from a year ear­li­er, record­ing the 26th con­sec­u­tive con­trac­tion. The ECB’s Bank Lend­ing Sur­vey, to be pub­lished on July 30, will show whether sup­ply or demand is to be blamed.

    Pol­i­cy mak­ers have placed their hopes on a tar­get­ed lend­ing pro­gram offer­ing banks low-cost funds for as long as four years that could, accord­ing to Draghi, inject as much as 1 tril­lion euros ($1.34 tril­lion) into the finan­cial sys­tem.

    “Let’s focus on get­ting these exist­ing, new­ly announced mea­sures going” before intro­duc­ing addi­tion­al pol­i­cy action, ECB Gov­ern­ing Coun­cil mem­ber Ardo Hans­son said in an inter­view on July 16. “It’s worth prepar­ing, it’s worth hav­ing more tools, but I don’t think quan­ti­ta­tive eas­ing is a tool that’s need­ed right now.”

    Yes, lend­ing to com­pa­nies and house­hold, some­thing that the ECB has iden­ti­fied as key imped­i­ment to the region’s recov­ery, shrank for the 26th con­sec­u­tive month across the euro­zone. So why don’t we all wait anoth­er half a year to see if the ECB should apply more mon­e­tary stim­u­lus while also allow­ing the ongo­ing “expan­sion­ary aus­ter­i­ty” poli­cies work their mag­ic too.

    Posted by Pterrafractyl | July 30, 2014, 2:45 pm
  16. Uh oh:

    Wei­d­mann jock­ey­ing to replace Draghi at ECB
    Opin­ion: A German’s ascen­sion would be con­tro­ver­sial even in Berlin
    David Marsch
    Aug. 4, 2014, 11:45 p.m. EDT

    Jens Wei­d­mann, pres­i­dent of the Ger­man Bun­des­bank, appears to be shap­ing up well as the poten­tial next head of the Euro­pean Cen­tral Bank, pos­si­bly well before the eight-year term of Mario Draghi, the incum­bent, expires at the end of Octo­ber 2019.

    In con­trast to his pre­de­ces­sor, Axel Weber, who in 2011 reject­ed the pos­si­bil­i­ty of tak­ing the ECB helm because of what he believed would be impos­si­ble con­di­tions for suc­cess, Wei­d­mann has hard-to-beat cre­den­tials. But his appoint­ment at the cen­ter of the 18-mem­ber eco­nom­ic and mon­e­tary union (EMU) would be deeply con­tro­ver­sial.

    Some non-Ger­mans would inter­pret it as a sign that con­trol over the euro area was final­ly mov­ing to Berlin — anath­e­ma to many tra­di­tion­al believ­ers in Euro­pean uni­ty. Many euroskep­ti­cal Ger­mans, on the oth­er hand, would see co-opt­ing Wei­d­mann into the ECB role as weak­en­ing Ger­man resis­tance to a Fran­co-Ital­ian cam­paign to shift EMU poli­cies away from sta­bil­i­ty-ori­ent­ed ortho­doxy, mark­ing the Bundesbank’s final loss of inde­pen­dence and polit­i­cal emas­cu­la­tion.

    Just as there is uncer­tain­ty about pre­cise­ly what the move would mean, whether Wei­d­mann will get the top job is mired in doubt. The appoint­ment of the ECB’s first three pres­i­dents, Wim Duisen­berg, for­mer pres­i­dent of the Dutch cen­tral bank, Jean-Claude Trichet, for­mer head of the Banque de France, then Draghi from the Ban­ca d’Italia, was dogged by polit­i­cal infight­ing. Weidmann’s ascent would be no dif­fer­ent.
    What hap­pens next depends on cir­cum­stances beyond anyone’s con­trol, rang­ing from Ital­ian polit­i­cal vicis­si­tudes to whether a two-year EMU eco­nom­ic truce holds.

    One cru­cial fac­tor is that Gior­gio Napoli­tano, Ital­ian pres­i­dent since 2006, who reluc­tant­ly agreed to stay on when his sev­en-year term expired in April 2013, is believed to wish to stand down around the time of his 90th birth­day on June 29, 2015. Draghi is the clear favorite to suc­ceed him.

    Whether a tran­si­tion in the piv­otal func­tion of Italy’s head of state should take place before or after the inevitable next cri­sis in Ital­ian pol­i­tics is a moot point.

    At present, Mat­teo Ren­zi, the 39-year-old prime min­is­ter, is ben­e­fit­ing from a bet­ter-than-expect­ed show­ing in the May Euro­pean elec­tions. Yet his wide-rang­ing reform pro­gram is already show­ing signs of run­ning into polit­i­cal oppo­si­tion. Dif­fi­cul­ties are bound to grow from autumn onwards if he achieves no quick break­through in alle­vi­at­ing Italy’s 20 years of polit­i­cal and eco­nom­ic stag­na­tion.

    Sim­i­lar­ly, Draghi is cred­it­ed with pre­sid­ing over a return of EMU con­fi­dence with his so far unre­quit­ed pledge in July 2012 to use the ECB’s pow­ers to print mon­ey to save the euro. The ECB’s unused out­right mon­e­tary trans­ac­tions (OMT) scheme has ush­ered in a long decline in bor­row­ing costs among hard-hit periph­er­al coun­tries, also reflect­ing and at first wel­come, now wor­ry­ing decline, in euro-area infla­tion.

    How­ev­er, cheap­er gov­ern­ment financ­ing has act­ed as a dis­in­cen­tive to thor­ough-going eco­nom­ic reform that has pro­longed the euro area’s low growth. The ECB now faces the haz­ard of engi­neer­ing a fur­ther peri­od of cheap mon­ey at a time when U.S. rates are about to rise.

    As Chan­cel­lor Angela Merkel’s for­mer chief eco­nom­ic advis­er, Wei­d­mann strad­dles pol­i­tics and cen­tral bank­ing. But he has made clear his pri­ma­ry alle­giance is to the Bundesbank’s hard-mon­ey prin­ci­ples.

    If he became ECB leader, Wei­d­mann would show the politi­cians that the bank’s sway is not unlim­it­ed. He believes that the key to solv­ing EMU’s abid­ing con­tra­dic­tions and conun­drums lies with gov­ern­ments, not with cen­tral bankers.


    Well isn’t that omi­nous.

    Note that when the arti­cle states “How­ev­er, cheap­er gov­ern­ment financ­ing has act­ed as a dis­in­cen­tive to thor­ough-going eco­nom­ic reform that has pro­longed the euro area’s low growth. The ECB now faces the haz­ard of engi­neer­ing a fur­ther peri­od of cheap mon­ey at a time when U.S. rates are about to rise,” this is only real­ly true if you sub­scribe to the sadomon­e­tarist school of eco­nom­ic thought that views debt mon­ey and debt as the cen­ter of the econ­o­my (as opposed to peo­ple try­ing to live) with lit­tle regard to the com­plex­i­ties of soci­ety’s needs or how economies actu­al­ly func­tion. It’s basi­cal­ly a form of eco­nom­ic reli­gious fun­da­men­tal­ism and you would have to be kind of crazy to believe in it. Much like Jens Wei­d­mann.

    Posted by Pterrafractyl | August 5, 2014, 4:58 pm
  17. The ECB left inter­est rates unchanged last week and stands ready to con­tin­ue doing noth­ing, as expect­ed, but prob­a­bly not as rec­om­mend­ed giv­en the cir­cum­stances:

    The Tele­graph
    Ger­many close to reces­sion as ECB admits recov­ery is weak
    Mario Draghi says the recov­ery remains “weak, frag­ile and uneven”, with a marked slow­down in recent weeks

    By Ambrose Evans-Pritchard

    8:19PM BST 07 Aug 2014

    Ger­man bonds yields plunged to a his­toric low and two-year rates briefly fell below zero on Thurs­day on fears of widen­ing reces­sion in the euro­zone, and a flight to safe­ty as Russ­ian troops massed on the Ukrain­ian bor­der.

    Yields on 10-year Bunds dropped to 1.06pc after a bliz­zard of fresh data showed that recov­ery has stalled across most of the cur­ren­cy bloc, with even Ger­many now uncom­fort­ably close to reces­sion.

    Com­merzbank warned that the Ger­man econ­o­my may have con­tract­ed by 0.2pc in the sec­ond quar­ter and is far too weak to pull south­ern Europe out of the dol­drums. Indus­tri­al out­put fell 1.5pc over the three months. The DAX index of equi­ties in Frank­furt has dropped 10pc over the past month and is threat­en­ing to break through the psy­cho­log­i­cal floor of 9,000.

    Mario Draghi, head of the Euro­pean Cen­tral Bank (ECB), said the recov­ery remained “weak, frag­ile and uneven”, with a marked slow­down in recent weeks on esca­lat­ing geopo­lit­i­cal wor­ries over Rus­sia and the Mid­dle East.

    He said the ECB, which on Thurs­day held bench­mark inter­est rates at 0.15pc, “stands ready” to inject mon­ey through pur­chas­es of asset-backed secu­ri­ties and quan­ti­ta­tive eas­ing if need­ed, but would not take fur­ther action yet even though infla­tion had fall­en to 0.4pc.

    The debt mar­kets are pric­ing in 0.5pc infla­tion in Ger­many and Italy over the next five years through so-called “break-even” rates, evi­dence that investors think the ECB is falling far behind the curve. Mr Draghi insist­ed that a string of mea­sures unveiled in June were start­ing to work and should be enough to stave off defla­tion.

    The ECB ignored pleas from lead­ing econ­o­mists for pre-emp­tive action to bol­ster the eurozone’s defences before an exter­nal shock hit and before the US Fed­er­al Reserve tight­ened mon­e­tary pol­i­cy, an inflec­tion point that risks send­ing tremors through the glob­al sys­tem, accord­ing to a paper by the Chica­go Fed.

    Hopes for a swift rebound in Ger­many are fad­ing. The eco­nom­ics min­istry said new orders in man­u­fac­tur­ing fell 3.2pc in June, with orders from the rest of the euro­zone col­laps­ing by 10.4pc. “What this shows is that Europe is nowhere close to recov­ery. Mon­e­tary pol­i­cy has run out of trac­tion,” said Steen Jakob­sen from Saxo Bank.


    The euro fell to a nine-month low of $1.3347 against the dol­lar after Mr Draghi said the “fun­da­men­tals for a weak­er exchange rate are much bet­ter than they were two or three months ago”, a clear attempt to dri­ve down the cur­ren­cy by ver­bal means. “Mr Draghi could bare­ly hide his enthu­si­asm for the weak­er euro,” said Ken Wat­tret ‚from BNP Paribas.

    A weak­er euro should prove a buffer against defla­tion but the dam­age already runs deep. Italy has fall­en back into a triple-dip reces­sion, with GDP return­ing to lev­els last seen 14 years ago. The tox­ic mix of reces­sion and very low infla­tion is a grave threat to Italy’s debt tra­jec­to­ry.

    The pub­lic debt ratio jumped from 130.2pc to 135.6pc of GDP in the first quar­ter from a year ear­li­er and will now rise again, despite aus­ter­i­ty mea­sures and a pri­ma­ry bud­get sur­plus.

    “The pic­ture is get­ting worse rather than bet­ter. We are going to get to 140pc for sure next year. Nobody knows when the mar­kets will react,” said a senior Ital­ian banker.

    “The pub­lic debt ratio jumped from 130.2pc to 135.6pc of GDP in the first quar­ter from a year ear­li­er and will now rise again, despite aus­ter­i­ty mea­sures and a pri­ma­ry bud­get sur­plus.” This sounds like a job for more aus­ter­i­ty.

    Posted by Pterrafractyl | August 9, 2014, 5:54 pm
  18. Here’s anoth­er arti­cle describ­ing how investors are scoop­ing up assets in the euro­zone based on the bet that the euro­zone econ­o­my will do so poor­ly that that the ECB will be final­ly forced to do much more to stim­u­late the euro­zone econ­o­my. So it’s like a vote of con­fi­dence in ECB incom­pe­tence but an even­tu­al return to san­i­ty:

    Ger­man yields recall Japan “lost decade” but mar­kets still trust ECB

    Fri Aug 15, 2014 10:26am EDT

    * Bund yields reach Japan-like ter­ri­to­ry around 1 per­cent

    * Pres­sure on the ECB to buy bonds increas­es

    * Mar­kets still see infla­tion even­tu­al­ly hit­ting ECB tar­get

    * Bunds seen safest place to be if ECB fails on infla­tion

    By Mar­ius Zaharia

    LONDON, Aug 15 (Reuters) — Ger­man Bund yields at 1 per­cent are stok­ing fears that the euro zone faces a “lost decade” of eco­nom­ic stag­na­tion and inces­sant strug­gle to lift infla­tion, sim­i­lar to that of the only oth­er coun­try where bor­row­ing costs hit such lev­els — Japan.

    At the same time, anoth­er indi­ca­tor in the bond mar­ket shows investors expect infla­tion will even­tu­al­ly rise to the Euro­pean Cen­tral Bank’s tar­get of just below 2 per­cent.

    The dis­crep­an­cy sug­gests that mar­kets are bank­ing on the fact that the ECB will take new mon­e­tary pol­i­cy eas­ing mea­sures to lift price growth and explains why investors are will­ing to buy assets that, on the face of it, might lose them mon­ey.

    And even if the ECB, like the Bank of Japan, fails to lift price growth, investors see val­ue in Bunds because the top-rat­ed asset should offer them pro­tec­tion from any reig­ni­tion of the debt cri­sis that the lack of infla­tion might trig­ger.

    “A break below 1.0 per­cent will arguably see the ongo­ing debate as to the pos­si­ble Japan­i­fi­ca­tion of Europe grow­ing sub­stan­tial­ly more vol­u­ble,” said Richard McGuire, senior rate strate­gist at Rabobank.

    “This, in turn, would very like­ly ratch­et up the pres­sure on the ECB to do more.”

    Finan­cial mar­kets’ and the ECB’s pre­ferred mea­sure of the infla­tion out­look, the five-year, five-year for­ward breakeven rate, which mea­sures rough­ly where investors see five-year infla­tion rates in five years’ time, stands just above 2 per­cent.

    After the ECB cut all its inter­est rates in June and promised long-term cheap loans to banks (TLTROs) from Sep­tem­ber, investors are increas­ing­ly bet­ting the cen­tral bank will even­tu­al­ly buy bonds and print mon­ey — a mon­e­tary tool known as quan­ti­ta­tive eas­ing (QE).

    This would allow investors to prof­it from buy­ing Bunds yield­ing 1 per­cent if they sell them lat­er to the ECB at a high­er price — and implic­it­ly a low­er yield.

    Ten-year Ger­man yields, the bench­mark for euro zone bor­row­ing costs, trad­ed at 1.01 per­cent on Fri­day, hav­ing hit a record low of just below 1 per­cent the pre­vi­ous day, after data showed the euro zone econ­o­my stag­nat­ing in the sec­ond quar­ter and July’s final infla­tion fig­ures at just 0.4 per­cent.


    “The mar­ket is pric­ing in prop­er QE if the TLTROs don’t work,” he said.


    Equiv­a­lent Japan­ese bonds yield 0.50 per­cent. They first hit 1 per­cent in 1998 and the Bank of Japan’s con­stant strug­gle to lift infla­tion meant that they have not moved more than rough­ly 1 per­cent­age point away from that lev­el ever since.

    Ten-year yields had nev­er hit 1 per­cent in any oth­er coun­try before. U.S. yields troughed at 1.36 per­cent in 2012 at the height of the euro zone cri­sis when investors were seek­ing assets per­ceived as safe havens.

    That episode, in fact, offers anoth­er argu­ment for buy­ing Bunds for returns low­er than the expect­ed infla­tion. Ger­man debt is seen as one of the safest assets in the world.

    If the ECB fails to lift price growth in the medi­um term, the euro zone cri­sis might reignite and at that stage investors will be con­cerned about get­ting their mon­ey back rather than a return on their assets.

    Coun­tries such as Spain and Italy, which were at the fore­front of the cri­sis two years ago as they were seen as too big to bail out, bad­ly need infla­tion to be able to stop their 3 tril­lion euro com­bined debts ris­ing fur­ther.

    “Italy is at risk at some stage of restruc­tur­ing its debt. It’s very hard with infla­tion at zero ... to sta­bilise the debt,” said Robin Mar­shall, direc­tor for fixed income at Smith & Williamson.

    “Bund prices add a bit of dis­count for the risks in the periph­ery ... But we’ve hit 1 per­cent with­out a true cri­sis in the periph­ery so you begin to won­der where we would go if we actu­al­ly had a cri­sis.”

    Posted by Pterrafractyl | August 16, 2014, 2:15 pm
  19. And the euro­zone con­tin­ues to be boxed in by its own plans to push itself off a cliff and then wait and see what hap­pens:

    ECB in pol­i­cy lim­bo, boxed in by its own plans

    By Paul Car­rel and Eva Tay­lor

    FRANKFURT Tue Aug 19, 2014 6:33am EDT

    (Reuters) — The Euro­pean Cen­tral Bank is in a pol­i­cy no man’s land, bom­bard­ed by news of a stag­nat­ing euro zone econ­o­my but hes­i­tant to move for­ward with new stim­u­lus until mea­sures it loaded in June have ignit­ed.

    After the ECB cut inter­est rates in June and promised banks cheap long-term loans start­ing in Sep­tem­ber, about all that is left is print­ing mon­ey to buy bonds — so-called quan­ti­ta­tive eas­ing (QE).

    But there are tricky prac­ti­cal and polit­i­cal bar­ri­ers in the ECB’s way: it is boxed in by its own plans, and still faces strong oppo­si­tion from eco­nom­ic pow­er Ger­many to any such mon­e­tary lenien­cy.

    Already deployed by oth­er major cen­tral banks, QE could be used to pump mon­ey into the euro zone econ­o­my with a view to stim­u­lat­ing growth and staving off defla­tion, which has already gripped some coun­tries in the bloc’s south.


    Yet the ECB may be in a wait-and-see mode for some time, wait­ing until the mea­sures it announced in June kick in. The first tranche of long-term loans it is offer­ing banks to stim­u­late lend­ing, called TLTROs, is not avail­able until Sept. 18, with a sec­ond shot in Decem­ber.


    And as well as TLTROs, the ECB is also inten­si­fy­ing prepa­ra­tions to buy asset-backed secu­ri­ties (ABS), which are cre­at­ed by banks pool­ing loans into an inter­est-bear­ing bond that is sold to raise funds.

    The ABS mar­ket has not recov­ered fol­low­ing the glob­al finan­cial cri­sis, but the ECB hopes that by sup­port­ing this seg­ment it can get cred­it to the small­er firms that make up the back­bone of the euro zone econ­o­my.

    Any ABS plan is like­ly to be small, but the ECB expects take-up of 450–850 bil­lion euros ($601 billion-$1.13 tril­lion) for the TLTROs, poten­tial­ly more than the total annu­al GDP of the Nether­lands.

    How­ev­er, despite the queued-up stim­u­lus, improv­ing cred­it con­di­tions and the prospect of a more robust bank­ing sec­tor thanks to upcom­ing health checks, France and gov­ern­ments fur­ther south want the ECB to do more to buoy their economies, which they have been unable — or unwill­ing — to shape up.

    “I am con­vinced that more can be done and I’m also con­vinced that the ECB is get­ting ready to do more,” Ital­ian Econ­o­my Min­is­ter Pier Car­lo Padoan told the BBC at the week­end.

    Indeed, a Reuters poll of euro mon­ey mar­ket traders gives a 50 per­cent chance that the ECB will resort to QE-style asset pur­chas­es to boost infla­tion in the com­ing year. [ECB/REFI]


    But wait­ing for evi­dence that what it has done is work­ing is only part of the ECB’s QE dilem­ma. Some pol­i­cy­mak­ers believe QE is inap­pro­pri­ate; oth­ers are not sure it would work any­way.

    Hawk­ish ECB pol­i­cy­mak­ers are still deeply resis­tant to the idea. For exam­ple, ECB Exec­u­tive Board mem­ber Sabine Laut­en­schlaeger, a for­mer mem­ber of Ger­many’s Bun­des­bank, said last month it need­ed a “real emer­gency” for a broad asset-buy­ing plan to be deployed.

    “Tech­ni­cal­ly there are quite a few peo­ple in Frank­furt who are not absolute­ly sure QE would have a sig­nif­i­cant­ly pos­i­tive impact on growth,” said Deutsche Bank econ­o­mist Gilles Moec.

    Some euro zone offi­cials argue the ECB would need to spend huge amounts on a broad asset-buy­ing plan to have any impact, and that this would prob­a­bly only be mar­gin­al as sov­er­eign bond yields are already near his­toric lows.

    There is also the issue of what to buy. In the Unit­ed States, where the econ­o­my is based on cap­i­tal mar­kets, Fed­er­al Reserve pur­chas­es of U.S. Trea­suries and mort­gage-backed bonds had an impact across asset prices, hold­ing down bor­row­ing costs.

    But in the euro zone, the econ­o­my is based on bank lend­ing, so buy­ing sov­er­eign bonds may not be as effec­tive. ECB Exec­u­tive Board mem­ber Benoit Coeure said ear­li­er this year any euro zone QE plan would have to be tai­lored to the bank-based econ­o­my.

    Buy­ing sov­er­eign bonds accord­ing to the ECB’s cap­i­tal key — the share each euro zone coun­try’s cen­tral bank has in the ECB’s cap­i­tal, based on the size of its econ­o­my — would see large pur­chas­es of Ger­man bonds, the mer­its of which are ques­tion­able as their yields are already near record lows.

    Padoan, the Ital­ian econ­o­my min­is­ter, acknowl­edged this: “Quan­ti­ta­tive eas­ing has worked well in the U.S.... but of course the under­ly­ing eco­nom­ic struc­ture of the U.S. econ­o­my is large­ly dif­fer­ent from the still-frag­ment­ed euro area.”


    Pol­i­cy devel­op­ments across the Atlantic could actu­al­ly play into the ECB’s hands. While the ECB con­sid­ers how to loosen pol­i­cy, the Fed has start­ed rein­ing in its expan­sive tools and is prepar­ing to raise inter­est rates, per­haps in mid-2015.

    A recent Reuters poll of 74 ana­lysts showed the Fed is not like­ly to raise rates until the sec­ond quar­ter next year, most like­ly in June. Inter­est rate futures are pric­ing the first rate hike in the third quar­ter of next year. [FED/R]

    “The ECB would jump for joy,” said Hans Redek­er, glob­al head of for­eign exchange strat­e­gy at Mor­gan Stan­ley, refer­ring to the implied dol­lar strength that such a step would bring with it.

    “This would also mean euro weak­ness and that is exact­ly what the ECB wants. It would ease pres­sure, because fur­ther steps from the ECB would be less nec­es­sary,” he said, adding exports, espe­cial­ly from the periph­ery, would become more com­pet­i­tive.

    An ECB pledge to keep inter­est rates at present lev­els for an extend­ed peri­od of time is also seen sta­bi­liz­ing the sit­u­a­tion in such an event.

    A weak­er exchange rate may be more effec­tive at gen­er­at­ing growth than ever more liq­uid­i­ty that strug­gles to find its way to com­pa­nies and house­holds as banks remain reluc­tant to lend while tidy­ing up their bal­ance sheets.

    The euro has weak­ened more than 4 per­cent since scrap­ing by the $1.40 mark in May. But it is still too strong for some periph­ery coun­tries, such as Italy.

    Mor­gan Stan­ley cal­cu­lat­ed what it called a “fair exchange rate”, at which a coun­try would be able to main­tain a sus­tain­able trade bal­ance and an exchange rate that would not have a long-term neg­a­tive impact on growth con­di­tions.

    Italy’s fair exchange rate would be $1.20 and Ger­many’s $1.53, Redek­er said, show­ing how diverse the economies are.

    Notice how the idea of nation­al gov­ern­ments using the record low bor­row­ing costs to finance fis­cal stim­u­lus pro­grams that could make invest­ments in the future is still com­plete­ly unper­son­ed.

    Posted by Pterrafractyl | August 20, 2014, 7:55 am
  20. Wolf­gang Schauble once again reit­er­at­ed his oppo­si­tion to the sug­ges­tion by Mario Draghi last week that fis­cal stim­u­lus mea­sure should be con­sid­ered by cred­i­tor coun­tries like Ger­many (and not the coun­tries that most need it). Schauble’s argu­ment appears to be that any addi­tion­al gov­ern­ment bor­row­ing by mem­ber states would con­sti­tute gov­ern­ment financ­ing by the ECB and there­fore be uncon­sti­tu­tion­al even though bond rates are at record lows with­out the ECB pur­chas­ing gov­ern­ment bonds. Because that’s just how the euro­zone rolls:

    UPDATE 2‑Merkel unhap­py with Draghi’s appar­ent new fis­cal focus — Spiegel

    Sun Aug 31, 2014 10:37am EDT

    * Merkel, Schaeu­ble both called Draghi last week — Spiegel

    * Took Draghi to task about Jack­son Hole com­ments, mag­a­zine says

    * Merkel want­ed to know if ECB was chang­ing tack — Spiegel

    * Gov­ern­ment spokesman report does not cor­re­late with facts (Adds finance min­is­ter’s com­ments)

    BERLIN, Aug 31 (Reuters) — A Ger­man news mag­a­zine report­ed on Sun­day that Chan­cel­lor Angela Merkel is unhap­py with Euro­pean Cen­tral Bank chief Mario Draghi for appar­ent­ly propos­ing a greater empha­sis on fis­cal stim­u­lus over aus­ter­i­ty in order to boost growth in Europe.

    Der Spiegel report­ed, with­out cit­ing any sources, that she and Finance Min­is­ter Wolf­gang Schaeu­ble had both called the ECB pres­i­dent last week to take him to task about com­ments he made in a speech at Jack­son Hole, Wyoming on Aug 22.

    A Ger­man gov­ern­ment spokesman con­tra­dict­ed Spiegel’s ver­sion of events, how­ev­er, say­ing that “the asser­tion that the chan­cel­lor took Pres­i­dent Draghi to task does not cor­re­late to the facts in any way”. The spokesman would give no fur­ther details of the call.

    Draghi told a con­fer­ence of cen­tral bankers that it would be “help­ful for the over­all stance of pol­i­cy” if fis­cal pol­i­cy could play a greater role along­side the ECB’s mon­e­tary pol­i­cy.

    The mag­a­zine said Merkel want­ed to know if the ECB had decid­ed to change tack away from fis­cal aus­ter­i­ty in the euro zone, as cham­pi­oned by Ger­many, among oth­ers.

    Der Spiegel said Draghi had defend­ed his Jack­son Hole speech, which was inter­pret­ed as mean­ing that the ECB, hav­ing cut inter­est rates to record lows and inject­ed mon­ey into the econ­o­my to sup­port a recov­ery, was now look­ing at fis­cal stim­u­lus as a way of foment­ing growth and facil­i­tat­ing reform.

    Schaeu­ble said last week that he believed Draghi’s com­ments had been “over-inter­pret­ed”.

    “The ECB has a clear man­date to ensure cur­ren­cy sta­bil­i­ty. It does­n’t have a man­date to finance states,” the min­is­ter told reporters on Sun­day. “All those who can’t man­age with­in their bud­get want to cross that bound­ary. They would like to get (financ­ing) from the ECB.


    Notice how Wolf­gang Schauble is argu­ing that euro­zone mem­bers can’t engage in fis­cal stim­u­lus mea­sures because that would vio­late the rule that the ECB can’t finance states even though gov­ern­ments can cur­rent­ly bor­row at record lows rates with­out the ECB buy­ing their sov­er­eign bonds. It’s one of the unex­plained quirks of the end­less dri­ve to send the euro­zone into near defla­tion: bor­row­ing costs are going to be low even for the ail­ing economies you send economies into a defla­tion­ary death spi­ral and the cen­tral bank is promis­ing to “do what­ev­er it takes”, and yet Berlin seems to always have one rea­son or anoth­er for why those low bor­row­ing costs can nev­er be used to by mem­ber states. It’s as if Schauble just assumes that all gov­ern­ment spend­ing is just guar­an­teed to be a giant waste of mon­ey that will become an ECB lia­bil­i­ty if the mon­ey to finance that gov­ern­ment spend­ing was bor­rowed as opposed to raised through tax­es. It’s just a bizarre stance divorced from real­i­ty but it is what it is.

    So, giv­en Schauble’s inter­pre­ta­tion of the euro­zone’s rules, will euro­zone mem­ber states will ever be allowed to engage in their own stim­u­lus pro­grams? Well, yes and no (with a lot less ‘yes’ than ‘no’). Yes, Schauble has in the past described a sce­nario where gov­ern­ments could poten­tial­ly bor­row from a shared pool of “eurobonds” that all nations are joint­ly back­ing. But, no, the indi­vid­ual gov­ern­ments them­selves won’t actu­al­ly get to make these fis­cal stim­u­lus deci­sions on their own, unless the indi­vid­ual gov­ern­ments hap­pen to be pow­er­ful enough to effec­tive­ly run the entire the EU. Because the sys­tem Schauble had in mind(as of July 2012) involved a trade­off: gov­ern­ments can receive joint­ly-backed euro­zone financ­ing, but Brus­sels decides how much they get to bor­row with veto pow­ers over how they choose to spend it:

    Der Spiegel
    SPIEGEL Inter­view with Finance Min­is­ter Schäu­ble: ‘We Cer­tain­ly Don’t Want to Divide Europe’

    Ger­man Finance Min­is­ter Wolf­gang Schäu­ble believes that only fur­ther EU inte­gra­tion can save the euro. SPIEGEL spoke with him about how the cur­ren­cy can be strength­ened, the hur­dles pre­sent­ed by Ger­many’s con­sti­tu­tion and what the 27-mem­ber club might look like in five years.

    June 25, 2012 – 12:09 PM

    SPIEGEL: Min­is­ter Schäu­ble, the Euro­pean Union is mired the worst cri­sis in its his­to­ry with the euro y. What is at stake?

    Schäu­ble: Our pros­per­i­ty. The world, with its glob­al­ized econ­o­my, is chang­ing at a rapid pace. Those who want to keep up can­not go it alone. It only works in col­lab­o­ra­tion with oth­er Euro­pean coun­tries and with a Euro­pean cur­ren­cy. Oth­er­wise we would fall far behind, and that would lead to a sub­stan­tial loss of pros­per­i­ty and soci­etal secu­ri­ty.

    SPIEGEL: Would the EU sur­vive the col­lapse of the mon­e­tary union?

    Schäu­ble: There is cer­tain­ly the risk that, in the event of a col­lapse of the euro — which, by the way, I don’t believe is going to hap­pen — much of what we have achieved and become fond of would be called into ques­tion, from the com­mon domes­tic mar­ket to free­dom of trav­el in Europe. But a col­lapse of the EU would be absurd. The world is mov­ing clos­er togeth­er, and we’re talk­ing about the pos­si­bil­i­ty of each coun­try in Europe going its own way? This can­not, must not and will not hap­pen!

    SPIEGEL: Was it a mis­take to intro­duce the euro?

    Schäu­ble: No. The mon­e­tary union was the log­i­cal con­se­quence of the advanc­ing eco­nom­ic inte­gra­tion of Europe.

    SPIEGEL: Nev­er­the­less, the euro is a mis­car­riage. The nec­es­sary polit­i­cal union was absent.

    Schäu­ble: To call it a mis­car­riage is non­sense. But it’s clear that we want­ed a polit­i­cal union at the time, but it was­n’t pos­si­ble. Ger­many would have been pre­pared to relin­quish pow­ers to Brus­sels, because it was only through Europe that we received a new chance after World War II. But oth­er coun­tries had trou­ble with the con­cept, because of spe­cial tra­di­tions, for exam­ple, or because they had only recent­ly regained their nation­al auton­o­my after the fall of the Iron Cur­tain. As such, we faced a fun­da­men­tal ques­tion: Do we intro­duce the euro with­out hav­ing the nec­es­sary polit­i­cal union, and do we assume that the euro will bring us clos­er togeth­er, or do we aban­don the idea?

    SPIEGEL: And in that sit­u­a­tion you pre­ferred to take the risk.

    Schäu­ble: If we had always said we would only take steps toward inte­gra­tion if they would imme­di­ate­ly work 100 per­cent, we would nev­er have advanced by so much as a meter. That’s why we want­ed to intro­duce the euro first and then quick­ly make the deci­sions need­ed for a polit­i­cal union. Lux­em­bourg Prime Min­is­ter Jean-Claude Junck­er was right when he said, at the time, that the euro would prove to be the father of future Euro­pean devel­op­ments.

    SPIEGEL: In the mean­time, how­ev­er, the com­mon cur­ren­cy has, above all, pow­ers of destruc­tion.

    Schäu­ble: Now you’re exag­ger­at­ing. Europe has always worked on the basis of two prin­ci­ples: What isn’t pos­si­ble at first will hap­pen over time, and what does­n’t work will be cor­rect­ed over time. That’s why per­fect solu­tions take so long in Europe. And that’s why we are now improv­ing the archi­tec­ture of the mon­e­tary union.

    SPIEGEL: It almost sounds as if you had longed for the cri­sis so that you could final­ly cor­rect the birth defects of the euro.

    Schäu­ble: Well, it isn’t quite that bad, espe­cial­ly since I don’t have a propen­si­ty for despair or even res­ig­na­tion. But the more peo­ple see what’s at stake, the more they are will­ing to draw the right con­se­quences.

    SPIEGEL: What are the con­se­quences that Europe now has to draw?

    Schäu­ble: We need more and not less Europe.

    SPIEGEL: You are clear­ly an advo­cate of the bicy­cle the­o­ry: Those who don’t move fall over.

    Schäu­ble: Yes, of course.

    SPIEGEL: But you also seem to sug­gest that the design is unsta­ble.

    Schäu­ble: Excuse me, but the desire for improve­ment is a basic con­di­tion of human exis­tence. In “Faust,” Goethe writes: “If the swift moment I entreat: Tar­ry a while! You are so fair! Then forge the shack­les to my feet, Then I will glad­ly per­ish there!” That’s how it is.

    SPIEGEL: The call for more Europe has become almost as much a clas­sic as “Faust.”

    Schäu­ble: Per­haps, but that does­n’t mean it’s wrong. Unfor­tu­nate­ly, Europe is com­pli­cat­ed, and its struc­tures are such that they inspire only lim­it­ed con­fi­dence in cit­i­zens and the finan­cial mar­kets.

    SPIEGEL: How do you intend to cor­rect this deficit?

    Schäu­ble: So far, mem­ber states have almost always had the final say in Europe. This can­not con­tin­ue. In key polit­i­cal areas, we have to trans­fer more pow­ers to Brus­sels, so that each nation state can­not block deci­sions.

    SPIEGEL: You want noth­ing less than a Unit­ed States of Europe.

    Schäu­ble: Even though the term is used repeat­ed­ly, it does­n’t make it any bet­ter. No, the Europe of the future will not be a fed­er­al state based on the mod­el of the Unit­ed States of Amer­i­ca or the Fed­er­al Repub­lic of Ger­many. It will have its own struc­ture. It’s an extreme­ly excit­ing ven­ture.

    SPIEGEL: It sounds more like a new exper­i­ment, not unlike the intro­duc­tion of the euro. And yet you want to trans­fer as much pow­er as pos­si­ble to Europe?

    Schäu­ble: No, we must not and can­not ever make deci­sions in Europe that apply uni­form­ly to all. Europe’s strength is pre­cise­ly its diver­si­ty. But there are things in a mon­e­tary union that are done more effec­tive­ly at the Euro­pean lev­el.

    SPIEGEL: What, for exam­ple?

    Schäu­ble: The most impor­tant thing is that we cre­ate a fis­cal union, one in which the nation states give up their juris­dic­tion in terms of fis­cal pol­i­cy. In addi­tion, the prob­lems of the Span­ish finan­cial insti­tu­tions reveal, once again, that Europe would bet­ter off with a bank union. We need a Euro­pean super­vi­so­ry author­i­ty, at least over the major lenders, which can then influ­ence the banks direct­ly. Then we can also save them with joint funds.

    SPIEGEL: For months, Ger­many has been under pres­sure to agree to joint gov­ern­ment bonds, the so-called euro bonds. It would cer­tain­ly be seen as a con­fi­dence-build­ing mea­sure if you com­plied with the wish­es of the oth­er Euro­pean coun­tries.

    Schäu­ble: As long as we don’t have a fis­cal union, we can­not assume joint lia­bil­i­ty for debts.

    SPIEGEL: Why are you so uncom­pro­mis­ing on this issue?

    Schäu­ble: Because you can’t sep­a­rate the respon­si­bil­i­ty for deci­sions and the lia­bil­i­ty. This applies to almost all areas, but espe­cial­ly to mon­ey. Some­one who has the abil­i­ty to spend mon­ey at some­one else’s expense will do so. You do it, and so do I. The mar­kets know that. And that’s why they too would not find euro bonds con­vinc­ing in the end.

    SPIEGEL: What would a fis­cal union have to look like so that Ger­many could accept euro bonds?

    Schäu­ble: In an opti­mal sce­nario, there would be a Euro­pean finance min­is­ter, who would have a veto against nation­al bud­gets and would have to approve lev­els of new bor­row­ing. It would be up the indi­vid­ual coun­tries to decide how to spend the approved funds, that is, how to answer the ques­tion: “Should we spend more mon­ey on fam­i­lies or on road con­struc­tion?”

    SPIEGEL: And you seri­ous­ly believe that this could work?

    Schäu­ble: It’s been work­ing for a long time in com­pe­ti­tion pol­i­cy. When the cur­rent Ital­ian prime min­is­ter, Mario Mon­ti, was the EU com­pe­ti­tion com­mis­sion­er, he suc­cess­ful­ly tan­gled with major inter­na­tion­al cor­po­ra­tions like Microsoft. A Euro­pean finance min­is­ter would, should it become nec­es­sary, be forced to take on Italy, for exam­ple.

    SPIEGEL: Or with Ger­many. Let’s assume the finance min­is­ter in Brus­sels reject­ed your bud­get. Peo­ple here would be incred­i­bly out­raged.

    Schäu­ble: There is cer­tain­ly the risk that there would be nation­al reac­tions, and that’s why all of this requires inten­sive dis­cus­sion. But one thing is also clear: Those who want a strong Europe also have to be will­ing to sur­ren­der deci­sions to Brus­sels. But even then par­lia­men­tary respon­si­bil­i­ties are need­ed.


    “But one thing is also clear: Those who want a strong Europe also have to be will­ing to sur­ren­der deci­sions to Brus­sels”. Yep! Well, ok, maybe not exact­ly Brus­sels...

    Posted by Pterrafractyl | August 31, 2014, 10:12 pm
  21. The ECB made a splash today in the mar­kets: a sur­prise rate cut and a dec­la­ra­tion that it was the last rate cut, with the ECB’s quan­ti­ta­tive eas­ing plans (buy­ing asset-backed secu­ri­ties) sched­uled to com­mence at some point in the future. Ger­many opposed the rate cut and still oppos­es any QE and the details of the plan are to be released fol­low­ing the ECB’s Octo­ber rate-set­ting meet­ing, so there are still a num­ber of open ques­tions about the scope of the mon­e­tary stim­u­lus and the Bun­des­bank has plen­ty of time to water the thing down. Still, it’s bet­ter than noth­ing:

    ECB Ready­ing Asset-Backed Pur­chas­es After Rate Cut, Draghi Says
    By Jeff Black and Cather­ine Bosley
    Sep 4, 2014 10:53 AM CT

    The Euro­pean Cen­tral Bank cut inter­est rates and will start buy­ing assets, in a bid to boost the flow of fund­ing for the euro-area econ­o­my while stop­ping short of broad-based quan­ti­ta­tive eas­ing.

    ECB Pres­i­dent Mario Draghi’s plan to buy asset-backed secu­ri­ties and cov­ered bonds pushed the euro below $1.30 for the first time since July 2013 as he said the infla­tion out­look had wors­ened. Germany’s Jens Wei­d­mann opposed the rate cut and ABS plan, accord­ing to two offi­cials.

    The ECB “will pur­chase a broad port­fo­lio of sim­ple and trans­par­ent secu­ri­ties,” Draghi said at a press con­fer­ence in Frank­furt today. “Some of our coun­cil were in favor of doing more than pre­sent­ed.”

    In com­mit­ting cash to the mar­ket for asset-backed secu­ri­ties, Draghi is mak­ing good on his pledge to rekin­dle an asset class that can fun­nel loans to the real econ­o­my. Even so, it prob­a­bly doesn’t rep­re­sent the kind of large-scale bond pur­chas­es that some econ­o­mists say are need­ed to stave off defla­tion.

    “The ECB stepped up to the plate, again,” said Chris­t­ian Schulz, senior econ­o­mist at Beren­berg Bank in Lon­don. “One way of read­ing the ECB rate cut is that, due to con­tin­ued seri­ous resis­tance against sov­er­eign-bond pur­chas­es, the ECB has decid­ed to first exhaust all oth­er options.”

    Weak­er Out­look

    Euro-area infla­tion lan­guished at 0.3 per­cent last month, far below the ECB’s 2 per­cent tar­get. The ECB today cut its macro­eco­nom­ic fore­casts for this year from its pre­vi­ous assess­ment in June.

    Gross domes­tic prod­uct is now pre­dict­ed to expand by 0.9 per­cent this year and 1.6 per­cent in 2015, instead of the pre­vi­ous 1 per­cent and 1.7 per­cent. Infla­tion is seen at 0.6 per­cent this year instead of 0.7 per­cent pre­vi­ous­ly. The infla­tion out­look for 2015 is unchanged at 1.1 per­cent.

    “We took into account the over­all sub­dued out­look for infla­tion, the weak­en­ing in the growth momen­tum in the recent past,” Draghi said. “The Gov­ern­ing Coun­cil sees the risks around the eco­nom­ic out­look on the down­side.”

    The ECB ear­li­er reduced all three of its main inter­est rates by 10 basis points. The bench­mark rate was low­ered to 0.05 per­cent, the deposit rate is now minus 0.2 per­cent, and the mar­gin­al lend­ing facil­i­ty is 0.3 per­cent.

    The euro fell to as low as $1.2952 and trad­ed at $1.2932 at 5:50 p.m. Frank­furt time.

    Low­er Bound

    The dis­sent from Bun­des­bank Pres­i­dent Wei­d­mann high­lights the resis­tance in Ger­many, the region’s largest econ­o­my. In July, he called ABS pur­chas­es “prob­lem­at­ic” and warned against sup­port­ing bank prof­its while social­iz­ing the loss­es.

    The offi­cials who con­firmed Weidmann’s oppo­si­tion today asked not to be iden­ti­fied because the dis­cus­sions are pri­vate, and a Bun­des­bank spokesman declined to com­ment. Draghi said he secured a “com­fort­able major­i­ty” for the deci­sions.


    Cred­it Eas­ing

    Today he said the cen­tral bank is now done with con­ven­tion­al rate cuts. The ECB wants to “make sure there’s no mis­un­der­stand­ings on whether we’ve reached the low­er bound,” he said. “Now we are at the low­er bound.”

    He said details of the ABS pro­gram will be announced after the Octo­ber rate-set­ting meet­ing. The secu­ri­ties are backed by under­ly­ing instru­ments such as mort­gages or cred­it-card debt, and are pack­aged into prod­ucts con­tain­ing slices with dif­fer­ent risk pro­files. Draghi said on Aug. 7 this process in the future has to be “sim­ple, trans­par­ent and real,” and not “a sausage full of deriv­a­tives.”

    The Euro­pean Com­mis­sion is con­sid­er­ing allow­ing banks to hold a wider range of asset-backed secu­ri­ties to meet liq­uid­i­ty require­ments than fore­seen by glob­al reg­u­la­tors, accord­ing to an EU doc­u­ment obtained by Bloomberg News. Banks will be allowed to use secu­ri­ti­za­tions backed by assets from car loans to small busi­ness and con­sumer debt under the EU rule, where­as the Basel Com­mit­tee on Bank­ing Super­vi­sion sought to lim­it secu­ri­ti­za­tions to those backed by res­i­den­tial mort­gage debt.


    Bal­ance Sheet

    He did say that the aim of all the ECB mea­sures com­bined is to return the cen­tral bank’s bal­ance sheet to the lev­el of the start of 2012. The ECB had about 2.7 tril­lion euros of assets in Jan­u­ary 2012, com­pared with 2 tril­lion euros now.

    There are fur­ther hur­dles to clear for offi­cials want­i­ng a deci­sive restart in the ABS mar­ket, includ­ing a thick­et of reg­u­la­to­ry ini­tia­tives from Basel to Brus­sels. Euro­pean Union and inter­na­tion­al stan­dard-set­ters are work­ing on as many as 19 mea­sures that could affect demand for ABS, includ­ing a stan­dard def­i­n­i­tion for what con­sti­tutes a high-qual­i­ty secu­ri­tized prod­uct.

    Draghi also reit­er­at­ed that mon­e­tary eas­ing must be com­bined with struc­tur­al reforms. Coun­tries includ­ing France and Italy have pushed for greater flex­i­bil­i­ty with­in EU fis­cal rules.

    “There’s no fis­cal or mon­e­tary stim­u­lus that will pro­duce any effect with­out ambi­tious and impor­tant and strong struc­tur­al reforms,” the ECB pres­i­dent said, repris­ing com­ments from his speech last month at a sym­po­sium for cen­tral bankers in Jack­son Hole, Wyoming.

    Note that when Draghi “reit­er­at­ed that mon­e­tary eas­ing must be com­bined with struc­tur­al reforms”, that means the aus­ter­i­ty is expect­ed to con­tin­ue. Also note that any real fis­cal stim­u­lus is com­plete­ly absent from the plan. And when the arti­cle points out that ““the ECB had about 2.7 tril­lion euros of assets in Jan­u­ary 2012, com­pared with 2 tril­lion euros now”, it’s a reminder that the ECB’s timid actions thus far (timid rel­a­tive to the scope of the cri­sis) have been effec­tive­ly suck­ing cred­it out of the euro­zone econ­o­my for the past two years.

    But at least it’s a start. The era of “don’t fight the ECB” might final­ly be around the cor­ner. Unless, of course, the ECB com­plete­ly blun­ders the entire QE plans by declar­ing in advance how much it will spend on assets. Espe­cial­ly if it’s not real­ly enough mon­ey to sig­nif­i­cant­ly impact the mar­kets. That would be unfor­tu­nate:

    Exclu­sive: ECB debat­ing ABS, cov­ered bond pur­chase plan

    Thu Sep 4, 2014 7:25am EDT

    (Reuters) — Plans to launch an asset-backed secu­ri­ties (ABS) and cov­ered bond pur­chase pro­gramme worth up to 500 bil­lion euros are on the table at Thurs­day’s Euro­pean Cen­tral Bank pol­i­cy meet­ing, peo­ple famil­iar with the dis­cus­sions say.

    ECB Pres­i­dent Mario Draghi will like­ly announce such a pro­gramme at his news con­fer­ence unless it comes up against strong oppo­si­tion at the Gov­ern­ing Coun­cil’s pol­i­cy meet­ing.

    The pro­gramme would have a dura­tion of three years and com­prise both ABS and cov­ered bond pur­chas­es. The ECB could begin buy­ing the assets this year, the peo­ple famil­iar with the dis­cus­sions told Reuters.

    The ECB declined to com­ment.


    The ECB has been devel­op­ing such a pro­gramme with a view to stim­u­lat­ing the ABS mar­ket and offer­ing small­er busi­ness­es an alter­na­tive source of fund­ing.

    Bankers and reg­u­la­tors have cast doubt on reviv­ing Europe’s repack­aged debt mar­ket to fund eco­nom­ic recov­ery, say­ing it will take years and hinge on a re-inven­tion of the sec­tor rather than quick reg­u­la­to­ry tweaks.

    How­ev­er, the mar­ket for cov­ered bonds in issuance, such as Pfand­briefe in Ger­many, is more sub­stan­tial.

    Asset-backed secu­ri­ties are cre­at­ed by banks pool­ing mort­gages and cor­po­rate, auto or cred­it card loans and sell­ing them to insur­ers, pen­sion funds or even the ECB.

    Cov­ered bonds are sim­i­lar instru­ments but the under­ly­ing assets are ringfenced on the issuer’s bal­ance sheet so if the bank goes bust, the assets are still there. That makes them safer than ABS where the under­ly­ing loans are not ringfenced.

    ECB Exec­u­tive Board mem­ber Benoit Coeure said last month that Euro­pean gov­ern­ments may have to sup­port Europe’s mar­ket for secu­ri­tised debt by issu­ing guar­an­tees to make it a suc­cess­ful alter­na­tive source of fund­ing to bank loans.

    Well that was unfor­tu­nate. Still, 500 bil­lion euros is bet­ter than noth­ing, even when the mar­ket knows the cap in advance,although hope­ful­ly some actu­al fis­cal stim­u­lus plans will get under­way one of these years. Hope­ful­ly...

    Posted by Pterrafractyl | September 4, 2014, 10:22 am
  22. This is one of those “did some real­ly have to do a study to fig­ure this out” stud­ies:

    The Wall Street Jour­nal
    Unem­ploy­ment Hurts Hap­pi­ness More Than Mod­est Infla­tion, New Paper Says
    11:27 am ET
    Oct 1, 2014

    By Pedro Nico­laci da Cos­ta

    Unem­ploy­ment is much more dam­ag­ing to soci­ety than mod­er­ate lev­els of infla­tion, mak­ing cen­tral bankers’ dis­pro­por­tion­ate focus on the lev­el of con­sumer price growth mis­guid­ed, a for­mer Bank of Eng­land rate-set­ter now at Dart­mouth Col­lege writes in a new paper.

    Along with three co-authors, David Blanch­flower, known for his view that pol­i­cy mak­ers should make aggres­sive efforts to bring down unem­ploy­ment, tries an unusu­al sta­tis­ti­cal tack for macro­econ­o­mist – he tries to break down hap­pi­ness sur­veys of Euro­pean indi­vid­u­als to see just how deeply, and dif­fer­ent­ly, they are affect­ed by unem­ploy­ment and infla­tion, respec­tive­ly.

    While “both high­er unem­ploy­ment and high­er infla­tion low­er well-being,” the authors write, “we also dis­cov­er that unem­ploy­ment depress­es well-being more than infla­tion.”

    In fact, Mr. Blanch­flower argues, the pain suf­fered by job­less­ness is many times greater than that caused by high­er infla­tion of sim­i­lar pro­por­tions. “Our esti­mates with Euro­pean data imply that a one per­cent­age point increase in the unem­ploy­ment rate low­ers well-being by more than five times as much as one per­cent­age point increase in the infla­tion rate.”

    In a tele­phone inter­view, Mr. Blanch­flower acknowl­edged that equa­tion might change once infla­tion exceeds a cer­tain lev­el, say in the dou­ble-dig­its. At that point, the trade­offs may shift. But with most advanced economies strug­gling to keep infla­tion from slip­ping fur­ther below offi­cial tar­gets, that’s sim­ply not a prob­lem that should be con­cern­ing pol­i­cy mak­ers at the moment, he says.

    Mr. Blanch­flower said many cur­rent cen­tral bank offi­cials, hav­ing lived through the infla­tion­ary 1970s, are over­ly sen­si­tive to pos­si­ble infla­tion threats.

    “Essen­tial­ly when you have an infla­tion prob­lem you put weight on infla­tion. When you have an unem­ploy­ment prob­lem you put weight on unem­ploy­ment,” he said.

    The Fed­er­al Reserve has said it will take a “bal­anced approach” to meet­ing its dual goals of price sta­bil­i­ty and max­i­mum sus­tain­able employ­ment. U.S. infla­tion con­tin­ues to under­shoot the cen­tral bank’s tar­get and unem­ploy­ment, at 6.1%, remains ele­vat­ed.

    The Euro­pean Cen­tral Bank has a sin­gle man­date to keep infla­tion just below 2%. Annu­al infla­tion in the euro­zone fell to 0.3% in August, a five-year low.


    “In the Great Reces­sion, unem­ploy­ment has been a much big­ger prob­lem than infla­tion for ordi­nary peo­ple,” Mr. Blanch­flower says. “Unem­ploy­ment hurts more than infla­tion does.”

    And, sad­ly, yes, some­one real­ly did need to do this study. Why? Because of influ­en­tial fig­ures like for­mer ECB and Bun­des­bank offi­cial Jür­gen Stark that still clear­ly feel oth­er­wise:

    The ECB’s Leap into the Unknown
    Jür­gen Stark
    OCT 1, 2014

    Jür­gen Stark is a for­mer Mem­ber of the Exec­u­tive Board of the Euro­pean Cen­tral Bank and for­mer Deputy Gov­er­nor of the Deutsche Bun­des­bank.

    FRANKFURT – The Euro­pean Cen­tral Bank is in the mid­dle of a big, risky exper­i­ment. Key inter­est rates have remained close to zero for six years now. Finan­cial mar­kets are flood­ed with liq­uid­i­ty. Cri­sis man­age­ment has result­ed in major mar­ket dis­tor­tions, with some seg­ments’ per­for­mance no longer explain­able by fun­da­men­tal eco­nom­ic data. The unin­tend­ed con­se­quences of this pol­i­cy are increas­ing­ly vis­i­ble – and will become increas­ing­ly tan­gi­ble with the US Fed­er­al Reserve’s exit from post-2008 ultra-loose mon­e­tary pol­i­cy.


    The expan­sion of the ECB’s bal­ance sheet and the tar­get­ed depre­ci­a­tion of the euro should help to bring the eurozone’s short-term infla­tion rate close to 2% and thus reduce defla­tion­ary risks. For the first time in its his­to­ry, the ECB appears to be pur­su­ing an exchange-rate tar­get. As was the case for the Bank of Japan, the exter­nal val­ue of the cur­ren­cy will become an impor­tant instru­ment in the frame­work of a new strate­gic approach.

    Finan­cial mar­kets have applaud­ed the ECB’s recent deci­sions. More­over, hav­ing “effec­tive­ly thrown off all of the Maas­tricht Treaty restric­tions that bound the bank to the mod­el of the Deutsche Bun­des­bank,” as for­mer Fed Chair Alan Greenspan put it, the ECB is pre­pared to break fur­ther taboos.

    But for what pur­pose? Par­tic­u­lar­ly by guar­an­tee­ing high­ly indebt­ed coun­tries’ sov­er­eign bonds, the ECB has actu­al­ly weak­ened the will­ing­ness to reform, par­tic­u­lar­ly in the larg­er Euro­pean Union coun­tries, whose decrepit eco­nom­ic struc­tures are an obsta­cle to poten­tial growth, and where more room must be giv­en to pri­vate ini­tia­tive.

    The ECB’s will­ing­ness to buy ABSs is espe­cial­ly risky and cre­ates a new ele­ment of joint lia­bil­i­ty in the euro­zone, with Euro­pean tax­pay­ers on the hook in the event of a loss. The ECB lacks the demo­c­ra­t­ic legit­i­ma­cy to take such far-reach­ing deci­sions, with poten­tial­ly sub­stan­tial redis­trib­u­tive effects, which implies an even greater risk to mon­e­tary-pol­i­cy inde­pen­dence.

    Indeed, the ECB already has been dri­ven onto the defen­sive by the Inter­na­tion­al Mon­e­tary Fund, the OECD, finan­cial-mar­ket ana­lysts, and Anglo-Sax­on econ­o­mists in the wake of fever­ish dis­cus­sion of the risk of defla­tion in the euro­zone. But what is the appro­pri­ate euro­zone infla­tion rate, giv­en de fac­to eco­nom­ic stag­na­tion? Should high­er nom­i­nal (that is, infla­tion-dri­ven) growth replace debt-dri­ven growth?

    Europe must aim for sus­tain­able, non-infla­tion­ary growth and the cre­ation of com­pet­i­tive jobs. The cur­rent infla­tion rate of 0.3% is due to the sig­nif­i­cant decline in com­mod­i­ty prices and the painful but unavoid­able adjust­ment of costs and prices in the periph­er­al coun­tries. Only Greece cur­rent­ly has a slight­ly neg­a­tive infla­tion rate.

    In oth­er words, price sta­bil­i­ty reigns in the euro­zone. This strength­ens pur­chas­ing pow­er and ulti­mate­ly pri­vate con­sump­tion. The ECB has ful­filled its man­date for the present and the fore­see­able future. There is no need for pol­i­cy action in the short term.

    It is, instead, the euro­zone gov­ern­ments that must act. But any clear divi­sion of tasks and respon­si­bil­i­ties between gov­ern­ments and cen­tral banks has, it seems, been jet­ti­soned. Gov­ern­ment action in many prob­lem coun­tries ulti­mate­ly ends in fin­ger point­ing: “Europe,” the ECB, and Ger­many, with its (rel­a­tive­ly) respon­si­ble pol­i­cy, have all been scape­goats.

    Against this back­ground, the ECB has yield­ed to immense polit­i­cal pres­sure, par­tic­u­lar­ly from France and Italy, to loosen mon­e­tary pol­i­cy fur­ther and weak­en the exchange rate. But indulging the old polit­i­cal reflex of manip­u­lat­ing the exchange rate to cre­ate a com­pet­i­tive advan­tage will yield a short-term fix at best. It will not elim­i­nate the struc­tur­al weak­ness­es of the coun­tries in ques­tion.

    The ECB is mov­ing ever far­ther into unchart­ed ter­ri­to­ry. In view of the insuf­fi­cient bal­ance-sheet cor­rec­tions in the pri­vate sec­tor and inad­e­quate struc­tur­al reforms, macro­eco­nom­ic demand-man­age­ment tools will not work. Despite the ECB’s aggres­sive approach, mon­e­tary pol­i­cy in the absence of struc­tur­al eco­nom­ic reform risks being inef­fec­tive.

    Sim­ply put, more liq­uid­i­ty will not lead to more active bank lend­ing until there is more trans­paren­cy regard­ing the extent of non-per­form­ing loans and the rel­e­vant economies have become more flex­i­ble. The ECB’s asset qual­i­ty review and bank stress tests are expect­ed to bring some clar­i­ty to the first ques­tion. Then, more lend­ing will occur on accept­able terms – assum­ing that there is cor­re­spond­ing demand. But the uncer­tain­ty regard­ing the extent and pace of eco­nom­ic reforms remains.

    The ECB’s recent deci­sions, with their focus on short-term effects, indi­cate that mon­e­tary pol­i­cy is no longer tar­get­ed at the euro­zone as a whole, but at its prob­lem mem­bers. Ad hoc deci­sions have replaced a fea­si­ble and prin­ci­pled medi­um-term strat­e­gy. The prob­lems cre­at­ed by this approach will be com­pound­ed by the unavoid­able con­flicts of inter­est with mon­e­tary pol­i­cy implied by the ECB’s assump­tion of its new finan­cial-sta­bil­i­ty and bank­ing-super­vi­sion roles. The first casu­al­ty will most like­ly be price sta­bil­i­ty.

    Yes, accord­ing to Stark, there’s obvi­ous­ly been nowhere close to enough aus­ter­i­ty in Europe and any­thing that does­n’t force more aus­ter­i­ty now will just lead to long-term mis­ery because only export-dri­ven growth via low­er pay for work­ers is allow­able even though it’s impos­si­ble for all of Europe to become a glob­al export pow­er­house unless Europe eco­nom­i­cal­ly con­quers the world by mim­ic­k­ing Chi­na’s low-wage eco­nom­ic mod­el (but a more extreme ver­sion) and the world does­n’t respond in kind with a glob­al race to the bot­tom. Also, near defla­tion isn’t any­thing to wor­ry about because, as Stark put it, a 0.3% infla­tion rate means “price sta­bil­i­ty reigns in the euro­zone. This strength­ens pur­chas­ing pow­er and ulti­mate­ly pri­vate con­sump­tion. The ECB has ful­filled its man­date for the present and the fore­see­able future. There is no need for pol­i­cy action in the short term.” So no more help by the ECB. Just more aus­ter­i­ty. That should do won­ders for the “pur­chas­ing pow­er and ulti­mate­ly pri­vate con­sump­tion” of the euro­zone which will no doubt make every­one hap­py, espe­cial­ly the glob­al poor that are going to be forced to com­pete with the new Euro-poor for more of that export mar­ket. Ok, it might not be that every­one will be hap­pi­er under Stark’s growth mod­el. But every­one that actu­al­ly mat­ters in Stark’s growth mod­el will be much, much hap­pi­er.

    Posted by Pterrafractyl | October 1, 2014, 11:48 am
  23. There are reports now that Mario Draghi and Jens Wei­d­mann are bare­ly speak­ing to each oth­er. And as the piece below points out, Mario and Jen­s’s tiff isn’t just an squab­ble between two cen­tral bankers. It’s rep­re­sen­ta­tive of a grow­ing divide between those that view defla­tion and ongo­ing aus­ter­i­ty poli­cies as a either the source of Europe’s prob­lems or the only pos­si­ble solu­tion:

    The New York Times
    The Upshot
    The Con­flict Between Ger­many and the E.C.B. That Threat­ens Europe

    OCT. 24, 2014
    Neil Irwin

    We’ve known for some time about the ten­sion between the Euro­pean Cen­tral Bank, charged with guid­ing the economies of the 18 coun­tries that use the euro, and Ger­many, the largest and rich­est mem­ber of that zone. A news report sheds light on just how dys­func­tion­al that rela­tion­ship has become.

    It’s not an over­state­ment to say that the future of Europe depends on how this con­flict is resolved.

    Mario Draghi, the E.C.B. pres­i­dent, is bare­ly on speak­ing terms with Jens Wei­d­mann, the pres­i­dent of the Ger­man Bun­des­bank (and a mem­ber of the E.C.B.‘s pol­i­cy-set­ting gov­ern­ing coun­cil), Reuters report­ed Thurs­day. When Mr. Draghi dis­patched a deputy to Berlin to vis­it aides to Chan­cel­lor Angela Merkel, the mes­sage received was that vocal Ger­man attacks on the cen­tral bank were unlike­ly to end any­time soon.

    The cen­tral issue is that Mr. Draghi and the E.C.B. see Europe as being on the cusp of a triple-dip reces­sion. Europe is also at risk of get­ting stuck in a cycle of very low infla­tion and stag­nant growth. Inas­much as it has already cut short-term inter­est rates to zero (below zero, even), the bank is con­sid­er­ing doing an Amer­i­can-style pro­gram of quan­ti­ta­tive eas­ing, or buy­ing vast sums of bonds with new­ly cre­at­ed euros, to try to avert this fate. It is also encour­ag­ing Ger­many and oth­er Euro­pean nations to loosen the purse strings a bit and pur­sue fis­cal pol­i­cy that is more sup­port­ive of growth.

    In Ger­many, by con­trast, both elect­ed lead­ers in Berlin and cen­tral bankers at the Bun­des­bank in Frank­furt view the wor­ry over defla­tion as over­wrought, the need for fis­cal pro­bity as crit­i­cal, and any effort to print mon­ey to buy gov­ern­ment bonds as the path­way to hyper­in­fla­tion­ary perdi­tion.

    It’s worth adding that most every­body on this side of the Atlantic, the Inter­na­tion­al Mon­e­tary Fund and the Unit­ed States gov­ern­ment, for exam­ple, is on Team Draghi in this dis­pute. Indeed, the wide­spread view among econ­o­mists in the Unit­ed States and Britain is that the risks fac­ing Europe are grave and that the need for eas­ing both mon­e­tary and fis­cal pol­i­cy is urgent.

    So why will this dis­pute deter­mine the future of Europe? Because Mr. Draghi is steer­ing through Scyl­la and Charyb­dis, with rad­i­cal­ly dif­fer­ent out­comes for Europe on either side.

    If Mr. Draghi and the E.C.B. take insuf­fi­cient action and the euro­zone econ­o­my indeed stag­nates or falls into a long reces­sion, it could mean a lost gen­er­a­tion of Euro­peans liv­ing with high unem­ploy­ment and declin­ing liv­ing stan­dards. We can’t know for sure whether Euro­peans would react to this out­come by being con­tent to mud­dle through, or if they would elect rad­i­cal politi­cians who might endan­ger the era of a Europe unit­ed around lib­er­al demo­c­ra­t­ic ideals. So far Euro­peans have been O.K. with mud­dling along amid high unem­ploy­ment, but it’s a real­ly bad result either way.

    If Mr. Draghi and the E.C.B. take aggres­sive action that alien­ates Ger­many too severe­ly, you could see sharp chal­lenges to the cen­tral bank from with­in its largest mem­ber. Already, Ger­man offi­cials are chal­leng­ing in the Euro­pean Court of Jus­tice an ear­li­er E.C.B. pro­gram to stand ready to buy bonds. A rul­ing is expect­ed next year. And that’s for a pro­gram that hasn’t actu­al­ly bought a sin­gle dollar’s worth of gov­ern­ment bonds! If the cen­tral bank begins large-scale quan­ti­ta­tive eas­ing, expect more legal chal­lenges to the E.C.B.‘s author­i­ty, and even calls with­in Ger­many to break off from the euro­zone entire­ly and go back to using the Ger­man mark.


    As we can see, the hyper­in­fla­tion­ary fear mon­ger­ing com­ing out of the Bun­des­bank and Berlin is, if any­thing, inflat­ing as defla­tion looms. And grow­ing increas­ing­ly inco­her­ent too. And as a result of these inflat­ing hyper­in­fla­tion fears the two paths fac­ing the euro­zone are either a lost gen­er­a­tion or hurt feel­ings at the Bun­des­bank over peo­ple not shar­ing its weird hyper­in­fla­tion­ary fear fetish. And thus far it’s very unclear which side will pre­vail although aus­ter­i­ty via eco­nom­ic dys­func­tion is almost cer­tain­ly going to win. Feel any fears inflat­ing yet?

    Also note when author says:

    It’s worth adding that most every­body on this side of the Atlantic, the Inter­na­tion­al Mon­e­tary Fund and the Unit­ed States gov­ern­ment, for exam­ple, is on Team Draghi in this dis­pute. Indeed, the wide­spread view among econ­o­mists in the Unit­ed States and Britain is that the risks fac­ing Europe are grave and that the need for eas­ing both mon­e­tary and fis­cal pol­i­cy is urgent.

    it’s impor­tant to rec­og­nize that this oppo­si­tion to Bun­des­bank-style ide­o­log­i­cal mad­ness only describes some of the US gov­ern­ment. There’s no short­age of US pol­i­cy­mak­ers that would love to indulge in some chron­ic hyper­in­fla­tion fear mon­ger­ing and those pol­i­cy­mak­ers just might take com­plete con­trol of the US Con­gress very soon. So while ide­o­log­i­cal­ly dri­ven fears of hyper­in­fla­tion may not actu­al­ly be war­rant­ed, fears that fears of hyper­in­fla­tion are about to inflate are very much jus­ti­fi­able right now. Destruc­tive eco­nom­ic fear mon­ger is a glob­al growth indus­try:

    The New York Times
    Ide­ol­o­gy and Invest­ment

    Paul Krug­man
    OCT. 26, 2014

    Amer­i­ca used to be a coun­try that built for the future. Some­times the gov­ern­ment built direct­ly: Pub­lic projects, from the Erie Canal to the Inter­state High­way Sys­tem, pro­vid­ed the back­bone for eco­nom­ic growth. Some­times it pro­vid­ed incen­tives to the pri­vate sec­tor, like land grants to spur rail­road con­struc­tion. Either way, there was broad sup­port for spend­ing that would make us rich­er.

    But nowa­days we sim­ply won’t invest, even when the need is obvi­ous and the tim­ing couldn’t be bet­ter. And don’t tell me that the prob­lem is “polit­i­cal dys­func­tion” or some oth­er weasel phrase that dif­fus­es the blame. Our inabil­i­ty to invest doesn’t reflect some­thing wrong with “Wash­ing­ton”; it reflects the destruc­tive ide­ol­o­gy that has tak­en over the Repub­li­can Par­ty.

    Some back­ground: More than sev­en years have passed since the hous­ing bub­ble burst, and ever since, Amer­i­ca has been awash in sav­ings — or more accu­rate­ly, desired sav­ings — with nowhere to go. Bor­row­ing to buy homes has recov­ered a bit, but remains low. Cor­po­ra­tions are earn­ing huge prof­its, but are reluc­tant to invest in the face of weak con­sumer demand, so they’re accu­mu­lat­ing cash or buy­ing back their own stock. Banks are hold­ing almost $2.7 tril­lion in excess reserves — funds they could lend out, but choose instead to leave idle.

    And the mis­match between desired sav­ing and the will­ing­ness to invest has kept the econ­o­my depressed. Remem­ber, your spend­ing is my income and my spend­ing is your income, so if every­one tries to spend less at the same time, everyone’s income falls.

    There’s an obvi­ous pol­i­cy response to this sit­u­a­tion: pub­lic invest­ment. We have huge infra­struc­ture needs, espe­cial­ly in water and trans­porta­tion, and the fed­er­al gov­ern­ment can bor­row incred­i­bly cheap­ly — in fact, inter­est rates on infla­tion-pro­tect­ed bonds have been neg­a­tive much of the time (they’re cur­rent­ly just 0.4 per­cent). So bor­row­ing to build roads, repair sew­ers and more seems like a no-brain­er. But what has actu­al­ly hap­pened is the reverse. After briefly ris­ing after the Oba­ma stim­u­lus went into effect, pub­lic con­struc­tion spend­ing has plunged. Why?

    In a direct sense, much of the fall in pub­lic invest­ment reflects the fis­cal trou­bles of state and local gov­ern­ments, which account for the great bulk of pub­lic invest­ment.

    These gov­ern­ments gen­er­al­ly must, by law, bal­ance their bud­gets, but they saw rev­enues plunge and some expens­es rise in a depressed econ­o­my. So they delayed or can­celed a lot of con­struc­tion to save cash.

    Yet this didn’t have to hap­pen. The fed­er­al gov­ern­ment could eas­i­ly have pro­vid­ed aid to the states to help them spend — in fact, the stim­u­lus bill includ­ed such aid, which was one main rea­son pub­lic invest­ment briefly increased. But once the G.O.P. took con­trol of the House, any chance of more mon­ey for infra­struc­ture van­ished. Once in a while Repub­li­cans would talk about want­i­ng to spend more, but they blocked every Oba­ma admin­is­tra­tion ini­tia­tive.

    And it’s all about ide­ol­o­gy, an over­whelm­ing hos­til­i­ty to gov­ern­ment spend­ing of any kind. This hos­til­i­ty began as an attack on social pro­grams, espe­cial­ly those that aid the poor, but over time it has broad­ened into oppo­si­tion to any kind of spend­ing, no mat­ter how nec­es­sary and no mat­ter what the state of the econ­o­my.

    You can get a sense of this ide­ol­o­gy at work in some of the doc­u­ments pro­duced by House Repub­li­cans under the lead­er­ship of Paul Ryan, the chair­man of the Bud­get Com­mit­tee. For exam­ple, a 2011 man­i­festo titled “Spend Less, Owe Less, Grow the Econ­o­my” called for sharp spend­ing cuts even in the face of high unem­ploy­ment, and dis­missed as “Key­ne­sian” the notion that “decreas­ing gov­ern­ment out­lays for infra­struc­ture lessens gov­ern­ment invest­ment.” (I thought that was just arith­metic, but what do I know?) Or take a Wall Street Jour­nal edi­to­r­i­al from the same year titled “The Great Mis­al­lo­ca­tors,” assert­ing that any mon­ey the gov­ern­ment spends diverts resources away from the pri­vate sec­tor, which would always make bet­ter use of those resources.

    Nev­er mind that the eco­nom­ic mod­els under­ly­ing such asser­tions have failed dra­mat­i­cal­ly in prac­tice, that the peo­ple who say such things have been pre­dict­ing run­away infla­tion and soar­ing inter­est rates year after year and keep being wrong; these aren’t the kind of peo­ple who recon­sid­er their views in the light of evi­dence. Nev­er mind the obvi­ous point that the pri­vate sec­tor doesn’t and won’t sup­ply most kinds of infra­struc­ture, from local roads to sew­er sys­tems; such dis­tinc­tions have been lost amid the chants of pri­vate sec­tor good, gov­ern­ment bad.


    Yes, that same mind­less obses­sion on deficits and infla­tion that’s cre­at­ing a Euro­pean lost gen­er­a­tion is about to seize com­plete con­trol of Con­gress and that means both Europe and the US could find them­selves try­ing to cre­ate pros­per­i­ty via spend­ing cuts. Simul­ta­ne­ous­ly. And that means the the world’s devel­oped economies are going to be simul­ta­ne­ous­ly engag­ing in even more vig­or­ous “inter­nal deval­u­a­tion” that they already are. It’s one of the under­ap­pre­ci­at­ed risks asso­ci­at­ed with GOP tak­ing con­trol of the US Sen­ate: While the GOP may not be able to ful­ly imple­ment its aus­ter­i­ty agen­da the aus­ter­i­ty is undoubt­ed­ly still going to increase if the GOP takes the Sen­ate. And the US econ­o­my is one of the few growth dri­vers for the entire glob­al econ­o­my right now. That means if the euro­zone’s eco­nom­ic zom­bie apoc­a­lypse aus­ter­i­ty mind virus infects the US econ­o­my and does enough seri­ous dam­age to derail the exist­ing recov­ery it’s going to be econo-WWZ because there are no oth­er sources of growth. A self-destruc­t­ing US will dev­as­tate glob­al growth for a while.

    It’s already scary enough when the Tea Par­ty takes over branch­es of pow­er in the US. But a US Tea Par­ty takeover is even scari­er when the Ger­man equiv­a­lent of the Tea Par­ty has already indi­rect­ly seized con­trol of most of Europe’s eco­nom­ic pol­i­cy-mak­ing and sent the con­ti­nent into a depres­sion. The euro-Tea Par­ty is already world-destroy­ing enough and yet it’s look­ing like the US could hand over even more pow­er to the US Tea Par­ty which means US and Ger­man-zom­bie ideas are poised to go glob­al once the GOP inevitablly hob­bles the US econ­o­my and glob­al growth sput­ters.

    If this all sounds bad, fear not. While Mario Draghi and Jens Wei­d­mann may no longer be on speak­ing terms that’s not real­ly impor­tant. Once a zom­bie apoc­a­lypse strikes the world’s halls of pow­er pol­i­cy mak­ers no longer real­ly need to be able to talk. Gen­er­al grunts and groans about deficits and infla­tion are more than enough. It’s not all bad.

    Posted by Pterrafractyl | October 26, 2014, 11:03 pm
  24. There was a recent piece by Ambrose Evans-Pritchard high­light­ing the fact that one of the biggest hur­dles to the ECB’s suc­cess­ful exe­cu­tion of its quan­ti­ta­tive eas­ing (QE) will come to whether or not the ECB will be allowed to engage in any mean­ing­ful QE at all:

    The Tele­graph
    Mario Draghi’s efforts to save EMU have hit the Berlin Wall
    If the ECB tries to press ahead with QE, Ger­many’s cen­tral bank chief will resign. If it does not do so, the euro­zone will remain stuck in a lowfla­tion trap and Mario Draghi will resign

    By Ambrose Evans-Pritchard

    9:22PM GMT 05 Nov 2014

    Mario Draghi has final­ly over­played his hand. He tried to bounce the Euro­pean Cen­tral Bank into €1 tril­lion of stim­u­lus with­out the acqui­es­cence of Europe’s cred­i­tor bloc or the polit­i­cal assent of Ger­many.

    The counter-attack is in full swing. The Frank­furter All­ge­meine talks of a “palace coup”, the Ger­man boule­vard press of a “Putsch”. I write before know­ing the out­come of the ECB’s pre-meet­ing din­ner on Wednes­day night, but a bliz­zard of leaks points to an ugly show­down between Mr Draghi and Bun­des­bank chief Jens Wei­d­mann.

    They are at dag­gers drawn. Mr Draghi is accused of with­hold­ing key doc­u­ments from the ECB’s two Ger­man mem­bers, lest they use them in their guer­ril­la cam­paign to head off quan­ti­ta­tive eas­ing. This includes Sabine Laut­en­schlager, Ger­many’s enforcer on the six-man exec­u­tive board, and an open foe of QE.

    The chem­istry is unrecog­nis­able from July 2012, when Mr Draghi was work­ing hand-in-glove with Ms Laut­en­schlager’s pre­de­ces­sor, Jorg Asmussen, an Ital­ian speak­er and Left-lean­ing Social Demo­c­rat. Togeth­er they cooked up the “do-what­ev­er-it-takes” res­cue plan for Italy and Spain (OMT). That is why it worked.

    We now learn from a Reuters report that Mr Draghi defied an explic­it order from the gov­ern­ing coun­cil when he seem­ing­ly promised to boost the ECB’s bal­ance sheet by €1 tril­lion. He also jumped the gun with a speech in Jack­son Hole, giv­ing the very strong impres­sion that the ECB was alarmed by the col­lapse of the so-called five-year/­five-year swap rate and would there­fore respond with over­pow­er­ing force. He had no clear­ance for this.

    The gov­er­nors of all north­ern and cen­tral EMU states — except Fin­land and Bel­gium — lean towards the Bun­des­bank view, fool­ish­ly in my view but that is irrel­e­vant. The North-South split is out in the open, and it reflects the raw con­flict of inter­est between the two halves.

    The North is com­pet­i­tive. The South is 20pc over­val­ued, caught in a debt-defla­tion vice. Data from the IMF show that Germany’s net for­eign cred­it posi­tion (NIIP) has risen from 34pc to 48pc of GDP since 2009, Hol­land’s from 17pc to 46pc. The net debtors are sink­ing into deep­er trou­ble, France from ‑9pc to ‑17pc, Italy from ‑27pc to ‑30pc and Spain from ‑94pc to ‑98pc. Claims that Spain is safe­ly out of the woods ignore this fes­ter­ing prob­lem.

    Note that the Reuters arti­cle lists which cen­tral bankers are in oppo­si­tion to more aggres­sive quan­ti­ta­tive eas­ing: Ger­many, the Nether­lands, Lux­em­bourg, Esto­nia, Latvia, and pos­si­bly Slo­va­kia, Slove­nia and Aus­tria, so it’s basi­cal­ly the same coali­tion of a rich cred­i­tor states (48% and 46% NIIP for Ger­many and the Nether­lands!) and poor euro­zone mem­ber states in favor of ongo­ing aus­ter­i­ty that we’ve seen for years.


    David Marsh, author of a book on the Bun­des­bank and now chair­man of the Offi­cial Mon­e­tary and Finan­cial Insti­tu­tions Forum, says the Bun­des­bank has been qui­et­ly seek­ing legal advice on whether it can block full-scale QE. It is look­ing at Arti­cles 10.3 and 32 of the ECB statutes, arguably rel­e­vant giv­en the scale of lia­bil­i­ties.

    The let-out claus­es would make QE the sole deci­sion of the 18 nation­al gov­er­nors — shut­ting out Mr Draghi — based on the share­hold­er weight­ings. Ger­many would have 26pc of the votes, eas­i­ly enough to mount a one-third block­ing minor­i­ty. Mr Draghi would not even have a say.

    Mr Marsh said this has echoes of the “Emminger Let­ter” invoked in Sep­tem­ber 1992 to jus­ti­fy the Bun­des­bank’s refusal to uphold its oblig­a­tion to defend the Ital­ian lira in the Exchange Rate Mech­a­nism. The lira crashed. The Ital­ians were stunned. One of them was the direc­tor of the Ital­ian Trea­sury, a young Mario Draghi.

    Lena Komil­e­va, from G+ Eco­nom­ics, says the ECB is head­ing for a cri­sis of legit­i­ma­cy what­ev­er hap­pens. If the bank tries to press ahead with a QE-blitz, Mr Wei­d­mann will resign. If it does not do so, the euro­zone will remain stuck in a lowfla­tion trap and the ECB will go the way of the Bank of Japan in the late 1990s, in which case Mr Draghi will resign.

    Mr Draghi’s bal­ance sheet pledge was mud­dled and over­sold from the start. Much of it was pred­i­cat­ed on banks tak­ing out super-cheap loans (TLTROs) from the ECB, but they have so far spurned it. You can­not make a horse drink. These loans are not the same as QE mon­ey cre­ation in any case. They are an exchange for col­lat­er­al.

    The asset pur­chas­es are what mat­ter and the pack­age announced so far is mod­est, bor­der­ing on triv­ial. It is unlike­ly to exceed €10bn a month as cur­rent­ly designed. The “buyable” mar­ket for cov­ered bonds and asset-backed secu­ri­ties is too small to move the macro-eco­nom­ic dial. If the ECB want­ed to match the Bank of Japan in its lat­est effort to dri­ve down the yen and export defla­tion, it would have to launch €130bn of asset pur­chas­es every month (1.4pc of GDP).

    Hawks claim that QE would make no dif­fer­ence because inter­est rates are already near zero, and the Ger­man 10-year Bund is already the low­est in his­to­ry. This is eye­wash. Cen­tral banks can print mon­ey to buy gold, land, oil for strate­gic reserves (why not?) or Charol­lais cat­tle. .Or they can print to build roads or wind­mills. They can hand the mon­ey out as cash envelopes. If they did this, even the dimmest wits would see that QE is a mon­e­tary device and can always defeat defla­tion as a math­e­mat­i­cal prin­ci­ple. It does not have to work through inter­est rates, nor should it.

    The ECB’s North-South clash mir­rors the polit­i­cal break­down of mon­e­tary union after six years of depres­sion and mass unem­ploy­ment. France’s Front Nation­al now has twice as many Euro-MPs as the rul­ing Social­ists. Euro defend­ers invari­ably insist that the tri­umph of Marine Le Pen — cur­rent­ly lead­ing pres­i­den­tial polls at 30pc — has noth­ing to do with her pledge to restore the franc and take back French eco­nom­ic sov­er­eign­ty.

    Whether or not this is true — and that smacks of pre­sump­tion — she is snatch­ing enough votes from the Social­ists to threat­en their sur­vival as a polit­i­cal move­ment. If they let per­ma-slump drift on until 2017, they will meet the fate of Greece’s PASOK, and deserve it.


    Mr Draghi is of course right to force the issue. The ECB is miss­ing its 2pc infla­tion tar­get by a mile, with crip­pling effects on the cri­sis states. This itself is a vio­la­tion of the ECB’s legal man­date. The refusal of the Ger­man-led hawks to do any­thing seri­ous about this is inde­fen­si­ble, and remark­ably stu­pid unless their inten­tion is to break up EMU, a pos­si­bil­i­ty one can no longer exclude.

    The Euro­pean Com­mis­sion’s Autumn fore­cast this week is a cri de coeur. It warns of a “snow­ball effect” as defla­tion­ary forces caus­es debt tra­jec­to­ries to accel­er­ate upwards by mechan­i­cal effect.

    Brus­sels admits that some­thing has gone hor­ri­bly wrong, oblique­ly blam­ing stag­na­tion on the “pol­i­cy response to the cri­sis”. It halved the growth esti­mate for France to 0.7pc next year, and for Italy to 0.6pc, a rit­u­al with each report.

    It says the euro­zone faces a “home-grown” malaise, left behind as the US and Britain pull away. “It is becom­ing hard­er to see the dent in recov­ery as the result of tem­po­rary fac­tors only. Trend growth has fall­en even low­er due to low invest­ment and high­er struc­tur­al unem­ploy­ment,” it said. Now they tell us.

    The col­lapse of invest­ment is not some form of witch­craft. It is entire­ly due to the fol­ly of deep cuts in pub­lic invest­ment — pushed by the Com­mis­sion itself — at a time of pri­vate sec­tor delever­ag­ing, all made much worse by mon­e­tary paral­y­sis. Italy’s rate of invest­ment fell by 7.4pc in 2012 and 5.4pc in 2013. Even Ger­many’s fell 0.7pc in each year.

    Tucked away in the report is a nugget that Britain alone account­ed for almost all the EU’s growth in 2013, half in 2014, and will still be the biggest con­trib­u­tor by far in 2015. This implies that the UK’s net pay­ments to the EU bud­get — already up four­fold since 2008 — will become ever more skewed. Or put anoth­er way, the more EMU makes a mess of its affairs, the more Britain must pay to prop it up.

    Europe’s lead­ers and offi­cials have run mon­e­tary union into the ground. Mr Draghi has brave­ly tried to bring them to their sens­es and con­tain the dam­age. He seems to have hit the lim­its of Euro­pean pow­er pol­i­tics.


    Yes, it cer­tain­ly appeared that Mario Draghi seemed to have “hit the lim­its of Euro­pean pow­er pol­i­tics” in his efforts to do some­thing to drag the euro­zone out of a defla­tion­ary death spi­ral. But that was two weeks ago. Today, some­what stun­ning­ly, it’s all ros­es and sun­shine:

    Draghi throws ECB door open to mon­ey print­ing as glob­al prospects dim

    By John O’Don­nell and Eva Tay­lor

    FRANKFURT Fri Nov 21, 2014 2:35pm EST

    (Reuters) — Euro­pean Cen­tral Bank Pres­i­dent Mario Draghi threw the door wide open on Fri­day for more dras­tic mea­sures to pre­vent the euro zone from slid­ing into defla­tion, promis­ing to use what­ev­er means nec­es­sary as Chi­na also act­ed to boost its sag­ging eco­nom­ic growth.

    With many fear­ing the euro zone could be head­ing for a Japan­ese-style lost decade of defla­tion and reces­sion, Draghi’s remarks were rem­i­nis­cent of when he pulled the bloc back from pos­si­ble dis­in­te­gra­tion in 2012 by promis­ing to do “what­ev­er it takes” to back the com­mon cur­ren­cy.

    Paint­ing a bleak pic­ture of the state of the 18 coun­tries in the euro bloc, Draghi stressed that “exces­sive­ly low” infla­tion had to be raised quick­ly.

    In a blunt mes­sage, he said there was now no sign of improve­ment in the months ahead and the ECB would pump more mon­ey into the euro bloc if its cur­rent mea­sures fell short.

    “We will do what we must to raise infla­tion and infla­tion expec­ta­tions as fast as pos­si­ble,” he told an audi­ence of bankers in Frank­furt.

    “If ... our pol­i­cy is not effec­tive enough to achieve this, or fur­ther risks to the infla­tion out­look mate­ri­alise, we would step up the pres­sure and broad­en even more the chan­nels through which we inter­vene, by alter­ing accord­ing­ly the size, pace and com­po­si­tion of our pur­chas­es,” he said.

    Annu­al euro zone infla­tion was 0.4 per­cent in Octo­ber, far short of the ECB’s medi­um-term tar­get of just below two per­cent.

    Draghi’s com­ments, which many read as inch­ing very close to pos­si­ble buy­ing of gov­ern­ment bonds, received a warm recep­tion from Ital­ian finance min­is­ter Pier Car­lo Padoan, who said ECB action was wel­come to revive eco­nom­ic growth in the euro zone.

    The ECB said on Fri­day it had start­ed buy­ing asset-backed secu­ri­ties. Along with pur­chas­es of cov­ered bonds, a secure form of debt often backed by prop­er­ty, it is try­ing to encour­age banks to lend and revive the econ­o­my.

    Draghi said ear­li­er this week that if the cur­rent mea­sures were not enough, or if infla­tion expec­ta­tions dete­ri­o­rat­ed fur­ther, the ECB could widen its pur­chas­es to include debt of euro zone gov­ern­ments, a strat­e­gy which Ger­man pol­i­cy­mak­ers strong­ly oppose.

    Econ­o­mists expect bold ECB action. “Draghi all but announced that the cen­tral bank will step up mon­e­tary eas­ing soon. Mr Maybe has become Mr Def­i­nite­ly,” said Nick Kou­nis of ABN Amro.

    But it is unclear how much such a move can help Europe as the prospects for the glob­al econ­o­my and one of its chief engines of growth, Chi­na, grow ever more uncer­tain.

    Chi­na cut its bench­mark inter­est rates for the first time in more than two years on Fri­day to stim­u­late eco­nom­ic growth, which is on track for its low­est annu­al rate in 24 years.

    Japan­ese Prime Min­is­ter Shin­zo Abe has called snap elec­tions, seek­ing a man­date for his strug­gling “Abe­nomics” revival strat­e­gy after the econ­o­my unex­pect­ed­ly slipped into reces­sion.

    The euro zone grew 0.2 per­cent in the third quar­ter, giv­ing an annu­al rate of 0.8 per­cent, accord­ing to a flash esti­mate from the Euro­pean sta­tis­ti­cal agency Euro­stat. Of the major nation­al economies, Italy has already fall­en back into reces­sion.


    Draghi had said fur­ther mea­sures could involve large-scale pur­chas­es of gov­ern­ment bonds — the kind of quan­ti­ta­tive eas­ing that the Unit­ed States, Japan and Britain have already used. Such a step in the euro zone would, how­ev­er, encounter stiff resis­tance from the bloc’s largest econ­o­my, Ger­many.

    Bun­des­bank Pres­i­dent Jens Wei­d­mann, speak­ing short­ly after Draghi at the same event, avoid­ed talk­ing about the issue entire­ly. The two have clashed before on their views on the future pol­i­cy path.

    “We can’t be con­stant­ly com­ment­ing on one anoth­er,” Wei­d­mann told reporters as he left the event.


    So after Mario Draghi gives a speech that sounds remark­able close to his now famous “do what­ev­er it takes” speech of July 2012 that’s been cred­it­ed with pre­vent­ing a col­lapse of the euro­zone sov­er­eign bond mar­kets and hints at poten­tial sig­nif­i­cant ECB pol­i­cy shifts, we see Draghi’s rival banker, Bun­des­bank chief Jens Wei­d­mann, give a speech that real­ly says noth­ing about Draghi’s big “do what­ev­er it takes II” procla­ma­tions. So what gives? Well, since it was a Wei­d­mann speech, there were more calls for austerity/“stuctural reforms”, which is a reminder that there’s no rea­son the Wei­d­mann fac­tion on the ECB gov­ern­ing coun­cil isn’t plan­ning on mak­ing ongo­ing aus­ter­i­ty part of “what­ev­er it takes” too:

    Draghi Ramps Up Stim­u­lus Pledge on Weak Infla­tion Out­look
    By Paul Gor­don, Jeff Black and Ste­fan Riech­er Nov 21, 2014 9:12 AM CT

    Mario Draghi strength­ened his stim­u­lus pledge for the euro area by say­ing the Euro­pean Cen­tral Bank can’t hold back in its fight to revive the econ­o­my.

    “We will do what we must to raise infla­tion and infla­tion expec­ta­tions as fast as pos­si­ble, as our price-sta­bil­i­ty man­date requires,” the ECB pres­i­dent said at a con­fer­ence in Frank­furt today. Some infla­tion expec­ta­tions “have been declin­ing to lev­els that I would deem exces­sive­ly low,” he said.


    Expand­ed mea­sures may not win unan­i­mous approval in the ECB’s Gov­ern­ing Coun­cil. Gov­ern­ing Coun­cil mem­ber Klaas Knot said this week that he’s “skep­ti­cal” about QE. Bun­des­bank Pres­i­dent Jens Wei­d­mann has argued that large-scale sov­er­eign-debt pur­chas­es mud­dy the line between fis­cal and mon­e­tary pol­i­cy.

    While Wei­d­mann didn’t address the ques­tion of asset pur­chas­es when he spoke at the Frank­furt con­fer­ence two hours after Draghi — instead focus­ing on bank­ing reg­u­la­tion — he did point to the lim­its of mon­e­tary pol­i­cy.

    “Mr. Def­i­nite­ly”

    “More than just favor­able refi­nanc­ing con­di­tions will be need­ed to stim­u­late cred­it growth,” he said. The euro area needs “struc­tur­al reforms which bol­ster com­pet­i­tive­ness and boost economies’ growth poten­tial. A pros­per­ous econ­o­my needs healthy banks, but the oppo­site is just as true: healthy banks need a pros­per­ous econ­o­my.”

    Draghi has repeat­ed­ly expressed con­cern that insuf­fi­cient struc­tur­al adjust­ments by gov­ern­ments pose a down­side risk for the euro-area econ­o­my. The ECB has sig­naled that it will reduce its macro­eco­nom­ic fore­casts for the region when it pub­lish­es a revised out­look after its Dec. 4 mon­e­tary-pol­i­cy meet­ing.

    “Draghi all but announced that the cen­tral bank will step up mon­e­tary eas­ing soon,” said Nick Kou­nis, head of macro and finan­cial mar­kets research at ABN Amro Bank NV in Ams­ter­dam, who pre­dicts the ECB will buy cor­po­rate and agency debt before sov­er­eign bonds. “Mr. Maybe has become Mr. Def­i­nite­ly.”

    “More than just favor­able refi­nanc­ing con­di­tions will be need­ed to stim­u­late cred­it growth... [The euro area needs] struc­tur­al reforms which bol­ster com­pet­i­tive­ness and boost economies’ growth poten­tial. A pros­per­ous econ­o­my needs healthy banks, but the oppo­site is just as true: healthy banks need a pros­per­ous econ­o­my.” That’s the kind of pro-aus­ter­i­ty non­sense argle-bar­gle we should expect from Jens Wei­d­mann. And if you com­pare his words to a speech Mario Draghi gave just last month, it’s clear that Wei­d­man­n’s end­less aus­ter­i­ty sen­ti­ments are still very much shared by Mr. “Do what­ev­er it takes” too:

    Brook­ings Now

    ECB Pres­i­dent Mario Draghi: With­out Reform There Can Be No Recov­ery
    Fred Dews | Octo­ber 10, 2014 9:16am

    “We are account­able to the Euro­pean peo­ple for deliv­er­ing price sta­bil­i­ty, which today means lift­ing infla­tion from its exces­sive­ly low lev­el; and we will do exact­ly that,” said Mario Draghi, pres­i­dent of the Euro­pean Cen­tral Bank, in a speech yes­ter­day at an event host­ed by the Hutchins Cen­ter on Fis­cal and Mon­e­tary Pol­i­cy at Brook­ings.

    Pres­i­dent Draghi con­tin­ued in his remarks that:

    The Gov­ern­ing Coun­cil has repeat­ed many times, even as it was adopt­ing new mea­sures, it is unan­i­mous in its com­mit­ment to take addi­tion­al uncon­ven­tion­al mea­sures to address the risk of a too-pro­longed peri­od of low infla­tion. This means that we are ready to alter the size and the com­po­si­tion of our uncon­ven­tion­al inter­ven­tions and there­fore of our bal­ance sheet as required.

    Draghi, who was joined on stage by Senior Fel­low David Wes­sel, direc­tor of the Hutchins Cen­ter, and Stan­ley Fis­ch­er, vice chair­man of the Board of Gov­er­nors of the Fed­er­al Reserve, began his remarks by recall­ing an open let­ter deliv­ered by econ­o­mist John May­nard Keynes to Pres­i­dent Franklin Roo­sevelt in Decem­ber 1933, in which the econ­o­mist wor­ried about the risk of too-fast reform imped­ing eco­nom­ic recov­ery. How­ev­er, Draghi not­ed, “we [in Europe] face the oppo­site con­cern to that expressed by Keynes. With­out reform, there can be no recov­ery.”


    Draghi then out­lined what he called a “coher­ent strat­e­gy” of struc­tur­al reform and pol­i­cy ini­tia­tives to “sta­bi­lize the euro area” and to “achieve a sus­tained recov­ery.” He dis­cussed actions on a num­ber of fronts, includ­ing: repair­ing the integri­ty of mon­ey; repair­ing the finan­cial sec­tor and cred­it allo­ca­tion; repair­ing mon­e­tary pol­i­cy; repair­ing fis­cal pol­i­cy; and rais­ing poten­tial growth through a ris­ing work­force and ris­ing pro­duc­tiv­i­ty.

    “The issue is not real­ly whether poli­cies to sup­port demand should pre­cede or fol­low poli­cies to sup­port sup­ply,” Draghi said in con­clu­sion. “Reform and recov­ery are not to be weighed against each oth­er. The whole range of poli­cies I have described aims simul­ta­ne­ous­ly at rais­ing out­put towards its poten­tial and at rais­ing that poten­tial.”


    Yes, just last month Mario Draghi start­ed off a pan­el dis­cus­sion explic­it­ly refut­ing Keynes. And then he dis­cussed the need for more “struc­tur­al reforms” that were need­ed to “achieve a sus­tained recov­ery. The same “struc­tur­al reforms” that have sent the euro­zone into a defla­tion­ary death spi­ral and con­tin­ue to derail any nascent recov­er­ies. Those need to be con­tin­ued. “With­out reform, there can be no recov­ery”. And that was just last month. So, real­ly, what does Wei­d­mann have to wor­ry about? The sit­u­a­tion is the same as ever: unful­filled pledges to “do what­ev­er it takes” and ongo­ing aus­ter­i­ty. Maybe there will be QE but maybe not! The orig­i­nal 2012 “do what­ev­er it takes” pledge was all about the ECB pos­si­bly buy­ing sov­er­eign bonds and that has­n’t hap­pened yet, so why exact­ly would Wei­d­mann wor­ry about any­thing oth­er than inad­e­quate QE now?

    And there’s the fact that Draghi’s call for a “coher­ent strat­e­gy” for imple­ment­ing that “struc­tur­al reform” sounds an awful lot like a call Draghi made back in July for anoth­er new to fea­ture in the eur­zone’s pro-growth strat­e­gy: Change the euro­zone rules to make imple­men­ta­tion of aus­ter­i­ty poli­cies out of the hands of nation­al gov­ern­ments. Tak­ing away the pow­er to imple­ment deep changes nation­al socioe­co­nom­ic poli­cies out of the hands of nation­al gov­ern­ments. That’s what Draghi was call­ing for just months ago:

    Wall Street Jour­nal
    Draghi Calls for Euro-Zone Rules for Eco­nom­ic Reforms
    ECB Pres­i­dent Out­lines New Pro­pos­al That Would Deep­en Eco­nom­ic Inte­gra­tion

    By Paul Han­non
    July 9, 2014 2:31 p.m. ET

    Euro­pean Cen­tral Bank Pres­i­dent Mario Draghi on Wednes­day called for new rules on eco­nom­ic reforms that the coun­tries in the euro zone should adopt to nar­row their eco­nom­ic dif­fer­ences.

    In out­lin­ing a new pro­pos­al from the ECB that would fur­ther deep­en the eco­nom­ic inte­gra­tion of the euro zone, Mr. Draghi said dif­fer­ences in the com­pet­i­tive­ness of its 18 mem­ber economies are as much a threat to the euro zone’s sur­vival as dif­fer­ences in mem­bers’ debt loads.

    The ECB has long called for greater struc­tur­al reform of euro-zone economies to nar­row the dif­fer­ences between their eco­nom­ic per­for­mance. But in a speech in Lon­don Wednes­day, Mr. Draghi gave the clear­est out­line yet of a gov­er­nance struc­ture that would help bring that about.

    Mr. Draghi did­n’t elab­o­rate on how the new rules would be framed or enforced, but the ECB had­n’t pre­vi­ous­ly pro­posed ways in which the eco­nom­ic reforms could be advanced.


    “No firm or indi­vid­ual should be penal­ized by its coun­try of res­i­dence,” he said. “The per­sis­tence of such dif­fer­ences cre­ates the risk of per­ma­nent imbal­ances. With this in mind, I believe that struc­tur­al reforms in each coun­try are enough of a com­mon inter­est to jus­ti­fy that they are made sub­ject to dis­ci­pline at the com­mu­ni­ty lev­el.”

    Mr. Draghi said estab­lish­ing new rules that would require mem­ber gov­ern­ments to take “cor­rec­tive action” to improve the com­pet­i­tive­ness of their economies would strength­en the cohe­sion of the cur­ren­cy area and help boost growth and cre­ate jobs.

    Mr. Draghi did­n’t detail the required actions, but they are like­ly to dif­fer for each mem­ber.

    He said the exis­tence of euro-zone rules would also help gov­ern­ments imple­ment need­ed reforms, which would “require sub­stan­tial polit­i­cal cap­i­tal.”

    “His­tor­i­cal expe­ri­ence, for exam­ple of the IMF [Inter­na­tion­al Mon­e­tary Fund], makes a con­vinc­ing case that the dis­ci­pline imposed by supra­na­tion­al bod­ies can make it eas­i­er to frame the debate on reforms at the nation­al lev­el,” he said. “In par­tic­u­lar, the debate can be framed not in terms of whether, but in terms of how reform needs to take place.”


    In his speech, Mr. Draghi also said the rules that gov­ern gov­ern­ment bor­row­ing in the euro zone must be strict­ly observed.

    Mr. Draghi repeat­ed his con­cern about too-low infla­tion in the euro zone, and the ECB’s readi­ness to use “uncon­ven­tion­al instru­ments with­in its man­date” should that prob­lem per­sist.

    “To unwind the con­sol­i­da­tion that has been achieved, and in doing so to divest the rules of cred­i­bil­i­ty, would be self-defeat­ing for all coun­tries,” Mr. Draghi said.

    First off, note that when Draghi talks about “His­tor­i­cal expe­ri­ence, for exam­ple of the IMF [Inter­na­tion­al Mon­e­tary Fund], makes a con­vinc­ing case that the dis­ci­pline imposed by supra­na­tion­al bod­ies can make it eas­i­er to frame the debate on reforms at the nation­al level...In par­tic­u­lar, the debate can be framed not in terms of whether, but in terms of how reform needs to take place,” the IMF actu­al­ly refut­ed its own aus­ter­i­ty pol­i­cy a while ago, so Mario Draghi is real­ly on agree­ing with the unre­formed IMF opin­ions on the need for end­less trick­le-down “struc­tur­al reforms”.

    And as we can see over­all, in the same speech in July where Mario Draghi calls for ‘estab­lish­ing new rules that would require mem­ber gov­ern­ments to take “cor­rec­tive action” to improve the com­pet­i­tive­ness of their economies’ he also ‘repeat­ed his con­cern about too-low infla­tion in the euro zone, and the ECB’s readi­ness to use “uncon­ven­tion­al instru­ments with­in its man­date” should that prob­lem per­sist.’ So when­ev­er Draghi calls for “doing what­ev­er it takes” to save the euro­zone, it’s impor­tant to keep in mind that “what­ev­er it takes” clear­ly involves main­tain­ing or even increas­ing the insane fis­cal aus­ter­i­ty poli­cies that have con­tribut­ing to the defla­tion­ary death spi­ral in the first place.

    So if you’re sur­prised by Jens Wei­d­man­n’s casu­al response to Draghi’s lat­est “do what­ev­er it takes” speech, don’t be. Doing “what­ev­er it takes” is a ver­bal Rorschach test that the aus­te­ri­ans rigged for them­selves a while ago.

    Posted by Pterrafractyl | November 22, 2014, 8:56 pm

Post a comment