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

Advertising

Advertising

Advertising

Featured Stings

Basel III rules relaxed: Banks got it all but become more prone to crisis

Gender Equality as a platform to improve Medicine

Why Eurozone’s problems may end in a few months

European Youth Forum welcomes the European Commission’s proposed revision of the Union Code on Visas, however it does not go far enough

A Valentine’s Special: heart has nothing to do with it, it’s all Brain

Brexit Update: EU endorses unprecedented compromise to help Cameron out of the referendum mess he got himself into

“The markets have moved on renewables, policy makers must keep up”, A Sting Exclusive by Erik Solheim, Head of UN Environment

The G7 adopted dangerous views about Ukraine and Greece

More unemployment and lower wages to make European workers competitive?

Ukraine-EU deal sees the light but there’s no defeat for Russia

EU and African leaders to jointly tackle the migration crisis across the Mediterranean

EU to spend €6 billion on youth employment and training futile schemes

ECB to buy corporate bonds: Will government financing be the next step?

Economic recovery won’t tackle youth unemployment problem

Post-Brexit muddled times: the resignation of UK’s top ambassador and Theresa May’s vague plans

Fair completion rules and the law of gravity don’t apply to banks

Italy can stand the US rating agencies’ meaningless degrading

The European giant tourism sector in constant growth

A Sting Exclusive: “Our ambition is by 2020 Indonesia to become an emerging power of World’s Maritime Access”, reveals the Chargé d’Affaires at the Embassy of Indonesia in Brussels, treating WEF, ASEAN and EU-Indonesia relations on the eve of the World Economic Forum East Asia 2015 in Jakarta

Why lay people don’t expect anything good from G20

Why is Merkel’s Germany so liberal with the refugees? Did the last elections change that?

Russia won’t let Ukraine drift westwards in one piece

Eurozone: Negative statistics bring deflation and recession closer

No tears for Cyprus in Brussels and Moscow

Climate change and health: creating global awareness and using earth resources wisely

Global Citizen – Volunteer Internships

The EU stops being soft with 10 Downing Street about Brexit

Court of Auditors: EU spending infested with errors well above the materiality threshold of 2%

The three sins the EU committed in 2015

G20 LIVE: G20 Leaders’ Communiqué Antalya Summit, 15-16 November 2015

The European Parliament rewrites the EU budget in a bright day for the Union

EU members commit to build an integrated gas market and finally cut dependency on Russia

European Junior Enterprises to address the significant skills mismatch in the EU between school and employment

The Eurogroup offered a cold reception to IMF’s director for Europe

EU budget: Will Germany alone manage Britain’s gap?

From inconvenience to opportunity: the importance of international medical exchanges

Turkey presents a new strategy for EU accession but foreign policy could be the lucky card

The EU cuts roaming charges further while the UK weighs Brexit impact

How will EU look after French, Dutch and German Elections and what will be the implications for Youth Entrepreneurship?

IMF’s Lagarde to Peoples of the world: You have to work more for the banks!

Mental Health: starting with myself

IMF: How can Eurozone avoid stagnation

Progress in medical research: leading or lagging behind?

iSting: Change Europe with your Writing

19th EU-China Summit: A historical advance in the Chino-European rapprochement

EU-India summit: Will the EU manage to sign a free trade agreement with India before Britain?

Environmental labelling, information and management schemes are central to the circular economy

The ECB still protects the banks at the expense of the EU taxpayers

IMF: Sorry Greece, Ireland, Portugal we were wrong!

How wealthy people transmit this advantage to their children and grand children

European Youth Forum demands immediate action & binding agreement on climate change

Doctors vs. Industry 4.0: who will win?

Draghi will not hesitate to zero ECB’s basic interest rate

EU Commission – US hasten talks to avoid NGO reactions on free trade agreement

China’s New Normal and Its Relevance to the EU

SPB TV @ MWC14: The TV of the Future

Eurostat: Real unemployment double than the official rate

Creating shared value: an opportunity and challenge for entrepreneurship

WEF Davos 2016 LIVE: “We need more Schengen but reinforce control!”, France’s Minister of Economy Emmanuel Macron emphasises from Davos

EU is now giving Google new monopolies to the detriment of European citizens and Internet companies

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 )

w

Connecting to %s