But Draghi Still Doesn’t Get it.
“ECB barrel-scraping getting louder” – that’s what Daiwa Capital Markets called it. But those acts of desperation, as sweet as they seem to the markets, had slammed into opposition at the German Bundesbank. And now “people familiar with the matter” and a “central bank source” are talking to the Wall Street Journal to air their concerns.
Yesterday, the ECB bent over backwards to increase the negative interest rate absurdity, given how well it has been working so far. It cut its deposit rate one notch to negative 0.4%. That was less than expected. But it also added a slew of “surprises” intended for the markets to feed on and soar.
It cut the main refi and marginal lending rates to 0% and 0.25% respectively. It expanded the monthly asset purchases by a greater-than-expected €20 billion to €80 billion, now including euro-denominated corporate bonds. It added four “targeted longer-term refinancing operations” (TLTRO II), with maturities of four years, conducted quarterly starting in June. These loans are subject to the refi rate, now 0%. But if banks increase their lending past certain benchmarks, the interest rate can drop as low as negative 0.4%. In other words, banks would get paid by the ECB to borrow from the ECB.
This is some serious money-printing and market manipulation explicitly intended to inflate corporate bond prices further, push even corporate bond yields near or into the negative, and prop up stocks. And to heck with the economy. But that’s a big problem for the Bundesbank.
Bundesbank President Jens Weidmann currently cannot vote at the ECB due to the rotating voting rights. And he cannot speak out publicly against Draghi’s machinations. So rather than mope in his corner, he’s unloading via “people familiar with the matter” to the Wall Street Journal.
He was particularly opposed to the expansion of the bond purchase programs, the “people familiar with the matter” said, which he’d opposed before for fear they’d do exactly what they’ve been doing and have been designed to do from get-go, namely create asset bubbles and remove the pressure on governments to reform.
While he was “willing to debate” policy tools such as interest rates and loans, he “may have preferred to do nothing at all, the people said.”
Now “some members” of the ECB’s governing council “are concerned that after years of easy-money policies, fresh stimulus is growing less effective.”
And a central-bank source, presumably from the Bundesbank, said that these increasing forays into ever more radical monetary policies could trigger “a doom loop of expectations and disappointment.”
All kinds of secrets come out once people familiar with the matter are talking. While Draghi claimed yesterday that “it was all in all a very reassuring discussion, very positive, very constructive,” and that the decision was approved by “the overwhelming majority,” turns out only 19 of the 25 council members voted for it, with Weidmann and three others unable to vote, and with two – German ECB Executive Board member Sabine Lautenschlaeger and Dutch central-bank Governor Klaas Knot – voting against it.
By now even proponents of these policies admit that they don’t work in stimulating the economy, though they were never designed to stimulate the economy in the first place. They were designed to create asset bubbles and bail out over-indebted governments. So Latvian central bank governor Ilmars Rimsevics – who’d voted with Draghi, according to these people familiar with the matter – got on TV today to explain what all this means:
“Presently, unfortunately, there are no sweet medicines left,” he said “What the European Central Bank has done – just printing money – increases the amount of money in circulation, but is unable to print the European economies out of crises, out of this stagnation.”
This was followed up by ECB Vice President Vítor Constâncio, a big proponent of all these absurd policies that have helped bail out the growing mountain of debt of his country, Portugal. Writing on the ECB website, he added a curious warning in our direction:
That decision was taken against a backdrop of vocal skepticism in the media and markets. The skeptics’ reasoning is two-pronged. First, that monetary policy is not sufficient to address the present low growth trend; and second, that monetary policy is increasingly ineffective in any case.
He instantly admitted and simultaneously brushed off with surprising ease the first reason of these awful “skeptics”: it’s “mostly true but trivial,” he said. “The current problem is lack of global demand,” and monetary policies can’t change that.
But then, in addressing the second reason, he blamed the “skeptics,” like us here, for the utter failure and nefarious effects of the current monetary policies, and he warned:
So if these other policies either can’t or won’t contribute to a significant degree, then not only is it wrong to start talking down monetary policy – it’s actually dangerous.
What this means is simple: Now that even central bankers like him admit that monetary policies don’t work in achieving economic growth, even though these policies get driven to ever greater levels of absurdity, no one is allowed to point that out anymore because it has suddenly become “dangerous” to do so.
Or is he saying that we have become “dangerous?” We’re beginning to look over our digital shoulder.
But wherever central banks have imposed negative interest rates, banks are trying to figure out how to dodge them. In Germany this has taken on a new form. Read… It Begins: Palace Revolt against ECB’s NIRP
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