Bini Smaghi Says ECB Should Use QE If Deflation Risk Arises
Posted by WARREN MOSLER on December 23rd, 2011
As if QE is an inflationary bias.
They are all clueless.
MMT to the ECB:
QE addresses the solvency issue, not ‘deflation’ or aggregate demand issues.
Bini Smaghi Says ECB Should Use QE If Deflation Risk Arises
By Gabi Thesing
Dec 23 (Bloomberg) — European Central Bank Executive Board member Lorenzo Bini Smaghi said that policy makers shouldn’t shirk from using quantitative easing if deflation becomes a danger to the euro region.
“I do not understand the quasi-religious discussions about quantitative easing,” Bini Smaghi, who will leave his post at the end of the month, said in an interview published yesterday by the Financial Times. The ECB confirmed the comments. “It is appropriate if economic conditions justify it, in particular in countries facing a liquidity trap that may lead to deflation.”
December 23rd, 2011 at 9:48 am
QE sustains sovereign bonds prices, so it sustains banks capital
so since banks are capital constrained QE sustains banks level of lending so at the end QE addresses aggregate demand, right?
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Mario Reply:
December 23rd, 2011 at 12:09 pm
@Jan,
having the ability to get a loan doesn’t really affect aggregate demand levels in a balance sheet recession. It may in a “normal” recession or “inventory” recession or what have you. But theoretically if all the banks in the world “went away” tomorrow, aggregate demand in the private sector wouldn’t drop unless their income and savings levels dropped (fired employees for example). QE doesn’t effect income and savings levels in the private sector AT ALL so it really doesn’t effect aggregate demand. I am not sure how many banks that participated in QE2 would have gone bankrupt if they didn’t participate…I am guessing zero.
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Jan Reply:
December 23rd, 2011 at 12:34 pm
@Mario,
So Warren should have written:
”
MMT to the ECB:
QE addresses the solvency issue, not ‘deflation’ or aggregate demand issues IN A BALANCE SHEET RECESSION.”
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Jan Reply:
December 23rd, 2011 at 12:37 pm
@Jan,
Mario if you’re from Italy, i’m from Italy too
please contact me at jvmartin@inbox.com, i’d like to speak to you
WARREN MOSLER Reply:
December 23rd, 2011 at 1:03 pm
Balance sheet rec isn’t a distinction
Jan Reply:
December 23rd, 2011 at 2:22 pm
@Warren,
if balance sheet rec isn’t a distinction then i write it again “QE sustains sovereign bonds prices, so it sustains banks capital so since banks are capital constrained QE sustains banks level of lending so at the end QE addresses aggregate demand, right?”
WARREN MOSLER Reply:
December 23rd, 2011 at 3:51 pm
yes, in the EU if the ECB doesn’t write the check the banks, the nat. govs, and the entire credit structure goes down
Mario Reply:
December 23rd, 2011 at 5:07 pm
@Jan,
@Warren
yes, in the EU if the ECB doesn’t write the check the banks, the nat. govs, and the entire credit structure goes down
okay I see what you’re saying now particularly for the EU today. But in the US do you think any banks actually used QE2 to stave off bankruptcy? I mean it’s definitely possible, but unlikely don’t you think?
WARREN MOSLER Reply:
December 23rd, 2011 at 9:36 pm
no US bank ‘used’ qe2 at all.
It was just the Fed buying govt securities.
to be analogous to europe the states would all have to be in trouble and would also have to be providing the deposit insurance for their banks,
and then qe would be the Fed buying the states debt
Mario Reply:
December 23rd, 2011 at 11:06 pm
@Jan,
@Warren
to be analogous to europe the states would all have to be in trouble and would also have to be providing the deposit insurance for their banks,
and then qe would be the Fed buying the states debt
ahh yes of course. I see where solvency could fit in there now. Thank you!!!
Merry Christmas to all and have a great new year!!
Walter Reply:
December 23rd, 2011 at 3:37 pm
@Jan, That depends. If those bonds are accounted for on a hold-to-maturity basis than these price fluctuations will not influence capital.
Keep also in mind a few other lending constraints. Bank lending is pro-cyclical. During a downturn collateral and income of potential borrowers decrease. Banks are therefor during such a period necessarily more prudent. Individuals and companies are also less willing to borrow when they are already afraid of losing their job or sales.
I think that this creditworthiness and availability of people who actually want to borrow are essential to increase lending.
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WARREN MOSLER Reply:
December 23rd, 2011 at 3:54 pm
true. it’s all up to the regulators and whether they make the banks write down any of their assets
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December 23rd, 2011 at 10:28 am
Clueless. That’s mild Warren, but OK it’s almost Christmas.
From Jan 1, 2012 LBS will be teaching at Harvard. What about that?
In the same article:
“The interest in the long-term refinancing operation may be a sign of confidence gradually returning,” Bini Smaghi said. “If this is right, interest rate spreads would be pushed down and create profitable opportunities. It would generate a herd movement in a positive direction.”
and
“Central banks act as lender of last resort to the financial system,” he said. “The concept of lender of last resort to governments is misplaced.”
This looks to me once more they make it very clear haircuts are still on the table. But somehow they don’t make the link to what this risk means for confidence in getting at least your nominal investment back.
and
The policy maker said he’s “not sure” if issuing common euro bonds would be the most effective solution to solve the crisis. “I could nevertheless envisage a limited amount of joint and several issuance to finance, for instance, specific projects, pan-European infrastructure or a common bank restructuring fund.”
This looks to me he mixes up efsf bonds that lack implicit ecb guarantee and bonds that would be issued by a newly created European Finance Ministry that would have such implicit guarantee.
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December 23rd, 2011 at 12:10 pm
http://www.bloomberg.com/news/2011-12-23/congress-passes-payroll-tax-cut-extension.html
Looks like we’re “saved” for another couple months.
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December 23rd, 2011 at 2:28 pm
Discussing QE with BS involves a semantic Catch-22? :)
Maybe he just thinks unlimited buying of “state” bonds is QE?
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December 23rd, 2011 at 3:02 pm
For Jan,
QE is ineffective because it is an asset swap and adds no new financial assets to the economy, and so in that respect has no effect on aggregate demand. To the extent it sustains bond prices you could say it acts on the wealth effect but this is minor with respect to demand.
In terms of bank capital, are banks reluctant to lend because they are capital constrained or because there are relatively few credit-worthy borrowers?
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roger erickson Reply:
December 23rd, 2011 at 3:35 pm
@Keith newman, Please define your terms.
Does someone have a recording of that song “You say QE, I say QE … oh, let’s call the whole [austerity] thing off!”
Sung to the tune of tomatoes throwing.
Seriously, no QE discussion can propagate without reference to a 9-level QE glossary, and specific indication of EXACTLY which QE definition you’re referring to.
Will the real QE please stand up? [Warren Mosler! Come.. on.. down! Now, do you want the paradigm behind door #1, OR .... ]
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WARREN MOSLER Reply:
December 23rd, 2011 at 3:54 pm
currently a large part of the problem is the euro banks are in limbo due to the sudden risk to their equity capital of holding member nation debt
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December 25th, 2011 at 11:32 am
I have raised this question before about the American Debt and Q.E 1 and 2. If Q.E is big enough then it will result in growth because it takes ‘pressure’ off imposed public debt constraints. For example, Q.E has reduced the total amount of outstanding public debt, which gives Govt. room to run more deficits. The same situation would be applicable to Euro-zone countries, would it not? The real questions would be the rate of quantitative easing and the structure of individual member state debt purchases by the E.C.B to achieve Q.E.
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Shaun Hingston Reply:
December 25th, 2011 at 11:43 am
@Shaun Hingston,
Of course it doesn’t guarantee that Govt, will run more deficits, but I’m making the strong assumption that if there is room between a current public debt level and the self imposed constraint, then the public debt level will rise towards the constraint.
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WARREN MOSLER Reply:
December 27th, 2011 at 9:05 am
the political constraint is ‘inflation’, and there seems to be plenty of opposition to that
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WARREN MOSLER Reply:
December 27th, 2011 at 9:04 am
there is no operational US public debt constraint.
nor does US style qe do anything like that in any case
please read the 7 dif on this website, thanks
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Shaun Hingston Reply:
December 27th, 2011 at 10:12 am
@WARREN MOSLER,
I think your missing what I’m saying. I’m not talking about operational or functional constraints. I’m talking about self-imposed constraints, either legislative or via public opinion. I’m not talking about hypothetical ‘Mosler’ changes that render such constraints irrelevant.
Primarily I’m referring to the ‘debt-ceiling’ legislative constraint and all other manifestations of public debt constraints.
I have asked before and Art has said, that Debt held by the FED, once it expires is simply written off the balance sheet. Accordingly this reduces the net amount of outstanding public debt.
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WARREN MOSLER Reply:
December 27th, 2011 at 10:16 am
when tsy debt held by the fed matures the fed debits the tsy’s account for the balance due.