The ECB, notwithstanding the efforts of Draghi is a dangerous, delusion organization, that either has no idea of its own stupidity or has an agenda in mind, which has nothing to do with its mandate of price stability and everything to do with wealth transfers from ordinary citizens to a cosseted financial elite for whom they provide enabling cog in a self enriching money go round.
Key Risk 2, contrary to the impression given in the summary blurb, the problem is coloured yellow and increasing: From the overview:
“Key risk 2: A further deterioration in bank profitability and credit quality owing to a weak macrofinancial environment.
The persistence of sovereign strains in the euro area, as part of the broader global financial crisis, has implied pronounced uncertainty surrounding euro area macro-financial developments. More worryingly, a progressive weakening in the macro-financial environment has led to increasing risks to banks’ credit exposures, profitability and capital levels. Specific channels through which such impacts may be most strongly felt could include increases in non-performing loans – of particular concern for those banks with low starting levels of profitability. Such interaction would be most relevant for banks with exposures to households and firms with stretched debt-servicing capacity – stemming, for instance, from high household or firm indebtedness along with susceptibility to adverse macroeconomic developments in the form of rising unemployment or weak economic demand.”
Reading this, one gets the impression that it is almost a pity that banks have to get their their hands dirty dealing with debt stretched households and firms. Perhaps the banks should commandeer the wealth of people rather than stoop to the mundane world of their customers.
“. While loan loss provisioning of euro area banks has exhibited a rise in recent quarters, possible forbearance is an issue to be monitored.”
How does that exhortation to ‘monitor forebearance’ manage to accord itself with the strict mandate of ‘price stability’?
And what does ‘monitor forebearance’ mean? Does it mean that every struggling householder is thrown onto the street; a deserted street, thanks to the devastating deleveraging policies implemented by the same ECB.
It is still clear that after destroying several countries, the ECB does not give a hoot about the economic conditions in the different countries. It is interested only in bank balance sheets. And the only reason it is interested in bank balance sheets is that it wants to ensure that creditors get paid. Though it may, and will, destroy a continent, Scrooge will have his pound of flesh.
It is clear too, that they are still unwilling to make the connection between deleveraging and the economic chaos they are causing.
The ‘weak macrofinancial environment’ is a direct result of the policies that they forced down the throats of Europe and in particular down Ireland’s throat.
The sooner Europe is rid of the ECB and the euro the better for everybody.
What have mainstream macroeconomists learn’t? Short answer: nothing
“Most importantly, the BIS paper urges us to take a “more fundamental, step” and that is:
… to capture more deeply the monetary nature of our economies … models should deal with true monetary economies, not with real economies treated as monetary ones … Financial contracts are set in nominal, not in real, terms. More importantly, the banking system does not simply transfer real resources, more or less efficiently, from one sector to another; it generates (nominal) purchasing power. Deposits are not endowments that precede loan formation; it is loans that create deposits. Money is not a “friction” but a necessary ingredient that improves over barter. And while the generation of purchasing power acts as oil for the economic machine, it can, in the process, open the door to instability”
The money supply is endogenously driven by the credit demand from the private sector, who have no claim to being rational and optimising. The GFC has dispelled that myth – as previous crises have dispelled it in the past. It is just that, in the words of the BIS paper, “(s)o-called ‘lessons’ are learnt, forgotten, re-learnt and forgotten again.”
“I would have said the so-called “lessons” are denied by an ideological arrogance that is intent on defending the hegemony of the paradigm and the rewards that delivers the main players rather than advancing any notion of knowledge or insight.
@ JR: “The sooner Europe is rid of the ECB and the euro the better for everybody.”
I am (reluctantly) slowly forming the opinion that this is what will happen – though some states will opt to leave voluntarily when their legislators realise that their social and political underpinnings have crumbled beneath them. Sky will not fall, but many folk will be in dire straits and it may take over a generation to settle – maybe never!
The ‘macrofinancial system’ sits atop what? Such a system is surely not a self-assembling, free-floating, independent economic construct even if its supporters allege otherwise and they behave as if it is such. Perhaps they may recognise their mistake when it is already too late and they cannot prevent their system unravelling. I doubt it. Sovereign states are like pieces of cast iron. You may be able to rivet them together, but I should not attempt to forge them into a single mass. You’ll get a nasty suprise.
Arrogance (the political variety) appears to have no limit!
Also from the BIS paper
“Moreover, it is no coincidence that the only significant financial cycle ending in a financial
crisis pre-1985 took place in the United Kingdom, following a phase of financial liberalisation
in the early 1970s (Competition and Credit Control). That this was also a period of high
inflation indicates that financial liberalisation, by itself, is quite capable of generating sizeable
financial cycles. That said, in those days the rise in inflation and/or the deterioration of the
balance of payments that tended to accompany economic expansions would inevitably
quickly call for a policy tightening, constraining the cycle compared with the policy regimes
that followed.”
Dork – in my opinion the crisis within late 70s UK leading up to thatchers ascent into power and her monetary medicine was a result of banks creating credit , much of which was directed toward cars.
These cars then preceded to burn through the capital (oil) base for no return.
The car boom within Ireland in the late 70s was no different.
These are dramatic credit / petro events as the private banking system seeks to capture temporary profits from this fleeting real capital and thus privatize the gains while socializing the losses.
Also
“Similarly, too much
capital in overgrown sectors holds back the recovery. And a heterogeneous labour pool adds
to the adjustment costs. Financial crises are largely a symptom of the underlying STOCK PROBLEMS ( Dork – houses & cars in Ireland) and, in turn, tend to exacerbate them. Current models generally rule out the
presence of such disequilibrium stocks, and when they incorporate them, they assume them
exogenously, do not see them as the legacy of the preceding boom and treat them as exogenous cuts in borrowing limits”
Again with the stock problems
Arguably, these features reflect a mixture of factors:
the overestimation of both potential output and growth during the boom; the misallocation of
resources, notably the capital stock but also labour, during that phase; the oppressive effect
of the debt and capital overhangs during the bust; and the disruptions to financial
intermediation once financial strains emerge.
This suggests that the key policy challenge is to prevent a stock problem from leading to a
long-lasting flow problem, weighing down on income, output and expenditures………………….”
So monetarist inflation targeting by banks after each post 1960s credit event was the wrong tool.
The inflation was a result of malinvested bank credit…
Instead of targeting the real problem…..
The credit products produced by the free banking system (mainly houses & cars in the Anglo world) – they raised rates.
So in January people will go out and buy new 131 cars while the City Cork burns down……….
What in the name of God is this !!!!
You cannot make such elementary economic mistakes again & again.
Its impossible.
Unless you begin to realize these are not mistakes.
@ Brian Woods Snr
There are many many forces that want to see the Euro stay in tact. Japan is going to print, the US are printing, the UK will print…the only currency that will break the back of its peasants to pay off its debts is …the Euro
Why – because at its centre is a mentality that engineered the deaths of 9 million human beings in gas chambers with diabolical precision. Germany is a heartless narcissist that is incapable of entering into any union. It is the self righteous sanctimonious wife-beating husband that must be kicked to the kerb. Sure we will be materially poorer without it for a while but you just can’t stick with something so indifferent to the suffering of others
@Eureka
I wouldn’t single out Germany there are a gaggle of elected and non-elected gits of various nationalities in Europe with an agenda to make it all one happy family and they would kill if you got in their way. My guess is the first significant deaths at protests will happen in Spain. Maybe even as soon as next year. They are certainly gearing up the protests there.
@PR Guy
My guess is the first significant deaths at protests will happen in Spain. Maybe even as soon as next year. They are certainly gearing up the protests there.
Eureka is way over the top on the modern German propensity for killing their political opponents, post war the southern fascist states have a much, much worse record (Spain was a fascist dictatorship and was executing people with gusto in 1975 – people forget this) and the Spanish People’s Party was never properly purged of its fascist sympathies. The Greek’s and the Portuguese military dictatorships were not quite as bad but we should not ignore the relatively recent presence and still malign influence of the militaristic right in European government. Golden Dawn and all that.
That having been said Eureka is most definitely on to something with calling the current German establishment heartless narcissists. Schauble’s last unselfconscious declaration of neoliberal faith in the Wall Street Journal was bizarrely self satisfied, strongly nationalistic and most importantly laughably dishonest (Germany has been at the forefront of this ambition. It was the first to suggest establishing a permanent European safety net for states’ but only after pushing many of them off a cliff).
German conservatives are, well, conservatives who are German. While they are allowed to control EU policy this is bad news for the weaker parties in any social or economic arrangement who are not German (see also: Ireland vs the Eurozone financial sector).
Can I say again how the WSJ article is definitely worth a read? I think people wilfully deceive themselves on the right wing radicalism and manifest destiny stylings of the current German establishment and how it is buttressed by a significant degree of self delusion and close mindedness. Of course Germany could not do the damage they have done without the hotbed of neoliberalism that are the ECB and European Commission but they are partially responsible for that too.
Unfortunately Germany has their neoliberal fellow travellers in Ireland too, keen, after the biggest market failure since the 1930s, to embed market fundamentalism here too. Fools, plutocrats and traitors.
9 replies on “ECB Financial Stability Review”
Credit banks serve no function in a energy starved world.
They can no longer take from future resources and call it “growth”
What is the purpose of the ECB when national credit is the only mechanism to restart the flow and clear the waste from the system.
@ All
FYI
http://www.bloomberg.com/news/2012-12-17/irish-gdp-seen-rising-0-6-in-third-quarter-as-growth-resumes.html
Whatever next?
The ECB, notwithstanding the efforts of Draghi is a dangerous, delusion organization, that either has no idea of its own stupidity or has an agenda in mind, which has nothing to do with its mandate of price stability and everything to do with wealth transfers from ordinary citizens to a cosseted financial elite for whom they provide enabling cog in a self enriching money go round.
Key Risk 2, contrary to the impression given in the summary blurb, the problem is coloured yellow and increasing: From the overview:
“Key risk 2: A further deterioration in bank profitability and credit quality owing to a weak macrofinancial environment.
The persistence of sovereign strains in the euro area, as part of the broader global financial crisis, has implied pronounced uncertainty surrounding euro area macro-financial developments. More worryingly, a progressive weakening in the macro-financial environment has led to increasing risks to banks’ credit exposures, profitability and capital levels. Specific channels through which such impacts may be most strongly felt could include increases in non-performing loans – of particular concern for those banks with low starting levels of profitability. Such interaction would be most relevant for banks with exposures to households and firms with stretched debt-servicing capacity – stemming, for instance, from high household or firm indebtedness along with susceptibility to adverse macroeconomic developments in the form of rising unemployment or weak economic demand.”
Reading this, one gets the impression that it is almost a pity that banks have to get their their hands dirty dealing with debt stretched households and firms. Perhaps the banks should commandeer the wealth of people rather than stoop to the mundane world of their customers.
“. While loan loss provisioning of euro area banks has exhibited a rise in recent quarters, possible forbearance is an issue to be monitored.”
How does that exhortation to ‘monitor forebearance’ manage to accord itself with the strict mandate of ‘price stability’?
And what does ‘monitor forebearance’ mean? Does it mean that every struggling householder is thrown onto the street; a deserted street, thanks to the devastating deleveraging policies implemented by the same ECB.
It is still clear that after destroying several countries, the ECB does not give a hoot about the economic conditions in the different countries. It is interested only in bank balance sheets. And the only reason it is interested in bank balance sheets is that it wants to ensure that creditors get paid. Though it may, and will, destroy a continent, Scrooge will have his pound of flesh.
It is clear too, that they are still unwilling to make the connection between deleveraging and the economic chaos they are causing.
The ‘weak macrofinancial environment’ is a direct result of the policies that they forced down the throats of Europe and in particular down Ireland’s throat.
The sooner Europe is rid of the ECB and the euro the better for everybody.
What have mainstream macroeconomists learn’t? Short answer: nothing
http://bilbo.economicoutlook.net/blog/?p=22113
“Most importantly, the BIS paper urges us to take a “more fundamental, step” and that is:
… to capture more deeply the monetary nature of our economies … models should deal with true monetary economies, not with real economies treated as monetary ones … Financial contracts are set in nominal, not in real, terms. More importantly, the banking system does not simply transfer real resources, more or less efficiently, from one sector to another; it generates (nominal) purchasing power. Deposits are not endowments that precede loan formation; it is loans that create deposits. Money is not a “friction” but a necessary ingredient that improves over barter. And while the generation of purchasing power acts as oil for the economic machine, it can, in the process, open the door to instability”
The money supply is endogenously driven by the credit demand from the private sector, who have no claim to being rational and optimising. The GFC has dispelled that myth – as previous crises have dispelled it in the past. It is just that, in the words of the BIS paper, “(s)o-called ‘lessons’ are learnt, forgotten, re-learnt and forgotten again.”
“I would have said the so-called “lessons” are denied by an ideological arrogance that is intent on defending the hegemony of the paradigm and the rewards that delivers the main players rather than advancing any notion of knowledge or insight.
@ JR: “The sooner Europe is rid of the ECB and the euro the better for everybody.”
I am (reluctantly) slowly forming the opinion that this is what will happen – though some states will opt to leave voluntarily when their legislators realise that their social and political underpinnings have crumbled beneath them. Sky will not fall, but many folk will be in dire straits and it may take over a generation to settle – maybe never!
The ‘macrofinancial system’ sits atop what? Such a system is surely not a self-assembling, free-floating, independent economic construct even if its supporters allege otherwise and they behave as if it is such. Perhaps they may recognise their mistake when it is already too late and they cannot prevent their system unravelling. I doubt it. Sovereign states are like pieces of cast iron. You may be able to rivet them together, but I should not attempt to forge them into a single mass. You’ll get a nasty suprise.
Arrogance (the political variety) appears to have no limit!
Also from the BIS paper
“Moreover, it is no coincidence that the only significant financial cycle ending in a financial
crisis pre-1985 took place in the United Kingdom, following a phase of financial liberalisation
in the early 1970s (Competition and Credit Control). That this was also a period of high
inflation indicates that financial liberalisation, by itself, is quite capable of generating sizeable
financial cycles. That said, in those days the rise in inflation and/or the deterioration of the
balance of payments that tended to accompany economic expansions would inevitably
quickly call for a policy tightening, constraining the cycle compared with the policy regimes
that followed.”
Dork – in my opinion the crisis within late 70s UK leading up to thatchers ascent into power and her monetary medicine was a result of banks creating credit , much of which was directed toward cars.
These cars then preceded to burn through the capital (oil) base for no return.
The car boom within Ireland in the late 70s was no different.
These are dramatic credit / petro events as the private banking system seeks to capture temporary profits from this fleeting real capital and thus privatize the gains while socializing the losses.
Also
“Similarly, too much
capital in overgrown sectors holds back the recovery. And a heterogeneous labour pool adds
to the adjustment costs. Financial crises are largely a symptom of the underlying STOCK PROBLEMS ( Dork – houses & cars in Ireland) and, in turn, tend to exacerbate them. Current models generally rule out the
presence of such disequilibrium stocks, and when they incorporate them, they assume them
exogenously, do not see them as the legacy of the preceding boom and treat them as exogenous cuts in borrowing limits”
Again with the stock problems
Arguably, these features reflect a mixture of factors:
the overestimation of both potential output and growth during the boom; the misallocation of
resources, notably the capital stock but also labour, during that phase; the oppressive effect
of the debt and capital overhangs during the bust; and the disruptions to financial
intermediation once financial strains emerge.
This suggests that the key policy challenge is to prevent a stock problem from leading to a
long-lasting flow problem, weighing down on income, output and expenditures………………….”
So monetarist inflation targeting by banks after each post 1960s credit event was the wrong tool.
The inflation was a result of malinvested bank credit…
Instead of targeting the real problem…..
The credit products produced by the free banking system (mainly houses & cars in the Anglo world) – they raised rates.
So in January people will go out and buy new 131 cars while the City Cork burns down……….
What in the name of God is this !!!!
You cannot make such elementary economic mistakes again & again.
Its impossible.
Unless you begin to realize these are not mistakes.
@ Brian Woods Snr
There are many many forces that want to see the Euro stay in tact. Japan is going to print, the US are printing, the UK will print…the only currency that will break the back of its peasants to pay off its debts is …the Euro
Why – because at its centre is a mentality that engineered the deaths of 9 million human beings in gas chambers with diabolical precision. Germany is a heartless narcissist that is incapable of entering into any union. It is the self righteous sanctimonious wife-beating husband that must be kicked to the kerb. Sure we will be materially poorer without it for a while but you just can’t stick with something so indifferent to the suffering of others
@Eureka
I wouldn’t single out Germany there are a gaggle of elected and non-elected gits of various nationalities in Europe with an agenda to make it all one happy family and they would kill if you got in their way. My guess is the first significant deaths at protests will happen in Spain. Maybe even as soon as next year. They are certainly gearing up the protests there.
@PR Guy
Eureka is way over the top on the modern German propensity for killing their political opponents, post war the southern fascist states have a much, much worse record (Spain was a fascist dictatorship and was executing people with gusto in 1975 – people forget this) and the Spanish People’s Party was never properly purged of its fascist sympathies. The Greek’s and the Portuguese military dictatorships were not quite as bad but we should not ignore the relatively recent presence and still malign influence of the militaristic right in European government. Golden Dawn and all that.
That having been said Eureka is most definitely on to something with calling the current German establishment heartless narcissists. Schauble’s last unselfconscious declaration of neoliberal faith in the Wall Street Journal was bizarrely self satisfied, strongly nationalistic and most importantly laughably dishonest (Germany has been at the forefront of this ambition. It was the first to suggest establishing a permanent European safety net for states’ but only after pushing many of them off a cliff).
German conservatives are, well, conservatives who are German. While they are allowed to control EU policy this is bad news for the weaker parties in any social or economic arrangement who are not German (see also: Ireland vs the Eurozone financial sector).
Can I say again how the WSJ article is definitely worth a read? I think people wilfully deceive themselves on the right wing radicalism and manifest destiny stylings of the current German establishment and how it is buttressed by a significant degree of self delusion and close mindedness. Of course Germany could not do the damage they have done without the hotbed of neoliberalism that are the ECB and European Commission but they are partially responsible for that too.
Unfortunately Germany has their neoliberal fellow travellers in Ireland too, keen, after the biggest market failure since the 1930s, to embed market fundamentalism here too. Fools, plutocrats and traitors.