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(Mario Draghi may be on the panel with me)
Category Archives: ECB
ECB’s Weidmann Says Unlimited Money Creation Risks Inflation
Only with fixed fx, where ‘money creation’ is better described as ‘deficit spending’.
Shame shame shame.
ECB’s Weidmann Says Unlimited Money Creation Risks Inflation
By Jeff Black and Jana Randow
September 18 (Bloomberg) — Bundesbank President Jens Weidmann said central banks that promise to create unlimited amounts of money risk fueling inflation and losing their credibility.
In a ceremonial speech in Frankfurt today, Weidmann, who opposes the European Central Bank’s plan to spend unlimited amounts on government bonds, spoke of the responsibilities that central banks have to preserve the value of money.
“If a central bank can potentially create unlimited money from nothing, how can it ensure that money is sufficiently scarce to retain its value?” he asked. “Is there not a big temptation to misuse this instrument to create short-term room to maneuver even when long-term damage is very likely? Yes, this temptation is very real, and many in the history of money have succumbed to it.”
While Weidmann didn’t directly address ECB policy, he is the only central bank governor from the 17 euro nations to publicly oppose ECB President Mario Draghi’s plan to help curb the borrowing costs of member states engulfed by the region’s debt crisis. Weidmann, who has warned the bond-buying policy is tantamount to financing governments, said today that central banks were given independence to ensure the power to create money couldn’t be abused by politicians.
“If one looks back in history, central banks were often created precisely to give the monarch the freest possible access to seemingly unlimited financial means,” Weidmann said. “The connection between states’ great financial needs and a government controlling the central bank often led to an excessive expansion of the money supply, and the result was devaluation of money through inflation.”
‘Extraordinary Privilege’
The independence of central banks is an “extraordinary privilege” and not an end in itself, he said.
“The independence serves much more to establish with credibility that monetary policy can concentrate without hindrance on keeping the value of money stable,” Weidmann said. “The best protection against the temptations inherent in monetary policy is an enlightened and stability-oriented society.”
Weidmann’s speech forms part of a series of events in Frankfurt on the theme of money in the works of Johann Wolfgang von Goethe.
Cliff on ECB
Over 6 weeks ago we distributed the attached Eurosystem Solutions paper.
It described the unique non-standard measures being used for by the Eurosystem and ECB to address bank solvency and national solvency issues and the movement towards a real solution involving the ECB.
Now the ECB has announced what is very close to the real solution: unlimited bond purchases.
Regardless of conditionality, or even in spite of conditionality, this is the crossing of the line into the notion that there is an entity that can credit accounts in Euro in unlimited amounts.
While conditionality is the apparent necessary circumstance, and it’s likely national authorities will play along, these ECB purchases will have to take place regardless of conditionality. If Spain says they can’t comply, is the ECB going to let them default? The ECB has done all this to avoid Spanish default.
The best case is for the markets to recognize the ECB backstop and so regular purchases aren’t very necessary. There will be lots of movement towards coordination of budgets and banking supervision.
But the ECB line has been crossed.
Sixteen years after our AVM/III July 1996 Bretton Woods conference that identified the severe credit problems with the looming Maastrict rules (1/1/99), and eleven years after Warren’s famous paper on the potential European credit crisis “The Rites of Passage” we are finally seeing the necessary repair to the EMU.
There still remain political obstacles, court challenges and the like, but the imperatives to avoid a complete collapse of the Euro financial system have driven virtually all the important constituents to this necessary path of solution.
ECB to sterilize bond purchases
>
> (email exchange)
>
> ”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
Asmussen statement
>
> (email exchange)
>
> On Wed, Aug 22, 2012 at 3:02 AM, wrote:
>
> You are totally right about him, I sent you a word doc with his exact words
> (emphasis mine)
>
Repeat: Asmussen: ECB Wants To Eliminate Doubts About Euro
2012-08-20 05:36:05.371 GMT
–First Ran On Mainwire At 2257 GMT/1857 ET Sunday
FRANKFURT (MNI) – The European Central Bank wants to remove any doubt about the permanence of the common currency, ECB Executive Board member Joerg Asmussen said in a newspaper interview published in Monday’s edition of the German daily Frankfurter Rundschau.
The German board member told the paper that financial market certainty regarding the continued existence of the euro was a necessary condition for the currency’s stability.
The ECB’s planned new bond-buying program is superior to its predecessor, the Securities Market Program, and the Governing Council will work on details at its next meeting, Asmussen said.
Noting the high risk premia for some sovereign bonds in the euro area, which he said were in part due to concerns about the reversibility of the euro, Asmussen said that such an exchange rate risk was theoretically not admissible in a currency union and was leading to the incomplete transmission of ECB monetary policy to some euro area economies.
“Our measures attempt to repair this defect in the monetary policy transmission mechanism,” he said. The worries about the euro’s permanence are no wonder, he added, given “how carelessly” the currency is talked about in Europe.
“It is precisely these concerns about the continued existence of the euro that we want to rid market participants of,” he said.
Asmussen asserted that the ECB is acting within its mandate, adding that “a currency can only be stable if there is no doubt about its existence.”
The new bond-buying program meant to address this issue “will be better conceived” than the SMP, he said, repeating that the ECB will only act in tandem with the EFSF or ESM and that interested countries must submit a request and satisfy “comprehensive economic policy conditions.”
The ECB’s Governing Council “will decide in complete independence whether, when and how bonds are purchased on the secondary market,” he added.
What happened last summer with Italy, which failed to use the time bought by ECB bond purchases to make necessary adjustments, cannot be allowed to happen again, he said.
Moreover, in the new program the ECB will deal with the problem of senior status, which interferes with affected countries’ return to capital markets because private investors fear being disadvantaged vis-a-vis the ECB, he said.
Asked if the new program could be successful because it will be unlimited in time and scope, Asmussen confirmed that ECB President Mario Draghi had said as much.
“But wait and see,” he said. “We are working on the design of the new program and will occupy ourselves with these questions in our next meeting.”
Credit and money growth in the euro area are “moderate,” and “inflation expectations in the entire Eurozone are firmly anchored to our target,” he said. “We are monitoring price developments very closely and have all the necessary instruments to fight possible inflationary dangers effectively and in a timely manner.”
Joerg Asmussen
Karim writes:
Germany’s director at the ECB, Joerg Asmussen, has signaled his full backing of Draghi’s bond purchasing plan reports the Daily Telegraph.
This is one more step in turning the Bundesbank’s opposition into the equivalent of Lacker’s dissent at the FOMC. One dissent cant derail the overwhelming majority. That is especially true now that a fellow countryman also supports the plan. Technically speaking, Asmussen’s position (as an Executive Board Member) is senior to that of the Bundesbank President (Governing Council): Sort of like Janet Yellen vs John Williams.
As background, note Asmussen was a Merkel appointee and had no prior affiliation with the Bundesbank.
See professional career here.
ECB Says It May Buy Bonds If Strict Conditionality Ensured
A mixed bag.
It addresses the solvency issue and can bring rates down to whatever the ECB wants them to pay.
But the ‘conditionality’ likely continues the contractionary bias it’s already introduced.
If pressed as implied, this is a prescription for rising unemployment and political turmoil.
The euro zone has massive ‘demand leakages’ into pension funds, corporate reserves, cash in circulation,
the desire of foreign governments to hold euro balances, etc. that are a powerful contractionary bias.
They can only be offset by deficit spending by the domestic private sector, the foreign sector (net exports)
or the euro zone public sector entities.
In my humble opinion
nothing less than full public sector recognition of this ‘accounting identity’
is a necessary prerequisite to a constructive response.
ECB Says It May Buy Bonds If Strict Conditionality Ensured
Aug. 9 (Bloomberg) — The European Central Bank said it may intervene in bond markets in tandem with Europe’s bailout funds if troubled nations commit to improving their economies and fiscal positions.
“The adherence of governments to their commitments and the fulfilment by the European Financial Stability Facility/European Stability Mechanism of their role are necessary conditions,”
the Frankfurt-based ECB said in its monthly bulletin today, echoing President Mario Draghi’s remarks on Aug. 2. The central bank “may undertake outright open market operations of a size adequate to reach its objective.”
The ECB is stepping up its crisis response after Spanish and Italian bond yields surged, exacerbating a sovereign debt crisis that has forced five of the 17-euro members into seeking external aid. Draghi last week justified any potential intervention, saying rising borrowing costs in “several countries and financial fragmentation hinders the effective working of monetary policy.”
Still, “in order to create the fundamental conditions for such risk premia to disappear, policy makers in the euro area need to push ahead with fiscal consolidation, structural reform and European institution-building with great determination,”
the ECB said. “Governments must stand ready to activate the EFSF/ESM in the bond market when exceptional financial market circumstances and risks to financial stability exist — with strict and effective conditionality.”
Market Tensions
A further worsening of the crisis is likely to hurt economic growth in the euro area, “with the ongoing tensions in financial markets and heightened uncertainty weighing on confidence and sentiment,” the report said.
Today’s bulletin also contains the quarterly survey of professional forecasters. Their estimate for 2012 inflation remained unchanged at 2.3 percent. For 2013, they expect annual price gains to average 1.7 percent, down from 1.8 percent previously estimated, and for 2014 they predict 1.9 percent. The longer term inflation forecast remained at 2 percent.
On growth, the forecasters predict a 0.3 percent contraction for 2012, down from a 0.2 percent contraction expected last quarter. For 2013, they anticipate growth of 0.6 percent, down from a previous estimate of 1 percent. For 2014, they see the economy expanding 1.4 percent.
ECB’s Hansson Says Germany Can Be Outvoted on Governing Council
Karim writes:
This is correct. The Bundesbank voting no is technically equivalent to Lacker dissenting at every FOMC meeting this year. It would be a bigger statement if dissents came from the Executive Board (the equivalent of Yellen dissenting vs a regional Fed bank president).
ECB’s Hansson Says Germany Can Be Outvoted on Governing Council
By Ott Ummelas
August 3 (Bloomberg) — European Central Bank policy maker Ardo Hansson, who heads Estonia’s central bank, said Germany c be outvoted on the ECB’s Governing Council.
“There are 23 members in the council and if there will be a vote then everyone’s vote has the same weight in the sense that some questions are solved by a majority,” Hansson told Eesti Rahvusringhaaling radio today when asked if new ECB bond purchases can be approved without German support.
While there was unanimity on the council to investigate options in the coming month, “there could be differing views of details and these would need to be solved in negotiations,” Hansson said. He also said purchases will focus on “relatively short-term debt instruments.”
ECB August Meeting
Not to forget this is the just the beginning of ‘doing what it takes’ to sustain the euro, and make it ‘safe’ for investors.
That’s all inclusive, though not necessarily immediate.
And ‘anchoring’ the short end ‘automatically’ goes a very long way towards anchoring the long end with regard to risk premium.
Karim writes:
Draghi announced significant philosophical changes today. The key announcements were:
- The ECB was ready to renounce seniority on its bond purchases.
- The size of future purchases was open-ended: ‘size adequate to reach its objectives’.
- Future purchases may not be sterilized, as they have been with the SMP so far.
- Purchases would be front-end focused as that ‘falls squarely in line with monetary policy instruments’. A key instrument is obviously the LTROs. So would imagine purchases would be 3yrs and in on the curve.
The adherence of governments to their commitments and the fulfilment by the EFSF/ESM of their role are necessary conditions [for some action on the ECB side]. The Governing Council, within its mandate to maintain price stability over the medium term and in observance of its independence in determining monetary policy, may undertake outright open market operations of a size adequate to reach its objective. In this context, the concerns of private investors about seniority will be addressed.
Other news was that:
- As in the excerpt above, purchases would be subject to strict conditionality via the EFSF (i.e., Spain has to accept a Memorandum of Understanding). Fiscal consolidation and structural reform were listed as the key conditions.
- He threw cold water on the ESM getting a banking license, saying he was ‘surprised by the attention this has received’.
- Logistics and objectives on bond purchases were TBD by a committee.
- Further non-standard measures were forthcoming.
- Rate cuts were discussed but unanimously voted down; as for a negative depo rate he said ‘we are in unchartered waters’, implying the hurdle may be high.
Relative to levels before Draghi’s London speech last week, Spanish 2y yields are 200bps lower, and 10yr yields are 50bps lower.
ECB notes?
An interesting move by the ECB would be to offer short to medium term notes in the market place.
As discussed over the years, unlike other currencies, the euro has no ‘risk free deposits’ available to anyone other than member banks and foreign governments.
This has probably caused substantial numbers of investors to sell their euro for other currencies rather than hold any of the available euro denominated financial assets.
If so, ECB notes could mark the return of these portfolio to ‘normal’ allocations to euro denominated financial assets, which would offer strong support for the euro vs other currencies.
And with the ECB measuring success by the strength of the euro, this could be an attractive proposition.
It would attract euro deposits from the banking system, which the ECB can easily accommodate by continuing its current policy of liquidity provision for its member banks as needed.
Additionally, and not that it actually matters for inflation, lending, aggregate demand, etc., most monetarists would not include these notes as part of the ‘money supply’ but instead as an anti inflationary ‘sterilization’ measure.