Is the ECB’s Draghi too smart by half
…or are we too dumb by full measure?
Auction madness! Markets are breathing a sigh of relief today as Spain’s and Italy’s bond auctions went off strongly. But this is with a huge assist from the ECB. Its 3-Year loans have pumped liquidity into banks who in turn are buying their government’s bonds. So while the ECB is not buying them directly in large amounts as the ECB is prohibited from doing. Thus the ECB is building up large claims on banks whose balance sheets are being stuffed with the same assets the ECB cannot but directly. Is the ECB better off having claims on unsteady banks rather than buying the government paper directly? Who can say. But the ECB also is giving away money for all sorts of uses as well under this program. A number of banks seem to be borrowing then turning around and warehousing it on the ECB balance sheet waiting for more choice opportunities to emerge.
Is anybody really enamored of this strategy?
Who is it fooling?
The interbank market is a Japanese lunch box not a bowl of soup- One thing the large ECB deposits tell us is that banks still do not trust one another. Yet the ECB is funneling HUGE amounts of money to government bond markets by means of taking the credit of these same banks as intermediaries.
Mixed signals with a clear message- But since banks are buying Euro-govy bonds hand over fist we are led to believe (wink, wink) that the crisis is over or losing intensity! But the Euro-depositing at the ECB tells us just the opposite does it not?
Who is being played for the fool?
Typo knows best- Let me share an inside joke with you. When I wrote this the first time I found a typo. I had written that the ECB has ‘pimped’ money into the markets. Of course, I hurried to correct that. But, on second thought, that typo reflects better economic analysis than saying it pumped it. What do you think?
Euro auctions Vs US auctions which are more telling? - Indeed, contrast the Euro auctions to the US where the 10-year government note auctions, with somewhat less direct help in the US, set a new auction-yield low on a high bid-cover ratio (over three and above the average of the last ten 10-Yr auctions). Here in the US the economy is (...well until today it was) spitting out nothing but strong numbers and the investors are STILL clamoring to buy them at historic yield lows! What does that tell you about competitor markets where yields are higher and banks are getting bashed with the stick and fed with the ECB carrot-loans?
The slippery slope to fund grandmother’s bank- We can wonder about how much the Germans like the ECB’s under the table and through the markets approach to investing in Grandmother’s bank and her sovereign bond market. It may be better than arguing dysfunctional capital markets that are short-circuiting monetary policy in order to justify large direct purchases of government bonds by the ECB. But probably not… Now the ECB has arranged a situation in which not only are there a lot more govy-bonds in the market but the ECB is entangled with more banks and banks of poor credit quality.
How can that be good?
Rules are rules; write outside the lines at your own peril…and ours - The bottom line is that Europe must get its house in order. The more it finds another end-run around rules enabling it to inject funding into places where market players left to their own devices would not go, the worse off we all are.
Draghi and his baggage- So is Draghi really that smart or is he too smart by half. Oh, he is an ivy-league US trained economist. But we have seen what a lot of those guys do and what they know. They do know ‘their stuff’ they also know the politics and have their own good-ole boy network. And Draghi seems to be working his overtime.
God bless him/God Help him…but, good God, stay way from what he is doing!
His policies are kind of a drag…hi.