Draghi drafts a plan to donate more money to bankers, the era of ‘money for nothin’ is flourishing

Mario Draghi, President of the ECB, delivers the Marjolin lecture at the SUERF conference organized by the Deutsche Bundesbank, in Frankfurt on 4 February 2016. Robert Marjolin was a pivotal figure in the birth of Economic and Monetary Union. (ECB Audiovisual Services).

Mario Draghi, President of the ECB, delivers the Marjolin lecture at the SUERF conference organized by the Deutsche Bundesbank, in Frankfurt on 4 February 2016. Robert Marjolin was a pivotal figure in the birth of Economic and Monetary Union. (ECB Audiovisual Services).

The European Central Bank announced last week that under its extraordinary Asset Purchase Program (APP), it has injected  €712.3 billion into the euro area financial system until January this year. Out of that, €544.2bn are Eurozone government and public entities bonds, bought under the Public Sector Purchase Program (PSPP). This last plan was decided in January 2015, implemented last March and will continue until March 2017, with monthly purchases of €60bn. The rest is asset backed securities and covered bonds.

Of course, the entire APP operation is realized through the banks. All of that money is being transferred to the lenders against securities that the bankers happily unloaded to the ECB, receiving freshly printed euro, liquid money, the king of the market. As Mario Draghi, the President of ECB has said, this expanded asset purchase program is supposed to fight the ultra low inflation rate the Eurozone suffers of. Last week though, he took a step ahead, speaking at a Deutsche Bundesbank (Germany’s central bank) conference, on 4 February, and said “the risks of acting too late outweigh the risks of acting too early”.

A proactive Draghi

He meant that the ECB has to act now, not later by injecting more money into the financial system, rather than wait and see, if the dying inflation recovers as the Germans propose. He explained that, “Adopting a wait-and-see attitude and extending the policy horizon is associated with risks: namely a lasting de-anchoring of expectations leading to persistently weaker inflation. And if that were to happen, we would need a much more accommodative monetary policy to reverse it”.

The overall theory is that the banks, which receive this bonanza of money, will direct it into the real economy, through loans and other forms of financing to the private sector, which is businesses and consumers. In this way the demand for more investments and consumption would revive prices and possibly wages and bring inflation nearer to ECB’s target of close to 2%. Theoretically, this policy will ultimately breathe life into the stagnating economy and create more jobs.

It works only for the banks

Unfortunately, nothing of the two has yet happened. Both inflation and GDP growth are stuck in the zero region. As Draghi was obliged to indirectly admit last week, it may already be too late to effectively fight super low inflation, because it is possible that, by now, it has affected the long-term expectations. Obviously his choice, to stress at a Bundesbank conference the dangers of acting too late, are a tough answer to Jens Weidmann the Buba’s President, who recently pointed a finger to Draghi not to overdo it with the PSPP.

In any case, it seems that they are both fighting this battle with wrong tools. In reality the Eurozone economy doesn’t seem to respond to Draghi’s money twelve months long treatment, nor does it show any better prospects under the German austerity recipe, preached by the country’s Federal Minister of Finance Wolfgang Schäuble. It’s even more important though, to note that Draghi has left it to be understood that in the next ECB Governing Council in March, he will propose and fight to pass an even more relaxed monetary policy, meaning more money to banks for free.

Take the money and run

This further relaxation may take the form of lower interest rates or more money injection or both. However, the interest rates that the ECB currently charges to banks, for the money it hands out to them by the trillions are already too close to zero, giving a different meaning to the Dire Straits song lyrics ‘money for nothin’.

Yet, Draghi thinks that this may not be enough and the banks should from now on get paid to ‘accept’ more money from the ECB. Since this may be difficult for the average reader to grasp, it has to be repeated that he clearly meant the new money transfers to banks may be realized at negative interest rates. More simply, the lenders would return less money that what they received and would be called relaxed monetary policy, not theft. He said that quite openly on the above mentioned conference when he stressed that “As the ECB and others have demonstrated, the lower bound for policy rates, wherever it might be, is not at zero”.

Is it that bad?

Now imagine a situation, where the banks receive €2tn from ECB, keep it for three or more years lending it out to us, the private sector of the real economy on an average interest rate of anything close or above 10%. At the end of this exercise the lenders return to ECB €1.9tn. It’s easy to calculate what the banks have gained during this period. At the same time though, if Draghi has it his way and all that is to materialize, there is one more conclusion to be reached, apart from the realization that the entire society is about to sweat for the banks to thrive. And this conclusion is that, presently, the banks may be too close or rather well into the area of bankruptcy, but don’t tell anyone except Draghi.

Obviously, the responsibility for letting all that to happen lies heavily with the politicians and the monetary authorities, Draghi included, who didn’t grab the opportunity to break up the ‘too big to fail’ banks, when they had the chance in the aftermath of the 2008-2010 financial crisis. Alas, it’s a dreadful reality that nothing has changed in the regulatory environment of the banking industry. Quite naturally then the bankers are free to repeat what they did six years ago.

Advertising

Advertising

Advertising

Advertising

Advertising

Advertising

Advertising

Advertising

Advertising

Advertising

Advertising

Advertising

Advertising

Featured Stings

“At the Environment Assembly citizens expect clean, not hot air”, the Head of UN Environment in Europe underscores in a Sting Exclusive

Congrats to the #FutureofMalta: a new age of voting

NEC @ MWC14: “Smart cities” hold the key to enhancing citizens’ lives and cutting costs

MARKUP initiative to boost market access to Europe for East African SMEs

Progress in medical research: leading or lagging behind?

Security: better access to data for border control and migration management

European Youth cries out: Sustainable Development Goals ambitious, but lack focus on youth

Juncker Investment Plan for Europe welcomed by European Youth Forum

A Sting Exclusive: “Delivering on the Environmental Dimension of the new Sustainable Development Agenda”, Ulf Björnholm underscores from UNEP Brussels

Junker for Commission President: What were the stakes in this affair

The German banks first to profit from public subsidies of trillions

EU: The Member States to pay for national banking problems

Rehn very reserved about growth in Eurozone

Young people meet in Malta to shape the future of Europe

Microsoft’s YouthSpark: a kiss of Life to European Youth from the European Parliament

How many more financial crises in the West can the world stand?

Is Germany yielding to pressures for more relaxed economic policies?

Has the EU economy truly revived from the financial crisis?

Chart of the day: These are the cities where the World Cup threatens productivity the most

The Tears of lovely Memories

Inegalitarian taxation on labour haunts Europe’s social model

Google once more under EU crossfire from a possible record fine and new Right to be forgotten case

A Sting Exclusive: “EU’s Sustainable Finance Action Plan – Laying down the foundations for a Greener Financial System”, by European Commission’s Vice-President Dombrovskis

Palm Oil: With Malaysia cracking down on production, what’s the alternative?

This team of Saudi women designed an award-winning app to make the Hajj safer

Medical students: The need for emigration

Women-Friendly Spaces for Rohingya refugees: A place for protection and care

UN condemns attack that leaves one ‘blue helmet’ dead in Central African Republic

Nigeria floods: Guterres ‘deeply saddened’ by loss of life and rising need

Foreign Affairs Council (Trade) of 22/05/2018: EU relations with key trading partners

Three ways the Fourth Industrial Revolution is shaping geopolitics

The quality of health education around the globe

G20 LIVE: the EU trade gold rush continues as EU and Australia agree to launch Free Trade Agreement (FTA) live from Antalya Turkey

MEPs condemn attacks on civilians, including children, in Yemen

Walk, cycle, dance and play – UN health agency recommends new action plan for good health

Global immunization is having its annual check-up. What can we learn?

MEPs demand an end to migrant deaths across the Mediterranean Sea

Charles Michel advocates a strong Europe that acts where it can add real value

Europe united in not supporting a US attack on Syria

‘I thought I’d never get out alive’ – the Muslim director who interviewed neo-Nazis

COP21 Breaking News_07 December: “The world is expecting more from you than half-measures”, UN Secretary General Bank Ki-moon cries out from Paris

After the Italian ‘no’ and the Brexit, Germans must decide which Europe they want

UN chief urges Hamas and Israel to ‘step back from the brink of another devastating conflict’ in Gaza

Berlin to pay at the end for Eurozone banks’ consolidation

End of plastic water bottles at European Parliament

The 13th round of TTIP negotiations hits a wall of intense protests and growing concerns

More taxpayers’ money for the banks

Parallel downfalls of Merkel and Deutsche Bank threaten Germany and Europe

Italy’s Letta: A European Banking Union soon or Eurozone collapses

No recovery for EU economy in sight and a Brexit can aggravate things for everyone

Bias in AI is a real problem. Here’s what we should do about it

Varna (Bulgaria) awarded European Youth Capital 2017

‘True’ peace, requires standing up for human rights, says UN chief Guterres

UN rights office appeals for peaceful Zimbabwe elections amid reports of intimidation

EU’s Mogherini visits Turkey “to step up engagement” and highlight interests

Far from a healthy Health Workforce: lack of workforce planning leaves our citizens without access to proper care

Service Engineer Intern – 1991

The ECB will do whatever it takes to set the Eurozone economy again in motion

Cameron’s Conservatives and UKIP are exploiting and cultivating anti-EU immigration sentiment but Labour party isn’t?

The EU can afford to invest trillions in support of employment

More Stings?

Speak your Mind Here

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out /  Change )

Google+ photo

You are commenting using your Google+ account. Log Out /  Change )

Twitter picture

You are commenting using your Twitter account. Log Out /  Change )

Facebook photo

You are commenting using your Facebook account. Log Out /  Change )

Connecting to %s