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).

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.