ECB to sterilize bond purchases
Posted by WARREN MOSLER on September 5th, 2012
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> (email exchange)
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> ”To sterilize the bond purchases, the ECB will remove from the system elsewhere the same
> amount of money it spends, ensuring the program has a neutral impact on the money
> supply.”
>
> blimey…
>
ECB Plan Said to Pledge Unlimited, Sterilized Bond-Buying
September 5th, 2012 at 10:30 am
Any thoughts on specific manner by which ECB will remove securities? Reverse repos? Selling core or long-term sovereign debt holdings?
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WARREN MOSLER Reply:
September 5th, 2012 at 10:46 am
don’t know. probably considering term repo, ecb notes, etc. the usual suspects
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Cesar Reply:
September 5th, 2012 at 7:18 pm
@WARREN MOSLER,
Does this significantly reduce your positivity on Draghi Warren?
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WARREN MOSLER Reply:
September 5th, 2012 at 9:26 pm
what positivity is that?
Neil Wilson Reply:
September 5th, 2012 at 10:50 am
@Joshua Wojnilower,
How about German TARGET2 balances.
Offer them a term deposit account…
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Jose Guilherme Reply:
September 5th, 2012 at 9:48 pm
@Neil Wilson,
Target2 balances can increase without limit.
But the PIIGS’ governments are so innefective that they won’t even use them to restore their monetary sovereignty.
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Neil Wilson Reply:
September 6th, 2012 at 2:19 am
@Jose Guilherme,
Only to the extent that somebody else’s is going down – if the ECB isn’t accommodating.
You could ‘neutralise’ the movement of some of them by offering a term deposit account at the ECB, the proceeds of which buy the equivalent term government bond from the periphery.
Essentially then the ECB takes on the default risk.
Jose Guilherme Reply:
September 6th, 2012 at 7:52 am
@Jose Guilherme,
@ Neil Wilson
A PIIGS’ bond is maturing today, held by – say – Deutsche Bank.
The PIIGS’ government sells a new bond to a government-owned commercial bank.
Uses the deposit to pay off the German bank.
At the end of the day, the Bundesbank will have a positive balance versus the ESCB while the PIIGS’ NCB will have a corresponding negative balance. Under TARGET2 there are are no limits to said balances.
Repeat the process tomorrow and after tomorrow on and on – PIIGS monetary sovereignty has been restored!
A pity that none of them dares to use this escape clause provided by the eurosystem, courtesy of TARGET2.
WARREN MOSLER Reply:
September 8th, 2012 at 2:59 pm
I don’t follow that.
target 2 differentials happen when deposits go from one bank to a bank in another member nation
Neil Wilson Reply:
September 6th, 2012 at 9:42 am
@Jose Guilherme,
They’ve been doing that effectively with the private commercial banks in the periphery.
And AFAICT it only works to the extent that the ECB is prepared to allow Emergency Loan Assistance (ELA) to the national central bank
Jose Guilherme Reply:
September 6th, 2012 at 10:01 am
@Jose Guilherme,
@ Neil Wilson
The ECB has to allow the necessary leeway to the NCB, with or without ELA. Otherwise, the payments system of the eurozone will collapse.
Therein lies the beauty of TARGET2.
A beauty, alas, the PIIGS have proved unable to capture.
Jose Guilherme Reply:
September 6th, 2012 at 10:06 am
@Jose Guilherme,
@ Neil Wilson
Also, doing it via private banks is very different from using the government-owned banks for the purpose.
The government bank has to follow orders from its shareholder. That means monetary sovereignty has returned through the back door.
WARREN MOSLER Reply:
September 8th, 2012 at 2:54 pm
right, they are reducing deficits, not increasing them.
plus, target 2 balances come largely from private sector activity, not govt.
Ed Rombach Reply:
September 5th, 2012 at 10:51 am
@Joshua Wojnilower,
Meanwhile, in a parallel universe, the fed dangles prospects of QE3 to excite market participants while simultaneously conducting “small scale” drain operations. Must be some sort of coordinated inaction.
*********
NY Fed: Will Conduct Series of Small Reverse Repos Starting Thursday
Wed Sep 05 10:37:23 2012 EDT
NEW YORK–The Federal Reserve Bank of New York said Wednesday that it will
again implement another series of “small scale” reserve draining operations
starting Thursday.
The reverse repurchase agreements, which take reserves from the banking
system, are part of “prudent advance planning” by the central bank, the New
York Fed said. “These operations do not represent a change in the stance of
monetary policy, and no inference should be drawn about the timing of any
change in the stance of monetary policy in the future,” the bank said.
The reverse repo will use all eligible collateral types. In implementing the
reverse repos, the New York Fed is planning for the day when it will eventually
work to tighten monetary policy. Most central bankers and private sector
economists believe that time lies well off in the future.
Write to Michael S. Derby at michael.derby@dowjones.com
(END) Dow Jones Newswires
September 05, 2012 10:37 ET (14:37 GMT)
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roger erickson Reply:
September 5th, 2012 at 12:56 pm
@Ed Rombach,
“coordinated inaction” – classic, Ed;
there’s a reason why constructively coordinated actions always outweigh inaction, even if coordinated;
is it the same reason matter seems to predeminate over antimatter? :)
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September 5th, 2012 at 11:11 am
does this “sterilization” square with your recent comments that there does seem to sufficient deficit spending to maintain the various euro economies?
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WARREN MOSLER Reply:
September 5th, 2012 at 9:32 pm
sterilization is meaningless.
but I do continue to think they will ‘do what it takes’ to the best of their abilities, however questionable.
and looks like deficits may be high enough for stability if they don’t increase the austerity.
July and August numbers so far possibly indicating things are either stabilizing or not getting worse at faster rates, but still too early to tell.
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Jose Guilherme Reply:
September 5th, 2012 at 9:45 pm
@WARREN MOSLER,
They’ll do what it takes, no doubt.
But in return the periphery will have to submit to ECB-dictated austerity – forever.
Failure to comply will mean the suspension of bond-buying and a consequent rise in yields. This means non-compliance won’t be an option.
The dream of European unity will thus be achieved not at the point of a gun, as in the distant past, but of a computet keyboard.
Less heroic but much more effective.
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WARREN MOSLER Reply:
September 8th, 2012 at 2:53 pm
and, as previously discussed, a central bank that also controls fiscal
September 5th, 2012 at 11:51 am
read this on John Mauldin’s latest letter; interesting… for the layman myself, it’s somewhat contradicting MMT. maybe you should get on his “conversations” sometime- would be interesting.
http://dallasfed.org/assets/documents/institute/wpapers/2012/0126.pdf
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roger erickson Reply:
September 5th, 2012 at 1:01 pm
@okl, corrected link is
http://www.dallasfed.org/assets/documents/institute/wpapers/2012/0126.pdf
ps: this comment is flat out wrong;
“governments must therefore use much more vigorously the policy levers they still control to support strong, sustainable and balanced growth at the global level”
The duty of each government is to further improve the general welfare of their own people. That’s why there are separate governments. If any one of them develops significantly better methods …. the other countries will eventually emulate the successful ones, or be replaced.
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September 6th, 2012 at 10:48 am
back to IMF helping to monitor ECB-member state finances
This is insane – just political cover.
All this shows is that ECB-member states don’t trust one another. What makes ‘em think the IMF is a neutral party? Or even a competent one? OR that electorates will be either satisfied, or impressed.
“Countries that want the ECB to buy their bonds must first officially ask for help from Europe’s bailout funds and agree to “strict and effective” budget policy conditions.
The International Monetary Fund will help monitor the compliance by governments to those conditions.”
http://www.usatoday.com/money/world/story/2012-09-06/draghi-europe-debt/57627926/1
Do we let the IMF monitor Mississippi’s fiscal operations? Don’t answer that. We actually might, behind the scenes.
Bigger question. Does the IMF – in effect – look to the public like a wholly owned subsidiary of Wall St., Inc.?
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Ed Rombach Reply:
September 6th, 2012 at 3:04 pm
@roger erickson,
“Do we let the IMF monitor Mississippi’s fiscal operations? Don’t answer that. We actually might, behind the scenes.”
Roger – Please don’t give them any ideas!
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Walid M Reply:
September 6th, 2012 at 7:57 pm
@roger erickson, Axel weber was the pioneer behind bringing in the IMF and for a very good reason . IMF may not be neutral but it is not Germany ..
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September 12th, 2012 at 4:38 pm
Can someone explain this? If they are buying bonds with new money, what are they selling to contract the money supply and to whom?
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