The ECB is widely expected to announce a new program of quantitative easing (QE) at its next meeting on January 22nd. The markets (read anglo-saxon carry traders and speculators) want it, the embattled European politicians want it, and from the top of their ivory towers mainstream economists have been rooting for it ! So we should expect Super Mario-nette to comply. Sooner or later . If you follow this blog, you know that we pointed early on in Draghi's tenure to a pattern. When taking the helm of the ECB Draghi was introduced as "the most German" of all Italian central bankers and he always peppered his speeches with a bit of German monetary rectitude talk. But it didn't take long for the real Draghi to show his idea of running a central bank : the slippery slope of bending ECB rules and principles to accommodate markets and appease politicians. Admittedly, he has proved to be a very shrewd operator, supporting and manipulating financial markets through words and an impressive show of resolve. It worked wonders for a time. Unfortunately, whether it was his intention or not, Mr Draghi has promised too much and went beyond his mandate, becoming a deficit enabler who allowed EU bureaucrats to delay painful reforms. Time will tell whether his various lending programs which did nothing to the economy and his promise of backstopping government bond markets created a carry trade bubble with another disastrous aftermath.
Taxpayers, responsible savers, the European middle-class and the Germans can only be concerned about the path on which Mr Draghi is taking the Eurozone. Mr Draghi's major accomplishment in 2014 has been a brutal devaluation of the Euro which should be highly beneficial to exporters and positively affect inflation. But to the ECB council it's not enough to devalue the european currency by 15% after having destroyed savers and enriched the financial oligarchy with ZIRP (zero interest rate policy), more should be done to attain that currently elusive 2% inflation target which if not met for several years will be very problematic to debtors (governments). Accordingly with a persistently low Eurozone inflation, natural consequence of the necessary adjustments in the periphery, yet worsened by the total collapse of oil prices, it 's apparent Draghi's German undertones of yesteryear have vanished. In recent months, what we have seen instead is a spineless submission to the market's whims and Fed-style cajoling by the ECB governors which often has bordered on ridiculous. From this ECB President, we must rightly fear as much rectitude in the future as from a well-cooked spaghetto and once the ECB embarks on outright QE it will be very difficult for Draghi's successor to exit that policy before damage is done.
Werner Sinn (IFO Institute) on Draghi's ECB :
"OUR WORST FEARS ARE BEING FULFILLED "
But there is hope, if Draghi's illegal project of outright QE can be delayed enough time (e.g. by legal challenges and German opposition), we could see the current ECB President replaced by a German central banker hopefully avoiding QE in Europe which everybody agrees won't be nearly as effective on the real economy as in the US and the UK because of the nature of European markets. Yes you got that right ! QE in the Eurozone won't be as effective as in the US where it had a disappointing, minimal according to some economists, impact on the real economy and on unemployment. What QE did first and foremost was inflating asset prices, making free money for the financial oligarchy while house prices soared, pricing out first-time buyers already struggling with tougher lending standards. Meanwhile long term unemployment was barely affected by the extraordinary Fed policy. QE only drove the wedge deeper between the american middle-class and the 1 %.
Let's go back to some common sense . German common sense
Jens Weidmann : QE' will not fix the eurozone's problems
According to the Bundesbank President, the structural barriers to competition, innovation and productivity in Europe are the real problem impeding European growth. In the short to medium term, how about new mechanisms to funnel lending to SME's which have been of most concern at the ECB ?
Obviously, any change at the top of the ECB should be as smooth as the replacement of Trichet by an Italian central banker introduced as "German", otherwise markets could panic. Mario Draghi has been the favorite successor to 89 year-old Italian President Giorgio Napolitano who expressed his wish to retire in June 2015. This could provide the opportunity for a graceful change at the helm of the ECB. Who would succeed Draghi ? Jens Weidmann, the President of the Bundesbank, could potentially become President. He, of course, should be introduced as "European".
Jens Weidmann : QE' will not fix the eurozone's problems
According to the Bundesbank President, the structural barriers to competition, innovation and productivity in Europe are the real problem impeding European growth. In the short to medium term, how about new mechanisms to funnel lending to SME's which have been of most concern at the ECB ?
Obviously, any change at the top of the ECB should be as smooth as the replacement of Trichet by an Italian central banker introduced as "German", otherwise markets could panic. Mario Draghi has been the favorite successor to 89 year-old Italian President Giorgio Napolitano who expressed his wish to retire in June 2015. This could provide the opportunity for a graceful change at the helm of the ECB. Who would succeed Draghi ? Jens Weidmann, the President of the Bundesbank, could potentially become President. He, of course, should be introduced as "European".
Mr Draghi has not just borrowed a few pages from Ben Bernanke's playbook, he's copying the whole book !
Ben Bernanke was economic advisor to President Bush - the poster-child of crony capitalism- who nominated him as President of the Federal Reserve. Once at the Fed, Ben Bernanke inflated a housing and energy bubble leading to the 2008 crash. Bernanke then proceeded with QE with the implicit objective of reflating asset prices first to get banks back into shape, then under the pretense of increasing employment. QE drove house prices which had become affordable back up, and gave free play money to the financial oligarchy likely setting the stage for another crisis, but it did little for the unemployed.
What's Wrong with Draghi's Quantitative Easing ?
- Most economists agree the effect on the European economy won't be as significant as in the US where QE had a rather disappointing effect
-QE is essentially financing the government's deficits allowing politicians to stop the reforms needed to ensure the long term viability of the euro. For this very reason, and because QE is inflationary with potentially disastrous consequences, the ECB is per its statutes barred from engaging in such policy, i.e QE IS ILLEGAL !
- QE will further fuel asset bubbles in the eurozone, mainly the bond bubbles and the housing bubbles that remain in France, Belgium etc. Germany could see a big housing bubble. Bubble always burst with disastrous consequences, especially property bubbles, but not without causing other damages first such as an increase in the gap between rich and poor, environmental impact and in the case of property bubbles an exclusion of ordinary households from homeownership. QE will further encourage malinvestment which in the end will hurt ordinary citizens when it becomes clear those malinvestments were a waste of resources, companies go bankrupt and thousands are laid off.
-QE could drive inflation to high levels, such as 4-5% in Germany and Northern Europe (in fact that's what it's intended to do) , while house prices and rents would rise as well. As such QE will have the same effect of hurting the middle class, pensioners and the poor as in the US and the UK.
-QE is essentially financing the government's deficits allowing politicians to stop the reforms needed to ensure the long term viability of the euro. For this very reason, and because QE is inflationary with potentially disastrous consequences, the ECB is per its statutes barred from engaging in such policy, i.e QE IS ILLEGAL !
- QE will further fuel asset bubbles in the eurozone, mainly the bond bubbles and the housing bubbles that remain in France, Belgium etc. Germany could see a big housing bubble. Bubble always burst with disastrous consequences, especially property bubbles, but not without causing other damages first such as an increase in the gap between rich and poor, environmental impact and in the case of property bubbles an exclusion of ordinary households from homeownership. QE will further encourage malinvestment which in the end will hurt ordinary citizens when it becomes clear those malinvestments were a waste of resources, companies go bankrupt and thousands are laid off.
-QE could drive inflation to high levels, such as 4-5% in Germany and Northern Europe (in fact that's what it's intended to do) , while house prices and rents would rise as well. As such QE will have the same effect of hurting the middle class, pensioners and the poor as in the US and the UK.
