Tuesday, September 11, 2012

ECB buys bonds

There is something almost touching about the furor surrounding the bond purchases by the European Central Bank (ECB).  Unless governments want to nationalize the world's central banks or something equally radical, folks like Draghi have very few options these days if they want to save their system.  There are a lot of strategies that can be employed but what Draghi is doing is "monetizing" the debts.  Since no one can pay these debts, the only solution they can imagine it creating new money to pay off old debts.

Whether monetizing debt is a useful strategy is the subject of good debates.  But when the conditions facing the country are dire enough, it can usually be done with little fuss.  The Fed monetized debt many times during World War II—Mariner Eccles was a big supporter of the practice.  But whenever you create a new supply of money, it supposedly dilutes the value of the money already in circulation.  This horrifies people who already have money and so most of Eccles strategies were effectively outlawed in the 1950s.

Right now, there is way too little money in widespread circulation—everyone is broke or worse, in debt.  Done right, the system could absorb a huge infusion of new cash without adverse economic effects.  But since the whole economics profession has been taught that anything that could possibly lead to inflation is unspeakably evil, even such minor moves like Draghi's are seem a potentially catastrophic.  The reaction in the German press borders on insane.  As Krugman says, the Germans are badly taught about their economic history.  They remember the lessons of the hyperinflation of 1923 but completely forget the austerity-mongers like Heinrich Brüning of 1930-1932.

The Euro crises truly is an example of a simple problem made complex by some long-discredited ideas about how money works.  It is sad that these bad ideas are still ruining millions of lives.

ECB introduces unlimited bond-buying in boldest attempt yet to end euro crisis

Central bank governor Mario Draghi overcomes Germany's fears over inflation to announce new intervention in debt markets
Ian Traynor in Brussels
guardian.co.uk, 6 September 2012

The European Central Bank (ECB) unveiled its boldest attempt yet to stabilise the battered single currency on Thursday when its president, Mario Draghi, announced a new programme of open-ended, unlimited buying of distressed government bonds.

The scheme is aimed at depressing the costs of borrowing for Spain and Italy and countering the risks of a fragmentation of the eurozone and the unravelling of the single currency.

But Draghi also set strict terms for triggering the bond-buying programme, putting pressure on the eurozone's political leaders to request help, enter austerity programmes, and agree on direct bailouts for struggling governments before the ECB will act.

Draghi brushed aside strong resistance from Germany's powerful Bundesbank, which lodged the only vote against the new policy in the ECB's 23-strong governing council, to come good on his pledge in London six weeks ago that the central bank would do "whatever it takes" to save the euro.

The new bond-buying scheme, to be known as outright monetary transactions or OMTs, means that the ECB will intervene in the secondary markets to buy up the debt of governments whose bond yields are too high and are therefore jeopardising the uniform conduct of monetary policy across the eurozone, Draghi said.

The purchases would apply only to short-term debt of up to three years. The countries benefiting from the help would first need to request a eurozone bailout and governments in the single currency would need to decide to use the bailout funds to lend directly to struggling states.
Draghi said he could not order the participation of the International Monetary Fund (IMF), but would strongly seek it in any future bailout programmes.

It is understood that the ECB believes IMF involvement in the new policy and future bailouts is essential. Initial reaction from the Fund's Washington headquarters was extremely positive. "We strongly welcome the ECB's new framework. The IMF stands ready to cooperate within our frameworks," said Christine Lagarde, the IMF chief. "We see the ECB's action as an important step toward strengthening stability and growth in the euro area."

Draghi's action received a glowing critical reception across Europe. Olli Rehn, the European commissioner for monetary affairs, welcomed the move; leaders of political parties in the European parliament compared Draghi's decisiveness favourably with the perceived fecklessness and hesitation of eurozone political leaders. Britain's Institute of Directors called the policy shift a potential "game-changer".

The tributes were more muted in Germany, (BI called the reaction "going berserk") however, where monetarist hawks accuse Draghi of overstepping his mandate, embarking on a policy that will fuel inflation, and illegally if surreptitiously launching a policy of financing debt-ridden countries. more
This is touching. In order to justify the insane rantings of the austerity ghouls, some guy wants them validated in a referendum.  Gee. Golly. Whiz!  An expensive public campaign to confuse voters about monetary policy should fix the Euro mess.
A Referendum on Europe

It's Time to Ask the People What They Think

By Dirk Kurbjuweit

The Germany democratic system has suffered as a result of the euro crisis, but it has also made fighting the crisis harder. Now it's time to hold a referendum on European integration. Only then will Berlin have the democratic legitimacy it needs to take effective action.

After World War II, the West gave Germany two great gifts. The first gift was democracy; the second gift was being integrated into a Europe of free nations. This also included the overriding vision that one day both gifts could be combined to create a democratic United States of Europe. But there was a lack of determination and strength to accomplish this. To make matters worse, both gifts have suffered from the attempt to use a common currency to integrate Europe. Postwar German democracy has never been in such a sorry state as today. It has been a long time since the peoples of Europe eyed each other with so much mistrust.

That is the current situation. Next week, Germany's Federal Constitutional Court will issue another ruling on Germany's euro policy. This is not expected to clear the air or fundamentally improve the situation. A court decision cannot accomplish that. But something must happen. We cannot allow both democracy and Europe to go to rack and ruin. Democracy and European integration form the foundations of our country. The problem is that they have come into contradiction with each other. Assuming the debt mania doesn't continue to spiral out of control, it's a fact that democracy impedes a rapid rescue for the euro, while a rapid rescue for the euro undermines democracy.

Such a contradiction begs a decision. What is more important to the Germans: their democracy or Europe? Or is there a way to reconcile the two, democracy and Europe? It isn't easy. It cannot be done without risks. But there is a way.

The rescue policy for the euro has changed the country's power structure. The winner is the executive, in other words, the government. German Chancellor Angela Merkel negotiates in Brussels with the other heads of state and government. This is the body where the major decisions are made, decisions which are usually hammered out in advance during bilateral talks. What's more, the executive has the strongest apparatus behind it. In Germany, it is only the experts in the Chancellery and the Finance Ministry who have any idea what is happening and what needs to happen.

A leitmotif of the current administration is the desire to do things under the table. For example, Merkel created a small, nine-member committee in the German parliament, the Bundestag, that is supposed to provide sufficient parliamentary control over certain decisions. She allows the Bundestag to vote on issues relating to the euro rescue fund, some of which have already been superseded by the time of the vote. Merkel was caught in the act each time, but she kept trying. She is overstepping her powers so that she can govern halfway efficiently.

Parliament is the loser here. The lawmakers are not present in Brussels when the negotiations are being conducted and the decisions made. They don't have any idea what is happening and what needs to happen, because they lack the appropriate tools -- and this in an area which is key to the parliamentary system, namely budgetary policy. Hence, they are barely able nowadays to perform their actual function, which is to hold the government to account.

The opposition is no longer playing its normal role because the problems are so grave that Germany's mainstream political parties -- the conservative Christian Democratic Union, its Bavarian sister party the Christian Social Union, the center-left Social Democratic Party, the business-friendly Free Democratic Party and the Greens -- are virtually obliged to stand shoulder to shoulder. Anyone who doesn't vote with the majority is almost seen as guilty of treason. But the desire to engage in insubordination is actually a virtue for a parliament. Until now, though, the leitmotif here has mainly been obedience. more
And at long last, someone points out that Draghi won't remove the austerity boot from Europe's neck without somehow increasing the power of private central banking.  He's probably right about this.  In any case, like Obama's stimulus, Draghi's plan is far too small to do much good.

Mario Draghi's Blindness Makes Him A Danger To Europe

Raúl Ilargi Meijer, The Automatic Earth | Sep. 10, 2012

The plan to "save the euro through unlimited bond-buying" that ECB president Mario Draghi presented last week shows one thing above all, and with blinding clarity to boot - why nobody picks up on it is beyond me: it shows that Draghi is the least suitable person to present any such plan.

Any country that wants a bailout under Draghi's terms, that is: any country that wants its bonds to be bought by the ECB, must relinquish a substantial part of its sovereignty. At the very least, such a country will no longer be in charge of its own economic policies.

And it doesn't stop there: the countries that will need to pay for and/or guarantee the bond-buying will also be called on, just like the ones whose bonds are bought, to relinquish a substantial part of their sovereignty: the ECB wants much more control over the banking system across Europe. The drive is towards more centralized (i.e. Brussels, Frankfurt) control, leading to far stricter fiscal union and political union, which would take away much of the control eurozone countries presently have over their economies.

Ergo, Mario Draghi's plan is not an economic one, it's political all the way (sovereignty, don't you know). And politics is not Draghi's field, if only because he's neither a politician nor elected. He should not be allowed to have any say whatsoever in it.

The problem with the plan is purely political as well (granted, it's also financially completely useless, but that's another, though by no means separate, story). Nobody in Europe, other than a handful of bureaucrats, truly wants to hand over sovereign powers. For very good reasons, no politician in any EU country will campaign on promises to give the keys to the house away, no more than they will do so on handing over the keys to the safe. Ambrose Evans Pritchard quotes former Spanish PM Jose Maria Aznar as saying that the drive for full fiscal and political union is "deeply misguided":

"A United States of Europe is an impossible idea. It is a very serious mistake to try to destroy the nation states. You cannot go against the cultural beliefs of the people and the forces of history [..]"

Indeed; and only someone like Draghi would be blind to that. That's what makes him dangerous.

At some point in the process, you must let the people speak. And if you don't, they will speak anyway. Let's not forget that there is not an elected official in sight in the ECB, yet it still attempts to make decisions that are clearly political in character. The notion that it is all just about finance has long since turned vanished into thin air.

In our western democratic societies, all decisions should in principle be taken along democratic, i.e. elected, lines, and that includes any and all economic and financial decisions. The 17 members of the eurozone should therefore hold 17 separate referendums on whether or not their people are comfortable with giving up all sorts of sovereign rights to unelected institutions. But that is not very likely to happen, since the outcome would be all too clear: no, nein, non, no way.

Meanwhile, Europe wastes a lot of valuable time and money focusing on only one possible outcome of this crisis: that Greece and Spain and everyone else will and must remain within the eurozone. It would do much better to spend far more of that same time and money on a veritable search for a plan B. That is to say, a search for ways in which the weakest brethren can leave the eurozone without blowing up completely either themselves or the monetary union.

This is not some crazy idea. There are 17 countries in the eurozone, but 27 in the European Union. The extra 10 have all at some point or another stated their intentions to enter into the eurozone, but many of them now have second thoughts about that. They are doing relatively fine without the euro. And the enormous subsidies that were once handed out to newcomers like Greece, Portugal and Slovakia, the probably biggest reason to join, are no longer available anyway; they're gone for good.

There is no reason, other than a few purely administrative and practical ones, why Greece couldn't move from the eurozone to the more peripheral EU. The thing is, it takes a bunch of clever heads to structure, guide and execute such a process. But all of Brussels' clever heads (not that there are that many in the first place) are presently tasked with finding ways to keep Greece et al INSIDE the eurozone, not with finding ways to let them leave in relative peace and good relationships.

As for the danger of contagion, sure, if a way is found to let Greece go in peace, other countries may find such a process attractive for themselves. Portugal has entered the eurozone from a very similar and misguided point of entry to that from which Greece has. Spain could find it preferable to go that route as well. As long as this is executed as well as possible, it might well be doable. Italy is not the same story, since it was involved from the very start, in the 1950s, in the European project, and it therefore has far deeper roots in it. more

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