ECB Infighting Preventing Quantitative Easing

The Guardian reports that ECB's iron discipline breaking down.

(emphasis mine) [my comment]

ECB's iron discipline breaking down
Reuters, Monday May 18 2009
By Paul Taylor

PARIS, May 18 (Reuters) - The iron discipline we have come to expect from the European Central Bank has broken down, giving an unprecedented public glimpse of feuding over the direction of monetary policy in the financial crisis.

As the 16-nation euro zone's central bank dangles its toes in the uncharted waters of quantitative easing
[money printing] -- starting to buy assets in an attempt to help revive the economy -- its leaders cannot agree on how far to go and when to stop.

[The US has already bought 430 billion mortgage backed-securities and $123 billion treasuries. Meanwhile, the ECB hasn't even started yet and is having trouble agreeing on the planned purchase of a mere 60 billion euros in covered bonds.]

As a result, ECB President Jean-Claude Trichet was only able to announce a minimal consensus on May 7 when the bank cut its key interest rate by 25 basis points to 1.0 percent and said it would for the first time buy 60 billion euros in covered bonds.
[It has been three weeks since then and the ECB has yet to buy anything.]

Trichet insisted this "enhanced credit support" was adopted unanimously and said: "We are not at all embarking on quantitative easing."

As the ensuing cacophony showed, the central bankers did not agree on whether 1.0 percent should be the floor for rates, whether the bank should signal it would keep rates there for a sustained period, how to conduct the covered bond purchase or whether to go further in credit easing.

Torn between the twin threats of recession and a potential return of inflation, the ECB remains extremely reluctant to follow the U.S. Federal Reserve and the Bank of England in creating money on a massive scale to revive economic growth.

The debate pits guardians of inflation-fighting orthodoxy such as German Bundesbank chief Axel Weber and ECB executive board member Juergen Stark, against advocates of a bolder monetary easing, including executive board member Lorenzo Bini Smaghi and Cypriot central bank governor Athanasios Orphanides.

It highlights the difficulty of building consensus and taking decisions in a 22-member governing council -- a larger and more unwieldy body than the Fed and Bank of England committees that set monetary policy.


The ECB's security purchases will amount to just 0.6 percent of the euro zone's Gross Domestic Product, compared with 9 percent in Britain and 12 percent in the United States.

Clearly, some of Europe's central bankers are still more worried about the ghost of future inflation, even as price growth is poised to turn negative for some time, than about shrinking output and soaring unemployment. The euro zone economy is forecast to contract by 4 percent this year and unemployment is projected to reach 11.5 percent of the workforce in 2010.

Yet the inflation hawks want the ECB to agree on an exit strategy from monetary easing even before starting asset purchases
[The US has no exit strategy.]. They also contend that buying securities has less impact in Europe than the United States because of the structure of the economy and the banking system. [True, the US economy is based on debt funded consumer spending, while a large part of the eurozone (especially Germany) still makes real goods.]

Unlike the Anglo-Saxon central banks, the ECB does not publish minutes or voting records, which signal to markets the range of views and the likely direction of policy.

So the unusual public spat among ECB policymakers in recent days provides a rare insight into the depth of differences on the way forward.

Consider last week: - Dutch central bank governor Nout Wellink said the ECB should discuss rates below 1 percent, after Germany's Weber said on April 27 that 1.0 percent was "a sensible lower limit"; - Slovenia's Marko Kranjec said the ECB was likely to spend more than 60 billion euros and might purchase other assets as well as covered bonds, while Austria's Ewald Nowotny said no further steps were being discussed and Weber said 60 billion was "the maximum"; - ECB vice-president Lucas Papademos said there were signs the worst was over for the economy, but Wellink retorted: "Don't become too optimistic when you see a few swallows."


How long the recession is expected to last affects the scope and the nature of measures the bank may adopt. Interest rate cuts take 18 months to two years to have an economic effect while asset purchases have an immediate impact.

First signs of "green shoots" of economic recovery would tend to support the ECB's caution.

Indeed, markets have already responded before the ECB's covered bond programme has begun. Yield spreads have fallen and issuers are rushing to market in anticipation.

Is the ECB's policy debate a sign of weakness and dithering while its U.S. and British counterparts act decisively, or a sign of prudence?
[It is DEFINITELY a "sign of prudence"] Perhaps it is refreshing that ECB policymakers are airing these issues in public rather than presenting a monolithic facade of unison.

The executive board's Stark sought to make a virtue out of the unusual dissonance.

"We are a public council and at the end, it's the collegial wisdom that counts. And for this collegial wisdom to come, it is important that different arguments are brought together," he told Reuters.

But when asked whether it was useful for markets to hear divergent opinions from board members, he said: "We have a policy of one voice -- so listen to the president. That's how it is." (editing by David Evans)

Howe Street reports that the Dollar and the Importance of TIC Flows.

FOREX Update: The Dollar and the Importance of TIC Flows
By Bill Jenkins
May 20, 2009

I've said it before:
the dollar's chances of long-term success going forward are slim and none... and slim just left town.

Consider the Treasury International Capital (TIC) flow data. TIC measures foreign investment in the United States. This is important because we rely on fo reign investors and sovereign governments to continue funding our deficit spending.

the most recent numbers show a major decrease — $23.2 billion in March, versus an outflow of $91.1 billion the previous month [foreign investors are dumping US treasuries]. That will put Ben Bernanke and his boys in an even tougher spot.

Here's our pal Chuck Butler from EverBank weighing in on this. "There are two ways they can try to entice these foreign investors back into the U.S. market.
They can either let interest rates increase, or let the value of the U.S. dollar fall.

Now which do you think they will choose?
They have been running the printing presses on overdrive in order to try and keep interest rates down to create another refinance boom [They have bought $553 billion so far...]. That tells me the Fed will try to do everything they can to keep interest rates down, so their only option is to let the U.S. dollar fall."

The drop in TIC flows, combined with a huge increase in funding requirements by the United States, will have to lead to a general debasing of the U.S. dollar.

That's not to say things are better on the other side of the Atlantic. The Eurozone (EZ) unveiled some nasty economic news last week.

Let's start with the real engine of the EZ, Germany. Its first-quarter 2009 GDP number showed a contraction of 3.8%, worse than forecast, and the worst figure since 1970, when these records began. Annually, they are looking at a 6.7% contraction, another record.

In the last nine months, Germany has squandered all of its GDP gains accrued since 2005.

Right on their heels, the EZ composite stats showed a 2.5% GDP drop for the quarter. Again, annualized, that comes in at a 4.6% drop... both of these numbers are records, too.

Expanding our horizons just a bit, we see that Spain continues adding fuel to the fire. Even though Standard & Poor's has already cut the country's credit rating, the Spanish folks unveiled their worst recession in four decades. GDP shrank 1.8%, after a 1% drop in the last reading. A year ago, GDP was 2.9% higher. It isn't a record number, but you'd have to go back 40 years to find something similar.

How much further can Spain fall (and Ireland, and Greece as well) before the euro enters crisis mode?
[The euro will not enter "crisis mode". Bank failures in Europe would be good for the euro, but bad for the eurozone economy.]

The truth is, we've never been down a road quite like this one
[Yes, we have. It was called "the great depression." The US didn't print money, and there were widespread bank failures. From 1930 to 1933, the dollar gained 10% per year because of deflation.]. So the map we have is out of date. But there is one thing it can tell us — there is a cliff and a gorge ahead. We just can't tell how far away it is, or around which bend we'll find it. No matter, we'll keep the pedal to the metal, so at least we can make good time getting there...

Adding to the loud accelerating noise in the Eurozone this week, Reuters reports that
the European Central Bank (ECB) "has rejected several Central European central banks' request to accept local currency bonds as collateral," according to Hungarian central bank's Kiraly. [Unlike the fed, the ECB is worried about the quality of the collateral it accepts.]

Remember that the ECB adopted
[agreed to adopt at some future date] quantitative easing (QE) — buying bonds — some weeks ago, but there was a significant dissenting vote. Germany's central bank, the Bundesbank, the most influential in the ECB, was completely against QE.

Axel Weber, the Bundesbank's president, said, "the ECB has done enough to help the economy and shouldn't consider further measures unless things get a lot worse." He added, "The ECB doesn't see the risk of a broad credit crunch or deflation in the euro area."

I'm pretty sure his counterparts in Spain, Ireland and Greece will take umbrage at his position.
[Spain, Ireland and Greece were fiscally reckless and are now burdened by huge amount of debt. They want to print away their problems at the expense of responsible nations like Germany.]

As I've written before,
the bureaucracy in the EZ makes these decisions and policies tough to carry out [which is very bullish for the euro]. ECB President Jean-Claude Trichet is going to have to work out some kind of ceasefire between the factions. Which means they still have no concrete plan to stimulate anything other than infighting [Infighting will save the euro]. While this is happening, the euro is speeding closer and closer to the cliff. [In the 1930s, the fed decided NOT to used quantitative easing (money printing) to save the banking system. Did the dollar go off a cliff? No.]

My reaction: Many of my comments are in articles above. Basically, the ECB will only undertake limited (if any) quantitative easing because:

1) Unlike the fed, the ECB has only one mandate: fight inflation, which leads to a much more hawkish outlook.

2) The Maastricht Treaty under which the European Union is founded prohibits the ECB from injecting stimulus by purchasing the government debt of the eurozone's fifteen member states.

3) The memory of hyperinflation eighty years has lead to very hawkish voices on the ECB's board.

4) Even if the ECB wanted to engage in quantitative easing, the bureaucracy in the euro zone makes these decisions and policies tough to carry out

5) Equitably distributing the benefits of quantitative easing would be increadibly complicated (which countries would get the printed cash and how much would they get?)

My reaction: There will be 1930s deflation in the euro zone. This means widespread bank failures, and a much stronger euro.
If you must own a paper currency, the euro is a good choice (assuming you keep these euros somewhere which doesn't default). However, gold is still the much better investment.

This entry was posted in Bailouts, Euro_Zone, News_Developments. Bookmark the permalink.

6 Responses to ECB Infighting Preventing Quantitative Easing

  1. good for Germany. Job well done.

  2. Anonymous says:

    how much would the gold rise?
    as of now, it is on 950s i believe.

  3. Pak says:

    "How much further can Spain fall (and Ireland, and Greece as well) before the euro enters crisis mode?"

    WAS ist DAS? Do they no longer teach MV=PT in high school?

    Mr. Jenkins mentions Chuck Butler but somehow fails to mention that Chuck has his own unique explanation of this ECB "infighting". It says that JC "Tricky" Trichet understand whatever is going on very well, and his biggest fear is - NO! not the 'crisis' of the euro, but its rapid REVALUATION against the USD, GBP and JPY at some point in the nearby future, which will kill the Eurozone economy, and its exports in particular. Therefore the need to make the ECB appear as a 'weak' organization, and provoke an artificial EUR weakness.

    After dust settles, you'll see - Germany will be the ONLY nation in the world which will be in a position to attract capital inflows to finance its fiscal deficits.

    Ya know. The one who laughs last..

  4. Numonic says:

    I said it before, if you're going to be fiscally responsible with your currency why use paper? Had the Euro been only in physical gold/silver or any metal, they wouldn't be having this argument. I always thought it to be questionable for someone to promise to be fiscally responsible with the currency while using paper as the currency. Why choose the most difficult type of currency(paper) to be fiscally responsible with when promising to be fiscally responsible? It's a trick. That's like a man fasting on thanksgiving sitting at the dinner table watching everyone else eat when he can leave the room or the house. Do you really think that these people enjoy being tempted, what are they masochists? If you're going to promise to be fiscally responsible, you're not going to make the currency one of the most easiest produced things in the world(paper). You will make it easy for you to maintain that fiscal responsibility and say that the currency will be nothing but physical gold and silver. Why have a bank if you are going to be fiscally responsible? A bank in inception automatically increases the money supply. That is what a bank does. When you let someone else hold your money and they promise to give it back to you on demand, you have just increased the money supply because that money is now in the possession of 2 people(you and the bank/other person) when before it was only in 1. I don't trust any paper currency, it's a trick. Buy physical gold and silver and hoard it privately.

  5. Anonymous says:

    Don't get how there can be deflation and falling price in the EU, while the "rest of the world" has inflation and rising prices. Comodity prices is the basis for all prices and these will of course rise in Euro as well

  6. Aki_Izayoi says:

    I doubt there would be 1930's style deflation in the Eurozone. There would be deflation, but it would be somewhat different from 1930s or Japan. It would be more tolerable to the countries that have a welfare state.

Leave a Reply

Your email address will not be published. Required fields are marked *


You may use these HTML tags and attributes: <a href="" title=""> <abbr title=""> <acronym title=""> <b> <blockquote cite=""> <cite> <code> <del datetime=""> <em> <i> <q cite=""> <strike> <strong>