When Jens Weidmann, President of the emasculated Bundesbank and member of the ECB’s Governing Council, speaks, central bankers and money printers worldwide stuff wax into their ears.
“Caution – the euro crisis is far from over.”
That’s what he dared to tell the WirtschaftsWoche, though central bankers, politicians, and Eurocrats had declared the crisis over and done with a year ago. Wax being stuffed into ears could be heard around the world. He apparently hadn’t yet noticed that economic growth and prosperity for all had washed over the Eurozone, even if no one who had to survive in the real economy could actually see it. Nevertheless, financial markets have been soaring.
The crisis “is currently less noticeable in the financial markets than a year ago,” he said, his eyes riveted on them. That’s what counts, even for him. And progress has been made. He credited tepid economic reforms in the crisis countries, fiscal bailout mechanisms, and “probably” also ECB President Mario Draghi’s announcement last year that the ECB would buy unlimited sovereign bonds, as Weidmann said, “of crisis countries under certain conditions if necessary.”
A grudging admission. Draghi’s infamous “whatever it takes” was the only thing that kept the debt crisis from blowing up the Eurozone. The mere threat of printing enough money to monetize the entire debt and all deficits did the trick. Printing money will always solve a debt crisis by bailing out bondholders, regardless of the costs to everyone else. “But,” he said, “it might take many years until the causes of the crisis are actually removed.”
Then he committed central-bank heresy.
He warned of low interest rates! There was a danger that the government and the private sector would get used to the cheap money, he said; it “keeps banks and companies that don’t have viable businesses alive.” He should be excommunicated from the central banking cartel for this transgression.
There was the danger that the current ultra-low interest rates were linked to “risks and side effects that increase with the duration of the loose monetary policy.” These ultra-low rates also deprived the central bank of its normal tools. Which put the ECB in a conundrum: “Our message is that the ECB is ready to act if necessary,” he said. “Yet the traditional instruments at the zero-interest-rate boundary are less effective.”
And the ultimate weapon against savers – those that haven’t been destroyed yet – negative deposit rates? They’ve been bandied about as solution to the economic quagmire. Banks would pay the ECB to store their money there. It would annihilate any interest that banks pay depositors. Destroying savers for the benefit of someone else is always good. Alas, rather than stimulate the economy, negative deposit rates could have the “opposite of the desired effect,” he said. Banks would pass on the costs associated with negative deposit rates to borrowers by raising the interest rates on loans. Instead of using cheap central bank money to step up lending to businesses and private households, banks would make loans more expensive.
Then he honed in like a heat-seeking missile on the voices clamoring for the ECB to hand banks another round of nearly free loans, similar to the previous Long-Term Refinancing Operations (LTRO). It had done absolutely zero for the economy in the Eurozone. Banks simply took that nearly free money and plowed it into high-yielding government bonds from crisis countries. It was a total no-brainer. And they got rich off the difference in yield without bending a finger. In the process, they loaded up their balance sheets with iffy Spanish and Italian government debt – while both countries sank deeper into their economic morass.
So this time, the loans would be designed to get banks to lend to certain businesses in certain sectors in certain crisis countries. That was the latest Eurocratic solution. Some wise central bankers would decide where exactly the money that they printed should go. They’d be called upon to “finely control regional or sectorial bank lending,” he said. But….
“That ends quickly in planned-economy approaches.”
A harsh warning. “Central banks should not interfere with the business decisions of banks to steer loans to certain regions or to certain borrowers,” Weidmann said. But then he returned to being a central banker whose job it was to give free money to the banks that are part of the cartel that he and his colleagues were holding together. Instead of opposing that more money is handed out, he suggested that banks should simply be discouraged from buying sovereign bonds through “pricing that makes such carry trades unattractive.”
And for the Eurozone as a whole, he saw no risk of deflation, unlike those who whined that not enough money was being printed. Instead, he saw inflation between 1% and 1.5%. It would be “low, but positive.” Longer-term, inflation expectations would be around 2%. Even if prices were to drop in Southern Europe, it would be “part of the adjustment to make these countries competitive again.” He didn’t see “a self-reinforcing and expectation-driven deflation” that could “act to exacerbate the crisis.”
But even he – like all central bankers – doesn’t waste his breath on an interview unless it’s to jawbone politicians and other players into doing what he wants them to do, drive consumers to spend more money, and manipulate the financial markets. Because manipulation is what central banks do, either by wagging their tongues or by handing out money.
Suddenly, there’s a solution to France’s economic crisis. Unlike the cacophonous clamor from the far right to drop the euro, this one was attractively presented with graphs and in terms that even a French politician might understand. And it’s not contaminated by partisanship. Read…. French Megabank: “Germany Should Leave The Eurozone”
Enjoy reading WOLF STREET and want to support it? Using ad blockers – I totally get why – but want to support the site? You can donate “beer money.” I appreciate it immensely. Click on the beer mug to find out how:
Would you like to be notified via email when WOLF STREET publishes a new article? Sign up here.