Here Comes the ECB with a “Bubble” Warning, After it Caused the Most Absurd Bond Bubble Ever

“The ECB cannot and should not turn a blind eye to risks to financial stability.”

“Maintaining financial stability is about two things: First, it is about preventing the build-up of bubbles; second, it is about making the system more resilient,” said ECB Executive Board Member and Vice-Chair of the ECB’s Supervisory Board, Sabine Lautenschläger, today in a speech. It’s not often that central bankers are allowed to use the B-word in public, except when denying that bubbles exist, or when denying that they can be identified if they do exist.

“Prices of several asset classes are influenced by the central bank’s policies,” she said. And these policies of the ECB include:

  • A negative interest rate policy (NIRP), with the ECB’s deposit rate a negative -0.4%;
  • An asset purchase program (QE) where the ECB buys government bonds, corporate bonds, asset backed securities, and covered bonds.

These policies have driven yields of many government bonds and some corporate bonds into the negative. The ECB’s balance sheet has swollen with assets. Borrowing for some countries and companies has become essentially free. Asset prices have surged, including the prices of homes, stocks, bonds, commercial real estate, etc.

Even at the riskiest end, junk bond yields dropped to a ludicrously low 2.1% by October 30 last year (ICE BofAML Euro High Yield Index Effective Yield), though they have lost some steam since (when bond yields fall, bond prices rise). These policies have triggered the most dizzyingly absurd corporate bond bubble ever.

“So there are some risks,” she said:

  • “There are risks that bubbles might be building up”
  • “There are risks that assets might be mispriced”
  • “Market participants might become too lenient when assessing the real value of assets”
  • Market participants “might overly rely on readily available liquidity and become too lazy to prepare for different, less convenient times.”

And these “risks” – or rather already blooming conditions – have been the result of the ECB’s monetary policy. “So, this is a case where monetary policy might affect financial stability,” she said.

“Financial stability” doesn’t just concern the banking sector, she said, but also the “shadow banking sector.” And it’s “big,” Lautenschläger said. “It accounts for 40% of the EU financial system.”

And “the ECB cannot and should not turn a blind eye to risks to financial stability.” Here are some keys points:

“Financial stability and price stability are functionally connected. They are linked in good times – and they are linked in bad times.”

“As we saw during the last crisis, financial instability can block the channels through which monetary policy influences prices. Thus, it can limit the ability of central banks to do their job. Without financial stability, it becomes quite hard to ensure price stability.”

“Financial stability, or rather the lack of it, can affect monetary policy.”

“Monetary policy can affect financial stability” [by creating the above-mentioned risks and bubbles].

She referenced the “extraordinarily accommodative monetary policy” and “unconventional tools” that the ECB has used. And while they did whatever they were supposed to do, there are “potential costs, too.”

  • “The tools may have changed the incentives of banks, businesses and even governments.”
  • “Low interest rates and abundant liquidity may encourage investors to take excessive risks.”
  • “Bond purchases by the central bank can reduce liquidity in the relevant markets or distort prices.”
  • “The more bonds we buy, and the longer we go on buying, the greater the risk that prices will be distorted.”

Financial stability is hard to describe, Lautenschläger said, “but you know when you no longer see it.”

Our experts think of financial stability as a condition in which the financial system, including financial intermediaries, markets and market infrastructures, is capable of withstanding shocks and the unraveling of financial imbalances. Only a resilient financial system is able to support the real economy during a potential shock.

To identify risks to financial stability, the ECB is looking at “incoming data” and is “talking to those who shape” the markets. And “we analyze asset prices.”

The findings are reported in the ECB’s Financial Stability Review. The most recent edition pointed out four key risks, she said:

  1. “Market sentiment might suddenly change.” This could “force prices in asset markets to adjust and set off a downturn in the real economy.”
  2. Banks still face structural challenges. “If financial or economic conditions deteriorate before the structural challenges are addressed, banks may lose their ability to finance the economy.”
  3. “Public and private debt may not be sustainable. Households, firms, and governments are highly indebted in a number of countries.”
  4. “Liquidity in the non-bank sector,” which is “highly interconnected with the banking sector.” Non-banks are also “interconnected among themselves: their portfolios tend to be similar, making them more vulnerable.”

How can the ECB communicate these risks without throwing markets into a panic? This is “always a challenge,” she said.

We know that the words of a central bank can be powerful. They can affect markets in either direction. Such communication is a challenge we cannot shy away from as it can encourage market participants to behave more prudently.

And it might also improve market discipline: by sharing our views on relevant risks, we create greater transparency about vulnerabilities in the financial sector.

So she did – another top-level central banker of one of the big central banks communicating ever so gingerly that the era of free money is ending, and that this era has caused all kinds of problems, including bubbles, that now need to be dealt with. 
 

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  73 comments for “Here Comes the ECB with a “Bubble” Warning, After it Caused the Most Absurd Bond Bubble Ever

  1. desmond
    Oct 12, 2018 at 2:44 pm

    What a surprise coming from the ECB.. Will they ‘do’ anything about it all..
    like whatever it takes..

    • sierra7
      Oct 14, 2018 at 6:50 pm

      Wow! Nobody came to talk to me! I could’a talked all day about “bubbles”! And, I’m just an old man in the mountains talking to squirrels! LOL!

  2. Bobber
    Oct 12, 2018 at 2:51 pm

    It’s amazing that the connection between asset prices and financial stability is headline news. It’s like waking up one morning surprised that the newspaper is at your door for the 1000th time. Have central bankers only recently discovered that central bank policies blow and pop bubbles?

    Unless they want to admit to pure stupidity and ineptitude, they must concede they’ve known about it all along. If they’ve known about it all along, why do they continue to blow bubbles? What are their motivations?

    Are they spineless thinkers that seek to avoid short-term pain at all costs, at the expense of long-term system health? Are they pursuing goals of the top 10% to permanently inflate asset prices as much as possible, much to the detriment of the bottom 90%? Are they seeking cushy well-paying jobs from Wall Street after their terms are over?

    This is why we need central bank transparency. Foul motivation and idiotic thinking cannot be ruled out at the present time.

    • Bobber
      Oct 12, 2018 at 3:05 pm

      This is why central bank policies should not be dictated by banks and Wall Street. Monetary policy and the economy impact everyone, so why are central bank committees staffed exclusively with bankers? Where is the representation of labor, small business, etc.? It’s like letting the fox manage the chicken coop.

      • Jim Mitchell
        Oct 12, 2018 at 4:18 pm

        The Federal Reserve is the banks. Originally established by Morgan, Chase, City. This cartel doesn’t care about your little people. I’m sorry. I was kidding. There is an Easter Bunny.

      • Anthony
        Oct 13, 2018 at 5:58 am

        I believe it would be better to abolish central banks, and let the negative feedback loops of the free market maintain financial stability. As I understand it, prior to central banking, bubbles still occurred, but serial bubbles, and bubbles on bubbles were not really a thing, like they are today..

        • Timthetiny
          Oct 13, 2018 at 11:00 am

          You understand wrong. The 19th century was essentially one bubble and depression after another.

        • Setarcos
          Oct 13, 2018 at 11:25 am

          How does one get the guys and gals carrying by far the the biggest economic stick ever known to mankind to put it down willingly? The fatal conceit of central planning has before and will again prove very fatal but for now it is alive and growing like a virus. Those with high IQs are absolutely certain they can micromanage better than the marketplace despite the fact that they have NEVER proven they can do it successfully. The hubris reached a temporary pinnacle when Greenspan was called “maestro”.

          Central planning, i.e. Price Fixing, the price of money is simply irresistable. The marketplace integrates voluminous information very efficiently and indiscriminantly, which is the problem…no opportunity for cronyism. The FED’s economic models have always omitted many many variables much less interrelationships between existing variables. The folks who sign the front of the check for those with the high IQs know this and they also know it doesn’t matter as long as they hold the stick.

        • Setarcos
          Oct 13, 2018 at 11:30 am

          @Anthony Recessions were frequent and short lived. So now instead of dodging bullets we have to dodge nukes.

        • alex in san jose AKA digital Detroit
          Oct 13, 2018 at 7:15 pm

          Timthetiny – Correct. They were called other names like “Panics” and they were extreme. The only reason they’re not remembered as much as the 1930s Depression was there was less mass media and no radio, and there was a “safety valve” in that if things were that bad you could go West.

    • ppp
      Oct 12, 2018 at 4:36 pm

      Has it ever occurred to you that the worldwide economic and financial systems are 100% corrupt? It should–and then nothing will surprise you. Even when they dig up Mussolini after deciding they need him to put the finishing touches on corporatism.

      • Unamused
        Oct 13, 2018 at 7:46 am

        ->Has it ever occurred to you that the worldwide economic and financial systems are 100% corrupt? It should–and then nothing will surprise you.

        You can see where this is going.

        The only surprising thing is that circumstances are not far worse than they already are and are not getting worse a lot faster. That said, if you read enough articles on this site, it becomes clear that they’re working on it as best they can. While they may seem to be using a light touch to ensure cooperation, it’s more likely that they simply lack the resources to exploit and abuse more aggressively.

        The bad news is that they’re using up the planet and are on course to damage it until it becomes uninhabitable. I’m sure this bothers them a bit but they can’t help themselves, and besides, they still have plenty of time before everything goes to hell. They won’t have anyone but themselves to blame for that, mostly because there won’t be anybody else left to blame them.

        It’s sort of happening in slow motion, but it’s still interesting to see it happening.

    • Javert Chip
      Oct 12, 2018 at 5:30 pm

      Of course ECB knows it’s blowing a bubble; it INTENDED to blow a bubble so undercapitalized banks could repair & grow balance sheets. EU banks being EU banks, simply pretended to grow balance sheets & loaded up with sovereign debt (which EU bank regulations consider to be essentially risk-free).

      The EU more-or-less had to do this because, without massively (50-100%) inflating the Euro, Europe simply does not have the wealth to clean-up & re-capitalize its banks.

      The EU could barely “save” Greece in 2008; Spain is 4 times bigger & Italy is 6 times bigger. The ECB has pulled a lot of magic out of the hat (QE, ZIRP, zero-risk sovereign bonds), but these has about run their course, and each has had nasty side-effects; god only knows what these cloys will think of during the next financial downturn.

      • Gershon
        Oct 12, 2018 at 7:28 pm

        <I.The EU could barely “save” Greece in 2008

        Note: Greece is still unsaved after three EU bailouts. All Draghi has done is kick the can and make the ultimate reckoning day, when it arrives, exponentially worse with his financial chicanery.

        • MC01
          Oct 13, 2018 at 6:45 am

          Greece is a very peculiar creature that would deserve separate treatment.

          Suffice to say Greece should have defaulted right away and be left to deal with the consequences, namely much higher servicing costs for her debt. That was the price to pay for over a decade of insane debt-fueled growth which turned the Greek economy in a bloated monstrosity.
          Her creditors should have eaten their losses and learned their lessons, as it always happens during any bankruptcy procedure.
          Bankruptcy is not a pleasant procedure, but often is necessary to put order in a big mess like this was.

          Instead we had a convoluted drama which took years to unfold and caused Greece to get far more sympathy than she deserved and European institutions to lose a whole lot of credibility, as their ghastly decision-making processes could be interpreted any way one wanted. Suffice to say if bankruptcies in the private sector were handled this badly there would a whole lot of heads rolling immediately afterwards.

        • Unamused
          Oct 13, 2018 at 9:04 am

          Greece got scammed by the Goldman Squid hit squad they got elected to run its government into the ground, one of the greatest frauds in history. Greece should have repudiated its debt. Iceland at least had the good sense to prosecute the banksters, which hardly any other country has done. The US, by contrast, rewarded its crooks.

      • Crysangle
        Oct 12, 2018 at 10:53 pm

        The first bubble from start of Euro was southern assets via, and leading to, southern private debt, rates were left too low.

        The resulting second bubble was southern gdp which was then upheld by counter-cyclical government spending.

        The resulting third bubble was southern national banks which were bailed by national guarantees.

        The resulting fourth bubble, of those first three combined , is national debt, which the ECB is currently supporting by QE, and with low rates to support all the pre-existing debt plus some, so also providing GDP to temporarily service national debt .

        The resulting fifth bubble during this time is northern credit, including Euro system, that relies on the above to appear sound.

        The whole eurozone is in one big flacid bubble, so it is no surprise Sabine Lautenschläge is issuing a warning on the likelihood of some small prick or another from the ECB bringing down the show, but I don’t see how that warning supposed to help anyone. Thank you Sabine, you have been absolutely no help whatsoever, even the reminder that you generate uncertainty is not appreciated as it distracts from people’s concentration.

        • Maximus Minimus
          Oct 13, 2018 at 12:15 am

          Sabine Lautenschlage (what a fitting name) is no help whatsoever because 99 % of the continent’s mesmerized citizens have no idea who she is, much less what she is talking about. If she could wrap it into some story of Russian meddling, she would stand a much better chance.
          Craddle-to-grave socialism has a side effect of creating a dozy
          population, relying on some higher authority to take care of all their needs.

        • Crysangle
          Oct 13, 2018 at 11:18 am

          It used to be wrapped into WW2 talk but that is losing effect now, and I think cold war revival does not look like cold war, just nuclear tipped, game dirty, grabbing neofeudal squabbling – there wouldn’t be enough space for the various empires in several worlds over, as eventually different people would come nose to nose and dislike. That is why to my view a contained stable order of fully representative nations is quite a normal and good idea. At least you can move away from unwanted authority if you feel to, and any say is more accountable. Anyway, I wrote this on EU previously but was not certain to post it, probably because it might offer satisfaction or encouragement to those who will think it just demonstrates the new way is taking effect… but what better than have your say… at the least it leaves a particular reference :

          EU has gone from open market to captive market. Before Euro there was difficulty of different kinds but local resilience and optimism, now all is eased through but there is fatalism and fear. Many countries I no longer recognise, old countries with sound tradition have been replaced by an unprepared generation who do not know how to use own inspiration, who are disuaded or misled and lack the grounding that was the simple but natural ownership of their own nation, the privilege of being at ease in own setting. There are new forms of unkindness, meanness, alienation, and those that are prepared to react to that. There can be no normal rotation out of the financial corner now painted, they know that, it is not possible – there is no possibility for several countries to accelerate out of rising rates and national debt service. It is not possible, it is written in as no exit, supposedly the voluntary will of several hundred million people. What might happen is that the existing position of leverage is raised and applied gently with rate rises as countries get progressively restructured, that is to say that monetary policy will be used as a tool for political reform and integration, not as an economic priority but under the guise of economic discipline. It will not end well because there is no true cohesion to it by the populations, it is a theme guided by an EU ideal that is ever more evasive and that privileges disloyalty and rewards carelessness. Without the social discipline or meaning of nation you have anarchy, and EU will not be a nation, just an absurd perverse imitation of what nation stands for.

          When you think of how often people have tried to take over each others countries in Europe, and place that in context of a powerful insolent and removed bureacracy that is able to quietly effect change over a whole continent, then you might understand who or what you are dealing with. Those taking over will always think they are right.Ordinary people though only have the pathetic offering of their own neutered politicians as a front to relate to, or as an incapacitated placebo to claim from, something they are encouraged to by the resultant decay of own society.

          When you look at the themes used to create the EU project, the psychology behind it, you are not looking at some beautiful integration and a move to a peaceful higher realm of state. Those ideals, and as much as they were previously able to exist, have only been arrogated by usurpers pretending to be protectors. There is no great new feeling from EU, if anything a loss. The dream of a continental empire is age old, even the Roman peace whose organisation and trade are proclaimed to have facilitated an age of prosperity, was no more than the attempted formalisation and capture of the budding continental economy that preceded it, inevitable maybe but its collapse gave way to the dark ages – such is the cost of a centralised forced or manipulated compliance . EU is definitely not free market, only a social bar slightly higher than others that is being misused in every way possible to establish a dictate. Soft power is just a nice way of telling someone exactly the same thing – you have no choice. It is always backed up somewhere by ability to use force, something very easy to apply on an increasingly destructured society.

          That is why I watch how the moral values of countries change, because it is what ends up being applied to “you”.

    • Guest
      Oct 13, 2018 at 10:32 am

      The mission of the Fed Res System matches the observations of Keynes nearly perfectly. The section in this book on the Fed Reserve System explains why increasing the price of capital (assets) results in a reduction in the real price of labor, which results in low unemployment with stable “inflation.” That is the mission of the Fed Reserve System, accomplished by the tool they have, setting the funds rate.

      https://www.amazon.com/1913-Specific-Amendment-Transformed-Constitution/dp/1718905424

  3. Oct 12, 2018 at 2:53 pm

    I reject the psychological aspect (market sentiment might change) Well capitalized investors behave rationally. Coordinated global monetary policy is not the cause of speculation. The failure of policy, or rather the advance of said policy in the absence of free market checks and balances, is the cause. Trade, the deficits, the dollar, its the perfect s**tstorm. She should have said that.

    • sierra7
      Oct 14, 2018 at 7:10 pm

      “….rationally….” I have huge problems with that word applied to “capitalists”. Is it rational to produce products that ravage one part of the world but not the ravagers’ one? I don’t believe capitalists are rational at all. They unconsciously genuflect to outright greed when they have so much capital that it all becomes a game to them and we are the pawns in that game. And, the ones who steal a loaf of bread to feed their families are acting “criminally” and not rationally. We already are witnessing what global corporations look like when they act “rationally”.

  4. Chris
    Oct 12, 2018 at 3:25 pm

    Wolf, you don’t want to allow any post which criticizes the policies of the republican party or the current administration. That way this forum is worse than Fox News. There is no freedom of speech. You cannot even state your opinion. You have deleted several of my posts all of which are accurate and respectful.

    • ewmayer
      Oct 12, 2018 at 4:04 pm

      Maybe Wolf deleted your other posts because, like this one, they have bupkis to do with the article topic?

      I do know that WR is very leery of allowing posts in which the political/polemical outweigh the information content – so if you wanna criticize the GOP & Trump, maybe try doing it in the context of the subject of the actual article where you make a comment.

      And I see no lack of articles where Wolf criticizes the current administration’s economic policies, so IMO your whine is unjustified.

    • Gershon
      Oct 12, 2018 at 4:48 pm

      Maybe Wolf has better things to do than allow partisan political posts that quickly degenerate into mud-slinging contests that waste his valuable time and bandwidth.

    • Oct 12, 2018 at 5:00 pm

      Chris,

      I deleted a duplicate comment of yours. No reason for anyone to read this twice.

      And this comment you just posted is another duplicate, and I just deleted the first one.

      A month ago, I deleted a comment in which you were bitching about a comment hung up in moderation for a little while. “Why is my comment awaiting moderation for so long?” you said. Yup, I deleted that.

      And I deleted another duplicate post about the trade deficit a month ago.

      And that’s about it.

      So I have some suggestions:

      1. Quit bitching about your comments getting hung up in the tripwires. This happens ALL the time to everyone. Just be patient.

      2. Quit posting duplicate comments (even if you change your screen name). That just makes my life harder.

      3. Quit blaming lack of “freedom of speech” when it’s your own errors and lack of patience that produced that problem in your own mind.

      • FromKS
        Oct 12, 2018 at 5:18 pm

        I appreciate your moderation. Too often contrarian economic articles attract the ZeroHedge trolls.

        • Gershon
          Oct 12, 2018 at 5:31 pm

          You say that like it’s a bad thing.

      • ewmayer
        Oct 13, 2018 at 1:01 am

        “This happens ALL the time to everyone.” — I can attest, as my above reply to Chris also spent time in moderation. Come and see the violence inherent in the system. Help! Help! I’m being repressed! :)

        • MB732
          Oct 13, 2018 at 11:07 am

          One of the all-time greatest scenes. If anyone not familiar YouTube Monty python I’m being repressed only 3 mins long.

      • d
        Oct 15, 2018 at 2:19 am

    • Adam
      Oct 12, 2018 at 5:04 pm

      While I can’t speak to you wrote specifically, these issues are not a Democrat-Republican split.

      • 4corners
        Oct 12, 2018 at 8:20 pm

        +1. It’s refreshingly rare to see content that’s not foisted into a left/right paradigm.

    • phusg
      Oct 13, 2018 at 4:14 am

      You mean like Wolf’s own post in this thread https://wolfstreet.com/2018/10/09/why-did-qe-money-printing-not-cause-consumer-price-inflation/:

      “Volcker had the backing of Reagan when he attacked inflation with fairly radical measures that threw the economy into a recession. Look at what Powell has to sit through: he is constantly being lambasted by Trump for the puny and “gradual” rate hikes.”

  5. kk
    Oct 12, 2018 at 3:34 pm

    We all live in a world becoming more complex by the day, like a computer program with untold billions of lines of code that could go wrong at any time. Like the rest of us, central bankers make it up as they go along and believe what soothes us.

  6. Maximus Minimus
    Oct 12, 2018 at 3:41 pm

    I am not sure if it’s the result of the translation, but I see a lot of might/could/potential in the speech. Still, she sounds like a proverbial one-eyed among the blind.
    When corporate junk bonds yield less than US treasuries, there is no hypothetical.

  7. Gershon
    Oct 12, 2018 at 4:43 pm

    The central bankers and their deranged money printing over the past ten years caused all of these insane bubbles and speculative manias. Now these Keynesian fraudsters warn about the consequences of their own handiwork?

    It’s a bit late for that. When the collapse comes, we won’t be in a forgiving mood.

  8. van_down_by_river
    Oct 12, 2018 at 4:44 pm

    Ha ha! Too funny. A surplus of central bankers running around saying anything and everything.

    Bernanke, Draghi and Kuroda were all in agreement that creating asset bubbles was necessary to save the system and they don’t seem to be shy (or lacking in arrogance) when they expound on the courage it took to create the biggest easy money bubble in monetary history. Meanwhile there are small fry central bankers everywhere, running around like frightened chickens, making statements that contradict what all the other frightened chickens are saying.

    They broke the world monetary system, too late to fix it. The only thing left to do is to contradict what all the other free range central bankers are saying so you don’t get blamed for the collapse caused by bad monetary policy.

    Soon there will be a parade of low ranking central bankers all shouting: “I tried to tell them QE3, zirp and nirp were bad ideas but they wouldn’t listen”

    • Gershon
      Oct 12, 2018 at 4:57 pm

      Bernanke, Draghi and Kuroda were all in agreement that creating asset bubbles was necessary to save the system

      This was never about “saving the system.” It was about concentrating all wealth and power in the hands of their oligarch cohorts. Ironically, though, the rapaciousness of the plutocracy’s looting and asset-stripping against the 99% and consequent wealth inequality is feeding the rise of populism and nationalism. The latter could ultimately act as a check against the banksters and globalists who have been using central banks as their chief instruments of plunder against the middle and working classes in formerly prosperous sovereign countries, now been reduced to neoliberal looting colonies.

      • phusg
        Oct 13, 2018 at 4:33 am

        > Now these Keynesian fraudsters warn about the consequences of their own handiwork?

        No, they’re finally admitting to these consequences publicly, preparing us for the consequences of the unwind they are about to embark upon. See Wolf’s last few paragraphs.

        > This was never about “saving the system.” It was about concentrating all wealth and power in the hands of their oligarch cohorts. Ironically, though, the rapaciousness of the plutocracy’s looting and asset-stripping against the 99% and consequent wealth inequality is feeding the rise of populism and nationalism.

        Do you not think these wealthy elites know and knew that too much inequality leads to the rise of populism and nationalism? My reading is that they were too afraid of populism to do the right thing for long term stability and not go on a bail-out and money printing spree.

        Only if their unwind is successful can we conclude that their can kicking saved the system long term. Personally I can’t see that happening without major currencies getting into major difficulties, with all the instability that entails. There’s certainly no precedent for any of this.

    • Peter Starr
      Oct 12, 2018 at 7:56 pm

      Priceless. Am I allowed to simply say that without fancy expoundation?

    • QQQBall
      Oct 13, 2018 at 5:36 pm

      Van by the River..

      Asset price inflation was necessary to save the banks and banksters..

      Fixed…

      Wolf – Best tile ever for a blog post!

      • sierra7
        Oct 14, 2018 at 7:25 pm

        “Asset price ‘re-inflation'”…….that “re” is important.

  9. Laughing Eagle
    Oct 12, 2018 at 4:49 pm

    She says in the speech the ECB is to maintain price stability, but they cannot ignore financial stability- the booms and busts.
    Wow, Greenspan taught the Central bankers well -Say one thing and do another. As long as you proclaim it, it cannot be your fault.

  10. Tom Jones
    Oct 12, 2018 at 4:49 pm

    She also should have mentioned Governments running up crazy deficits like here in the US, due to cheap or free money. Same with refinancing zombie corporations, and can’t pay it back countries like Greece. Easier just to roll everything over when no interest on debt…and even add to the debt…Students are about the only ones not to get a “get out of jail free card” for their debts. In US, the plan to fix this is to gut Soc. Sec., Medicare, Medicad, etc to try to control debt after huge corporate tax cuts, and military increases. Infrastructure? Too late.

  11. Sadie
    Oct 12, 2018 at 7:02 pm

    Hmm, price stability without price discovery? How can you have one without the other. Maybe they have been pricing assets at “mark to make believe” instead of mark to market.

  12. Unamused
    Oct 12, 2018 at 10:37 pm

    ->“The ECB cannot and should not turn a blind eye to risks to financial stability.”

    And yet long since committed itself to such as its absolute and only principle. The most absurd, evil, and fatal lies are those we tell ourselves, and believe without question.

  13. KPL
    Oct 12, 2018 at 11:51 pm

    I have always believed that it is when ECB ends QE and starts raising rates that the rubber hits road. One can never say what the central bankers will do at that stage. Till then it is all talk.

    ECB may well get another “we will do whatever it takes and believe me it will be enough” chief in 2019 and this charade can continue for another decade. After all, they have the courage to act and have saved the system. Forget that they have grabbed power, printed money at will, dumped savers, retirees and prudent people under the bus, grabbed tax-payers money in the guise of better good, destroyed capitalism as we knew it by socializing losses and privatizing profits, infested the system with moral hazard and made it THE RIGHT WAY to do business. As if this is not enough they STRUT ABOUT IT!

    If 2008 can break the financial system it is not exactly impossible that it can break again. At that stage it is also unlikely that the central bankers will sit back and watch the show. Who knows how crazy demented fools, filled with hubris, who feel they can control the world will get. Especially with the powers they have usurped. How powerful the central bankers have become since 2009 where the world hangs on to every syllable uttered by these deranged central bankers.

    IMO, what may come to pass is going to be anything but pretty.

  14. Frits Fiene
    Oct 13, 2018 at 12:24 am

    The ECB is politically motivated not economically. Now the political burdens are becoming bigger then the benefits, the shift in Europe to the right has also to do with that. If the right wins it is the end of the EU.

    • safe as milk
      Oct 13, 2018 at 12:41 am

      bingo. the eu was always a backdoor attempt to federalize europe politically without going through the messiness of federalizing democratically.

      i recommend “tower of basel” by adam lebir to anyone who is interested in the history of how this came to be.

  15. Steve clayton
    Oct 13, 2018 at 5:08 am

    The ECB is keeping alive a lot of bankrupt banks with their actions. That’s all well and good but that means the banks 10 years down the line are still in the same position riddled with bad debt which needs writing off and the true financial position reflected. Some of the Greek Banks have 50% none performing loans.

  16. Anthony
    Oct 13, 2018 at 5:41 am

    True. In today’s absurd world, the blowing of financial bubbles is a tool to solve the problems caused by financial bubbles.

  17. R cohn
    Oct 13, 2018 at 9:03 am

    The markets continue to accept and expect ECB intervention. This will continue until the currency depreciates significantly.

  18. Tom
    Oct 13, 2018 at 9:07 am

    You can fool the market some of the time but you can’t fool the market all the time.

    • Gershon
      Oct 13, 2018 at 9:55 am

      There are no more “markets.” There are only the Keynesian fraudsters at the central banks and their insider pals with their algos and collusion, front-running hapless retail investor muppets while captured regulators and enforcers have stopped all pretense of cracking down on fraud and market manipulation.

      • Joe Banks
        Oct 14, 2018 at 1:25 pm

        I disagree. The market will always balance in the end. Yes there is manipulation, and it may take time but the market will overcome it. Look at Venezuela. Don’t you think the rulers there would like to manipulate the market and fix it? Market wins eventually, always. Always.

  19. L Lavery
    Oct 13, 2018 at 9:48 am

    Here in the UK they’ve decided not to scrap the £50 note. There was talk of doing so some time ago. Instead they intend issuing a new plastic version, so all our UK notes will then be plastic. Plastic money, says it all really.

  20. Ishkabibble
    Oct 13, 2018 at 10:12 am

    No problem for investors. Just find out what TPTB (Group of 30) secretly or unsecretly regards as TBTF and pile in. We’ll find out in the next few days or weeks if the EESA legally mandated that certain stock markets are TBTD. If they are TBTD (TBTF), just pile in. BTW, make sure you teach each of your children to have 10 kids of their own and your investments will grow and grow and grow. Great system “we” have going here, don’t you think?

  21. aqualech
    Oct 13, 2018 at 10:52 am

    Interesting that anyone believes that the central banks fundamentally operate towards fulfilling their public mandate. They would only do that if they were public institutions. They DO however need to somewhat maintain a guise that they are motivated by the needs of the public. Politicians COULD (lol, they are owned) act to dissolve the central banks should political will become strong enough….but I digress from my point:
    This article, as do Powell’s actions, tell me that things are worse than we think. The central banks work to maximize indebtedness of the public to the banks. They work to then orchestrate crashes through which they become even more rich and powerful. That they are now making statements and course corrections that might lend themselves some mantle of credibility tells me that the indebtedness is for now maximized and that the next crash is baked-in.
    Time to protect your assets from the coming bail-ins.

    • MB732
      Oct 13, 2018 at 12:00 pm

      Any recommendations how to protect 401k assets?

    • Oct 13, 2018 at 12:03 pm

      The central banks have been buying gold which I assume is done in deference to the concern for their customers

  22. Mean Chicken
    Oct 13, 2018 at 11:26 am

    Something doesn’t add up….

    So they gently admit they’ve been running a Ponzi scheme and just now are considering to pull the rug out since their employers have distributed their assets onto the unsuspecting at artificially inflated prices?

    Who owns all the bad public debt of the southern periphery, my understanding is EU banks have been gorging on it b/c it’s counted as reserves?

    • Oct 13, 2018 at 1:31 pm

      The ECB also owns a bunch of it.

    • BillS
      Oct 13, 2018 at 3:32 pm

      Much debt is owned by citizens of periphery countries. In particular, much Italian national debt is owed to many small bondholders. Any talk of default, partial or otherwise, would be political death.

      The situation, as usual, is much more complicated than the usual greedy banker narrative.

      • Mean Chicken
        Oct 14, 2018 at 8:38 am

        Right, obviously not the work of greedy special interest groups as the gap widens purely by accident.

  23. Don
    Oct 13, 2018 at 12:32 pm

    Half a pound of tuppenny rice
    Half a pound of treacle
    That’s the way the money goes
    Pop! goes the weasel.

    Or:

    Zero on a treasury bond
    five pounds for a bagel
    That’s the way the debt grows
    Pop! goes the bubble.

  24. George W
    Oct 13, 2018 at 7:18 pm

    The Federal Reserve, the lender of last resort…

    By design this should be the one and only role of Central Banks around the world.

    Congress needs to rescind the Federal Reserve Act’s mandate which is to ensure maximum employment, stable prices, and moderate long term interest rates”

    • Gershon
      Oct 14, 2018 at 8:51 am

      Congress needs to end the Fed and finally put a stop to its financial warfare against the 99%.

      • Kevin
        Oct 14, 2018 at 10:47 am

        Never going to happen…

        Congress can’t pass a budget that cuts spending, let alone a balanced one where they don’t spend money they don’t have. Until Congress can force the USA to live within it’s means they are the one fomenting “financial warfare”.

  25. Ed
    Oct 13, 2018 at 10:36 pm

    I, for one, appreciate the gentle warning. But I do feel sorry for people who are not alert enough to hear it or who are represented by brokers who aren’t alert (or don’t care).

    I’ll just add that I find it interesting that it’s not obvious to me how to handle the situation. I moved to cash a few days ago. My stocks have been misbehaving for months so I luckily avoided the very recent bloodbath. Can’t afford to short. Gold? Ha, ha. Maybe I’ll dollar cost average back in over into my “long term” stocks over a middling time frame . . .

  26. losi
    Oct 14, 2018 at 2:57 pm

    Is it possible that his time subprime lending is not towards homeowners, but to zombie companies?

    Can we use debt/equity or interest coverage ratio or operating margin to identify zombie companies? Maybe these are not enough in themselves but could they gave an estimation of “zombieness”? :)

    Thanks for the great blog, best regards Gabor from Hungary

    • Ed
      Oct 14, 2018 at 7:09 pm

      I imagine free cash flow v. debt would be a good way initially to select companies that *could* be in trouble. Especially if that debt is new debt.

      But then you have to bet against the bonds or against the stock. That’s hard to do for long and make money.

      More knowledgeable people here will probably have a better idea. :)

  27. Robert
    Oct 16, 2018 at 2:18 pm

    Don´t forget that she is german and came from the Bundesbank. Therefore she may not speak for the ECB or better for Mario Draghi. My guess is that this just shows that there are at least two camps within the ECB.

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