How the ECB Turned Activist Post author By Philip Lane Post date October 3, 2012 This long WSJ article provides an account of how the OMT programme was born – read it here. Categories In Uncategorized 25 Comments on How the ECB Turned Activist ← Tests of German Resilience → ESRI Geary Lecture – Tim Besley, LSE 25 replies on “How the ECB Turned Activist” A bit off topic… Excellent article in the NYRB by George Soros giving an overview of the European problem and how it is playing out. http://www.nybooks.com/articles/archives/2012/sep/27/tragedy-european-union-and-how-resolve-it/?pagination=false I find the article very persuasive. This is probably because it echos a lot of the comments on this forum made by Kevin O’Rourke and others over the last number of years. My summary in line with Soros’s article is as follows: We placed our trust in the EU as the institution set up to find technical solutions to big problems. The EU has a history of solving problems through increased integration and incremental change in the face of necessity. These mechanisms have broken down in the current crisis and the EU has been unable to deliver a solution. Whilst it is relatively easy to design solutions to the problems we face, it is politically difficult to implement such decisions and the time window for deploying effective solutions is closing or has closed. It now appears that the most likely outcome is for creditor nations to continue to do the minimum to keep the Euro intact resulting in an eventual chaotic break up of not only the Eurozone but also of the European Union. — I would also like to bring to your attention Prof John Gray’s comments, that as per Hobbes, humans co-operate with each other largely because of their reasonable fear of the consequences of disorder and violence. When fear of disorder no longer prevails, which occurs in circumstances where people are suffering despite subscribing to democratic institutions and civilised society (e.g. pre-war Germany), then extreme alternatives can flourish, such as dictatorships, and the fear of conflict recedes when the alternative is not itself palatable. BTW, Soros’s article also touches on how Draghi and the ECB had to step in after the Germans suggested that Spain would have to guarantee any ESM investment in Spanish banks. Accordingly, it is not wholly off topic. Off topic, apologies but the transcript of last week’s Fiscal Advisory Council appearance before the Oireachtas finance committee is available here http://oireachtasdebates.oireachtas.ie/Debates%20Authoring/DebatesWebPack.nsf/committeetakes/FIJ2012092700004?opendocument I see there is now a FAC secretariat which includes some economists. You kept the recruitment of that quiet, John! I imagine Draghi read the tea leaves and didn’t fancy returning to the nihilism of last November http://www.guardian.co.uk/business/2012/oct/03/eurozone-crisis-portugal-austerity-spain-bailout Economists say this morning’s weak service sector PMI (see 9.29am) is further proof that the eurozone is in recession. The eurozone could have contracted by as much as 0.4% in the last three months, following the news that its service sector shrank at its fastest pace in 38 months. Howard Archer of IHS Global Insight said the data was “very disappointing and worrying”. It reinforces belief that the Eurozone suffered further GDP contraction in the third quarter (we anticipate a drop of 0.3-0.4% quarter-on-quarter). This would put the Eurozone in recession in all senses of the word and the prospects for a return to growth in the fourth quarter currently look far from bright given still markedly contracting incoming new business. A most interesting article, amazing how Mr Draghi has flip flopped from being pro Bundesbank to pro ECB. With stakes that high… I suppose it is understandable. It would appear Mr Draghi’s skills are an order of magnitude above that of Mr Ahern. Obviously what was not understood in Ireland was that on joining the euro “was the Bundesbank view: Central banks exist to defend a currency against politicians’ cravings for easy money.” It was not too long ago when SIPTU had 24 hour access to the Taoiseach’s office for late chats with the “most cunning of them all”. But of course in those days “there was something for everybody in the audience”. I wonder has the lesson been learn’t by our political class? @ Jagdip It is definitely worthy of its own posting. Peter Matthews testimony is literally revolutionary. @ Jagdip Is there a single element in the appearance of the FAC before the Oireachtas Finance Committee that you can identify as related to anything the present government might decide to do or not to do? In short, are these debates actually connecting to anything (leaving aside the sterling contributions of Peter Matthews)? Does any one know who Richard Field is. The sinner paragraph sounds quite Irish. tyillc.blogspot.ca/2012/10/ireland-is-case-study-in-why-not-to.html From tyillc.blogspot.ca posted by Richard Field Trust Your Instincts The view from Canada. Tuesday, October 2, 2012 Ireland is a case study in why not to accept money from the Troika to bailout your banks Recently, finance ministers from Germany, the Netherlands and Finland took the position that the European Stability Mechanism could not be used for legacy assets and the cost of bank bailouts would be left to each country. This was a very important statement as it cutoff Ireland from the possibility of having the ESM take over 20 billion euros of debt. Debt that was incurred specifically to bailout the Irish banks so that they could repay unsecured debt owned by banks in countries like Germany, the Netherlands and Finland. Given this example, Spain might want to ask itself why it would want to accept funds from the Troika to bailout its banks. A bailout that helps banks from countries like Germany, the Netherlands and Finland avoid losses while saddling the Spanish taxpayer with more debt. The Spanish banking system is designed so that banks do not need to be recapitalized even after the banks recognize all the losses on the excess debt in the financial system. With deposit insurance and access to central bank funding, Spain’s banks can continue to operate and support the real economy while they are rebuilding their book capital levels. As discussed in the Irish Times, The loot may be lost forever. All the media buzz last week surrounded the feisty Roisin’s dramatic resignation in Dublin. Far more cataclysmic events in Helsinki were relegated to second place. The three most powerful finance ministers in Europe had given the thumbs-down to Ireland’s hopes of a Santa Claus-type bank rescue. The new European Stability Mechanism (ESM) funds would not, after all, be allowed to be used to sort out those sins of bankers committed prior to the establishment of a new European banking supervisor. Or, as they put it so delicately, no “legacy” assets would be taken on by the new body. Thus historic problems would be left in the hands of “national authorities”. Enda and Ireland are left holding their own banking babies. Contrary to previous hopes, Europe was not now going to charge in, a white knight on a chariot, to buy shares in AIB and Bank of Ireland at inflated prices. Europe doesn’t do white knights. As far as the three powerful finance ministers were concerned, Ireland was done and dusted. There was going to be no relief for past sins. Ireland is a sinner from the past, doing its penance dutifully — an example to other errant nations. Future sinners will qualify for forgiveness. The ESM will step in with funding to break the link between bank and sovereign debt for them, but not for us. Ireland was out on a limb, abandoned by its colleagues. The Government was exposed. It had grossly oversold the benefits of the earlier agreement in June. Irish ministers were ashen -faced in the Dail on Wednesday morning. The premature cries of triumph after the summit in June had vanished. No wonder they looked shell-shocked. Enda admitted to the Dail that he had been given no warning about the three ministers’ bombshell. He was kept in the dark. He was reminded that he had announced a “seismic shift” in June. Now, Ireland had been humiliated. Kenny was careful to repeat ad nauseam the bald words of the June communique: the vicious cycle of the link between bank debt and sovereign debt would be broken. Equally, he reminded TDs of the June promise that Europe would “examine the situation of the Irish financial sector with the view of further improving the sustainability of the well-performing adjustment programme”. Gone was June’s rhetoric of “seismic shifts” and “game changers”. Stripped of the rhetoric, the June statement suddenly looked naked. The Taoiseach tried to claim that nothing had changed. He was in denial. So too was the Department of Finance who even told the Irish Times that it “welcomed the ideas put forward by [German finance minister] Schauble and his allies”. The mandarins feebly mumbled that “these ideas will feed into our discussions over the coming months”. The Taoiseach was in denial. The mandarins of Merrion Street were in denial. And their own minister, Michael Noonan, was in denial…. Taoiseach Kenny spoke loftily of his own meetings with three PRIME MINISTERS, firmly putting the three upstart finance ministers in their place. Unfortunately the three prime ministers whom Enda had met came from Greece, Italy and Spain — three basket-case countries. The three finance ministers issuing the statement came from the three strongest, triple-A rated nations in Europe: Germany, Holland and Finland. No contest. Enda’s pals are the bearers of begging bowls. The three finance ministers hold the purse strings. His assertion that “all European finance ministers are equal when they sit around the table” is nonsense. The big powers in Europe are treating us shabbily. For a short while they even cruelly allowed us to indulge the fantasy that they would pay us €20bn for equity in our pillar banks when it was worth less than €8bn. We will hear no more of that. The Government needs someone with the bottle of Roisin Shortall to stand up to our European colleagues, someone who is neither captured, nor in denial. Mickey Rosin Shorthall..best laugh I have had all day. @Iceland http://www.ft.com/cms/s/0/edb12a4e-0d92-11e2-97a1-00144feabdc0.html Watch where you park those trawlers! Surprised this: http://www.ft.com/cms/s/0/e1455dc4-0cb2-11e2-b175-00144feabdc0.html hasn’t been linked to yet. @Mickey Hickey “The Government needs someone with the bottle of Roisin Shortall to stand up to our European colleagues, someone who is neither captured, nor in denial.” +1 @Grumpy re FT article: Not another inch, not another cent, is my humble view. Why centralize to an institution that has cowered at every turn to the wishes of Germany. The EU is not an independent institution. Barroso’s ‘Higgins’ outburst showed that he was the paid lackey of the bigger powers. Centralize to an independent power if you wish, but when push came we saw how independent the ECB was. “Europe must accept there are limits to austerity and that additional austerity won’t do anything but bring societies on the verge of collapse,” said Krugman, an economics professor at Princeton University. “No country will have prosperity until Germany and the ECB have decided that too much pain has been inflicted.” http://www.bloomberg.com/news/2012-10-03/u-s-europe-nowhere-close-to-ending-crisis-krugman-says.html Looks like Angela has her back to Moscow and her €uropean vision goes no further than the Maginot Line! Ireland should be part of the debt relief programme agreed by EU leaders in June, President of the European parliament Martin Schultz has told the Dáil. In the first ever address by a president of the European parliament to the House, Mr Schultz said to applause “I believe the Irish programme should be adjusted before the end of the year along the lines of the June European council conclusion”. http://www.irishtimes.com/newspaper/breaking/2012/1004/breaking34.html JR/MH yes we need somebody who runs away rather than stands and negotiates. @ grumpy On the FT report, it was a racing certainty that debate on some lofty document setting high-sounding political objectives would be associated with the actual nitty-gritty of the steps required to dig the EU out of the hole in which it finds itself. This enables those involved to put up a reasonable impression of being statesmen when the reality is that they are involved in rather grubby horse-trading trying to find the common ground from which all will emerge with some advantage. The news from the latter front, at least in relation to the banking union, is good, especially as the Commission proposal meets with UK approval. http://www.ft.com/intl/cms/s/0/3b119bbe-0d54-11e2-99a1-00144feabdc0.html#axzz285IXzHFe The comments by Schultz are helpful. He is not, unfortunately, the German signing the cheques. Barroso suceeded in appearing to say a lot when, as far as I can judge, he said nothing at all. @TullMcadoo ‘Negotiation’ is not a word some people or countries understand. Some people want their way only. They are sometimes rightly called bullies or dictators. After a lifetime of work, I have come across more than my fair share of them. There is no negotiation with such people. Better to tell such people and countries to take a hike. They are like very cross ‘terriers’. They appear to work for a while, until one suddenly discovers that nobody calls anymore. The ‘very effective terrier’ is then usually got rid of. I admire Roisin Shorthall for that. re- Zhou I still find it hard to fathom the willingness of many to see it desirable for the EU to push through it’s Great Work in the method it does; twisting crises into opportunities for blackmail. The fact is undeniable that willing support in Ireland for the EU is virtually nil, the very structure of an external body with legislative power that over-rules our own democratic system is an anthema to the constitution, and the popular will. Soros & his fellows have more than once publicly lauded the system of ‘technocracy’, and called for it’s extension – the removal of swathes of decision-making from ‘politics’; meaning democratic influence. And that is what the EU is struggling to create; sugar-coating and disguising it as much as possible, but nobody is fooled. The EU mus either accept the severe curtailing of it’s powers, give up it’s ambitions of control and governance and exist solely as a limited apparatus for the co-operation of member-states, or it will fall apart, and this will happen at precisely the point when it deems the time to have arrived to remove the clauses of sovereignty from the national constitutions. This is fairly self-evident; the split will favour those who want to retain self-determination, and when politicians choose to support the federal regime they de facto surrender their mandate. The only thing amusisng in all this is the denial still apparent from the elite euro-coteries in the face of opposition – everything is ‘populism’, far-right/left extremists, etc. The people I see burning flags on the news in Spain and Greece certainly don’t fit these mischaracterisations. The two-faced cheek of Schulz today merited a horse-whipping, but instead he was applauded by the Dáil schills. “Irish taxpayers are now paying the bankers’ bills to stop a domino effect that could have dragged the whole European banking system down and therefore solidarity with Ireland is to give something back,” Mr Schulz added, in the first such address to the Dail and ahead of Ireland taking up the EU presidency. “You took the burden on your shoulders to avoid the crash of the system of all the other countries, also my country. “Therefore I find the 27pc German participation in the package for Ireland is to give back solidarity to the country that gave solidarity to us,” said Mr Schulz, who has been head of the Socialists in the European Parliament since 2004 How about recompense for debts accrued at the behest of the ECB, all borrowings from that source to be written off by means of reparation and correction of the balance of alignment for who’s actually to blame for all this, and the provision of a clear route out of this monster without threats or fear of punitive responses ? Otherwise, expect this absurd class-presidency ritual to have the opposite effect than that intended. JR, Off topic. What has she achieved? She was complaining about lack of input into PC policy and presumably wanted to allocate all the centres to Labour heartlands. When that stroke failed she shouted “stroke” and stormed off. Now she has no input over policy and sits beside other useless idiots such as the ULA. Ironically she ends up campaigning about the increased allocation of PC centres to other areas of deprivation such as Balbriggan. Have you spotted the irony of a socialist campaigning agains the allocation of more services to areas of deprivation. The LP was correct in easing her out. re- Joseph Ryan + 1000 re – Tullmcadoo Wasn’t the point that the allocation was supposed to be cost-saving, to justify the cuts & removal of services, and Reilly’s nominations wd. incur expense ? Balbriggan may be deprived, but it’s also the most remote, inaccessible & costly (in every sense other than the price of the site) armpit in Dublin that could possibly have been dreamt up to choose. Stiglitz gets quoted here often, I hope this is not a repeat. From the Guardian Thursday Oct. 4th Central banks on both sides of the Atlantic took extraordinary monetary policy measures in September: the long awaited “QE3” (the third dose of quantitative easing by the United States Federal Reserve), and the European Central Bank’s announcement that it will purchase unlimited volumes of troubled eurozone members’ government bonds. Markets responded euphorically, with stock prices in the US, for example, reaching post-recession highs. Others, especially on the political right, worried that the latest monetary measures would fuel future inflation and encourage unbridled government spending. In fact, both the critics’ fears and the optimists’ euphoria are unwarranted. With so much underutilised productive capacity today, and with immediate economic prospects so dismal, the risk of serious inflation is minimal. Nonetheless, the Fed and ECB actions sent three messages that should have given the markets pause. First, they were saying that previous actions have not worked; indeed, the major central banks deserve much of the blame for the crisis. But their ability to undo their mistakes is limited. Second, the Fed’s announcement that it will keep interest rates at extraordinarily low levels through to mid-2015 implied that it does not expect recovery anytime soon. That should be a warning for Europe, whose economy is now far weaker than America’s. Finally, the Fed and the ECB were saying that markets will not quickly restore full employment on their own. A stimulus is needed. That should serve as a rejoinder to those in Europe and America who are calling for just the opposite: further austerity. But the stimulus that is needed – on both sides of the Atlantic – is a fiscal stimulus. Monetary policy has proven ineffective, and more of it is unlikely to return the economy to sustainable growth. In traditional economic models, increased liquidity results in more lending, mostly to investors and sometimes to consumers, thereby increasing demand and employment. But consider a case like Spain, where so much money has fled the banking system – and continues to flee as Europe fiddles over the implementation of a common banking system. Just adding liquidity, while continuing current austerity policies, will not reignite the Spanish economy. So, too, in the US, the smaller banks that largely finance small- and medium-sized enterprises have been all but neglected. The federal government – under both President George W Bush and Barack Obama – allocated hundreds of billions of dollars to prop up the mega-banks, while allowing hundreds of these crucially important smaller lenders to fail. But lending would be inhibited even if the banks were healthier. After all, small enterprises rely on collateral-based lending, and the value of real estate – the main form of collateral – is still down one third from its pre-crisis level. Moreover, given the magnitude of excess capacity in real estate, lower interest rates will do little to revive real-estate prices, much less inflate another consumption bubble. Of course, marginal effects cannot be ruled out: small changes in long-term interest rates from QE3 may lead to a little more investment; some of the rich will take advantage of temporarily higher stock prices to consume more; and a few homeowners will be able to refinance their mortgages, with lower payments allowing them to boost consumption as well. But most of the wealthy know that temporary measures result only in a fleeting blip in stock prices – hardly enough to support a consumption splurge. Moreover, reports suggest that few of the benefits of lower long-term interest rates are filtering through to homeowners: the major beneficiaries, it seems, are the banks. Many who want to refinance their mortgages still cannot, because they are “underwater” (owing more on their mortgages than the underlying property is worth). In other circumstances, the US would benefit from the exchange-rate weakening that follows from lower interest rates – a kind of beggar-thy-neighbour competitive devaluation that would come at the expense of America’s trading partners. But, given lower interest rates in Europe and the global slowdown, the gains are likely to be small even here. Some worry that the fresh liquidity will lead to worse outcomes: a commodity boom, for example, which would act much like a tax on American and European consumers. Older people, who were prudent and held their money in government bonds, will see lower returns, further curtailing their consumption. And low interest rates will encourage firms that do invest to spend on fixed capital like highly automated machines, thereby ensuring that, when recovery comes, it will be relatively jobless. In short, the benefits are at best small. In Europe, monetary intervention has greater potential to help – but with a similar risk of making matters worse. To allay anxiety about government profligacy, the ECB built conditionality into its bond-purchase programme. But if the conditions operate like austerity measures – imposed without significant accompanying growth measures – they will be more akin to bloodletting: the patient must risk death before receiving genuine medicine. Fear of losing economic sovereignty will make governments reluctant to ask for ECB help, and only if they ask will there be any real effect. There is a further risk for Europe: if the ECB focuses too much on inflation, while the Fed tries to stimulate the US economy, interest-rate differentials will lead to a stronger euro (at least relative to what it otherwise would be), undermining Europe’s competitiveness and growth prospects. For both Europe and America, the danger now is that politicians and markets believe that monetary policy can revive the economy. Unfortunately, its main impact at this point is to distract attention from measures that would truly stimulate growth, including an expansionary fiscal policy and financial-sector reforms that boost lending. The current downturn, already a half-decade long, will not end anytime soon. That, in a nutshell, is what the Fed and the ECB are saying. The sooner our leaders acknowledge it, the better. © Project Syndicate, 2012. There are 26 comments, fascinating. http://www.guardian.co.uk/business/economics-blog/2012/oct/04/adding-liquidity-fiscal-stimulus#start-of-comments @MH Th article itself is fascinating. It seems to show that FED and ECB and many commentators are way ahead of the witchdoctory which is still the order of the day in Europe, particularly in the creditor countries. I must read the comments. Comments are closed.