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.

the sting Milestone

Featured Stings

Can we feed everyone without unleashing disaster? Read on

These campaigners want to give a quarter of the UK back to nature

How to build a more resilient and inclusive global system

Stopping antimicrobial resistance would cost just USD 2 per person a year

The 5 lessons from New York Climate Week to help us combat deforestation

No agreement in sight on EU budget

European Commission launches EU-wide public consultation on Europe’s Beating Cancer Plan

Why collective action is the key to saving our forests

Who may profit from the rise of the extreme right in the West?

Talent is worldwide. Opportunity is not. How can we redistribute it?

UN chief expresses solidarity with Indonesian authorities after flash floods kill dozens in Papua

Who is culpable in the EU for Ukraine’s defection to Russia?

Obama turns the G20 summit into warmongering platform

Cash-strapped cities must look to private partners

“Let hope be the antidote to fear” – Today’s WHO briefing and other key Coronavirus updates, tips and tools

The world’s coastal cities are going under. Here’s how some are fighting back

Closure of borders: Civil Liberties Chair demands proportionality and coordination within the EU

Member States and Commission to work together to boost artificial intelligence “made in Europe”

EU allocates over €22 million to help Palestinians in need

How close is Eurozone to a new recession which may trigger formidable developments?

How fintech is setting Southeast Asia’s SMEs free

Eurozone: Despite anemic growth and shaky banks marks record trade surplus

Survivors of ISIL terror in Iraq want justice, not revenge, says head of UN investigation team

We need to talk: UN gears up for 75th anniversary with Global Conversations

Europe rethinking its severe austerity policies

World cannot be transformed without ‘ingenuity of the countries of the South’: UN Chief

The West and Russia accomplished the dismembering and the economic destruction of Ukraine

COVID-19: lessons from Italy on public-private healthcare procurement

3 technologies that could define the next decade of cybersecurity

4 steps for looking after our mental health during these unsettling times

Politics still matter in the US but not in Europe

It’s Trump’s anti-globalization and inward-looking rhetoric that perturbs GOP and US

Brexit: MEPs concerned over reported UK registration plans for EU27 citizens

A young doctor from Glasgow reports: in the UK refugees are left to rot

More children killed by unsafe water, than bullets, says UNICEF chief

Coronavirus – here’s the public health advice on how to protect yourself

Health spending set to outpace GDP growth to 2030

Everyone has ‘a moral imperative’ to uphold the rights of persons with disabilities, says UN chief

OECD warns global economy remains weak as subdued trade drags down growth

Eurozone officials play with people’s deposits and minds

The US reject EU proposal for prudential financial controls

A record number of people will need help worldwide during 2020: Global Humanitarian Overview

Global hunger is on the rise. These simple steps could help eradicate it

Deal on tightening the rules to stop terrorists from using homemade explosives

DR Congo elections: ‘Excessive use of force’ in campaign must be avoided, says Bachelet

It’s time to move: 5 ways we can upgrade our SDG navigation systems

Can free trade deliver cheaper renewable energy? Ask Mexico

India’s agro-food sector has made strong progress, but a new policy approach is needed to meet future challenges, says new report by OECD and ICRIER

As urbanisation grows, cities unveil sustainable development solutions on World Day

Sovereign wealth funds could increase equality in a post-COVID world

How migrants who send money home have become a global economic force

Online radio and news broadcasts: Parliament and Council reach deal

European Business Summit 2013: Where Business and Politics shape the future

Global Trade Identity can be the cornerstone of paperless trade

FROM THE FIELD: Changing world, changing families

ECB bets billions on Eurozone’s economic recovery

Global Leaders Take The Stage At MWC Shanghai 2019, in association with The European Sting

25 years on from landmark conference, millions of women and girls still in danger: UN deputy chief

New El Salvador law, a victory for forced displacement victims: UN refugee agency

How Big Food is responding to the alternative protein boom

How Eurozone consumers spend their income when they have one…

Health services for Syrian women caught up in war, foster safety and hope: UNFPA

270 million people are migrants, who send home a staggering $689 billion

UN chief welcomes ‘positive steps’ towards peace between Eritrea and Ethiopia

More Stings?

Advertising

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