torsdag 6 september 2012

ECB - an unlimited bond- purchase program

Draghi said policy makers agreed to an unlimited bond- purchase program as they try to regain control of interest rates in the euro area. He said the ECB will have a “fully effective backstop to avoid destructive scenarios with potentially severe challenges for price stability.”

Did the German Bundesbank roll over and die as Die Welt suggest, by yielding to the will of the ECB and Goldman? Or is it merely setting the stage for the inevitable German referendum? Many claim the Italian head of the ECB won today in his ever escalating confrontation with the last remaining German on the ECB governing council, although in reality he is merely doing what he has already done twice before. The outcome will be the same: abject failure to contain the crisis which will not be resolved until and if Europe succeeds in creating a united, Federal state, with one bond issuance authority. That will never happen: after all, 17 European states will never hand over their sovereignty to a third party, especially one which is backstopped by German cash. But it can pretend. In the meantime, Buba will not quietly go, instead it has already stated what it thinks, and what it thinks is that what the ECB is doing (once again) is "tantamount to financing governments by printing banknotes" and that monetary policy is now subjugated to fiscal policy. Full text of the Buba's response below:

The reality is made clear by comparing the ways in which the United States, Britain and Europe handle their public financing.

The U.S. Treasury is by far the world’s largest debtor, and its largest banks seem to be in negative equity, liable to their depositors and to other financial institutions for much larger sums that can be paid by their portfolio of loans, investments and assorted financial gambles.

Yet as global financial turmoil escalates, institutional investors are putting their money into U.S. Treasury bonds – so much that these bonds now yield less than 1%.

By contrast, a quarter of U.S. real estate is in negative equity, American states and cities are facing insolvency and must scale back spending. Large companies are going bankrupt, pension plans are falling deeper into arrears, yet the U.S. economy remains a magnet for global savings.

Britain’s economy also is staggering, yet its government is paying just 2% interest. But European governments are now paying over 7%.

The reason for this disparity is that they lack a “public option” in money creation.

Having a Federal Reserve Bank or Bank of England that can print the money to pay interest or roll over existing debts is what makes the United States and Britain different from Europe.

Nobody expects these two nations to be forced to sell off their public lands and other assets to raise the money to pay (although they may do this as a policy choice). Given that the U.S. Treasury and Federal Reserve can create new money, it follows that as long as government debts are denominated in dollars, they can print enough IOUs on their computer keyboards so that the only risk that holders of Treasury bonds bear is the dollar’s exchange rate vis-à-vis other currencies.

By contrast, the Eurozone has a central bank, but Article 123 of the Lisbon treaty forbids the ECB from doing what central banks were created to do: create the money to finance government budget deficits or roll over their debt falling due.

Future historians no doubt will find it remarkable that there actually is a rationale behind this policy – or at least the pretense of a cover story. It is so flimsy that any student of history can see how distorted it is. The claim is that if a central bank creates credit, this threatens price stability. Only government spending is deemed to be inflationary, not private credit!

Europe’s Transition From Social Democracy to Oligarchy

In fact the ECB now creates "debt free money" and that Article 123 is overruled. Thus this is the solution long promoted by people like e.g. Bill Still amd AIM and Stephen Zarlenga:

Bill Still says Ron Paul WRONG on Gold Standard on Keiser Repo

Only issue is that there are some conditionalitys to the ECB solution:

The ECB & Conditionality

The markets may rally today, yields may fall as the ECB pulled out the BIG words, “without limit” and “no cap.” This is the focus of the market and it is a very wrong focus. The entire ECB scheme is dependent on conditionality and this is the key to all of the hype!

Any action by the ECB will be telegraphed well in advance because of it; if anything happens at all. The ECB has now said that it will do nothing, not anything, without a country applying for assistance and without the agreement of the Stabilization Funds which means that the EU and perhaps the IMF will have to agree. To accept any application from a country then that nation will be audited as part of the process. Bear in mind that now when a country submits its numbers to Eurostat or to the Bank for International Settlements that no one, no fiscal oversight commission, audits the books and records of a nation in Europe. This is true for the sovereign and this is true for the banks domiciled in a country. The audits that have been conducted have all been for the troubled nations that have lined-up for aid. In each case, every case, with Greece being the most notable example the numbers have not been as presented. This was true for Greece, Ireland and Portugal.

So the ECB disavows the bond buying for Portugal, Ireland and Greece and the focus is upon who is coming next which is really Spain and Italy. Spain, by their own tacit admission, uses “dynamic provisioning” as part of their economic policy. They stick to this on the basis of manipulating their reserves in good times and bad times and there is quite an academic argument appended to this notion but what cannot be denied is that it all gets down to fiddling with their books. Consequently it is a good assumption based upon sound logic that their books, the balance sheet for the country and their banks, are not as presented or thought. This is one reason, in my view, why Spain does not want a full bailout because it would mean that the sovereign and the Spanish banks would be subject to an audit and that certain discrepancies would have to be accounted for in front of God and their brethren.

Next we have hard evidence that the EU may not approve any such assistance programs. The Prime Minister of the Netherlands has said “No more money for Greece” while the Finance Minister of Austria has stated quite clearly that Austria has had enough and that Austria will not be giving anymore of her citizen’s money to any other country in Europe. I think both statements are clear enough.

Consequently all of the ECB hype, jargon and fluff have no value if the EU won’t approve any of the aid programs. It is all just rhetoric floating around in the air. Even if the EU approved some program for Spain or Italy it would take months and the ECB has specifically said that they will not act, not buy any bonds, without the approval of the Stabilization Funds. The ECB scheme is cleverly designed and it reminds me of the second round of the European bank stress tests where the methodology was really fraudulent and hid the actuality as Dexia, Bankia and several Austrian banks have gone bust since then after we were assured, in the strongest of terms, that they were safe. The ECB has spoken and promised to buy “without limit” but since it is dependent on an European Union where several nations do not wish to fund I find our current rallies dependent upon an assumption that is faulty and perhaps dangerously faulty in its basis.

Next step is allowing each country to do this themselves as well as QE for the people not the banks.

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