Draghi strives to control the unruly exploitation of financial markets by banking leviathans

Photographers aim their cameras at ECB President Mario Draghi (on the right), who is about to start his Press Conference of Thursday 8 March. Markets and money loving news groups will use the photos for their own purposes. (ECB Audiovisual Services, some rights reserved).

During the past few weeks, financial markets sharks have been sending stock and bond prices and money parities wildly up and down, while busy securing for themselves hefty short term gains. Obviously, this is to the detriment of the real economy, where values are produced by technology and sweat. In Europe and, partly, in the US, market volatility was based on the vague prospects, about what the European Central Bank was to decide about its extraordinary monetary policy measures. The bank’s Governing Council was set to be convened on Thursday, 8 March to clarify the matter, as it’s President Mario Draghi finally did on that day.

However, Draghi sensing this unruly appetite for easy gains by global ‘investors’ aka the major banking conglomerates, had in time tried to clear the foggy financial landscape. On 26 February at his regular appearance before the Committee on Economic and Monetary Affairs of the European Parliament, he had concluded “In fact, the evolution of inflation remains crucially conditional on an ample degree of monetary stimulus provided by the full set of our monetary policy measures: our net asset purchases, the sizeable stock of acquired assets and the forthcoming reinvestments, and our forward guidance on policy interest rates”.

ECB steady on course

In a few words, nothing is to change with ECB’s extra accommodative monetary policy in the foreseeable future. Yet, the financial sharks chose to ignore this plain statement and decided to focus on a tiny detail. They were aided in this by major global news groups. Market media started ‘wondering’ if Draghi – in his introductory statement during the Thursday 8 March afternoon Press conference – was to retain a phrase about ECB’s preparedness “to increase the size of the €30-billion-a-month program if necessary”.

On this base and according to various ‘predictions’, markets oscillated widely leaving good profits for the big banking sharks. Finally, Draghi didn’t repeat this phrase. Economically and literally though, he gave more than enough clear reassurances, about ECB’s policy measures to continue as decided many months ago. The euro/dollar parity and the other financial markets returned to levels or below the agitation days, leaving in the between the banks with sizeable gains.

€30bn a month

The probability, however, for the ECB to increase its monthly purchase program is actually nonexistent. Draghi has indirectly ascertained that the Eurozone economy has achieved a strong and sustainable growth rate and it just needs the right level of monetary support. For this reason, the ECB at the end of last year had corrected its policy. It decided to reduce its monthly program of money injections (asset purchases program– APP) into the economy to €30 billion a month, from €60 bn.

No extra liquidity

Not a chance then whatsoever to increase the size of APP, at least not under the prevailing long term tendencies. In any case, if such a necessity appears, after say a major disruption of the current economic conjuncture, it goes without saying the central bank can rush to change its course. In conclusion, no reason to keep repeating the phrase, ‘the central bank can increase the monthly money injection program (asset purchases) if need appears’.

Of course, the wording of central bankers’ statements is watched very closely both technically and even grammatically. In view of that, last Thursday Draghi clearly stated “we confirm that our net asset purchases, at the current monthly pace of €30 billion, are intended to run until the end of September 2018, or beyond, if necessary, and in any case until the Governing Council sees a sustained adjustment in the path of inflation consistent with its inflation aim. The Eurosystem will continue to reinvest the principal payments from maturing securities purchased under the asset purchase program for an extended period of time after the end of its net asset purchases, and in any case for as long as necessary”.

Zero interest rates

In reference to the interest rates level he confirmed “we decided to keep the key ECB interest rates unchanged. We continue to expect them to remain at their present levels for an extended period of time, and well past the horizon of our net asset purchases”. These are perfect examples of ECB clear cut forward guidance, but ‘investors’ always vie to extract something more out of everything.

In short, Draghi’s presently applied accommodative monetary policy is here to stay (well past the horizon…) as it has been formulated during the past months and years: “the current monthly pace of €30 billion, are intended to run until the end of September 2018, or beyond, if necessary”. He also reiterated that the “key ECB interest rates (to remain) unchanged… at their present levels for an extended period of time, and well past the horizon of our net asset purchases”.

€2.5tn is enough

Al in all, the ECB will continue to finance Eurozone with a total sum of cash of around €2.5tn and also refinance the euro area banks at zero interest rates. These are precisely the key characteristics of ECB’s extraordinary monetary measures, guaranteed to remain in place “for an extended period of time”. Let’s see if this constitutes a change of course in relation to what Draghi had said after the previous Governing Council meeting.

On 25 January Draghi had stated “we stand ready to increase the asset purchase program (APP) in terms of size and/or duration’. He had been repeating this phrase for years. Last week, he just didn’t repeat the word “size”. This is in line with the generally accepted assessment that the euro area doesn’t need additional monetary stimulus. In view of that, and in order to reduce to the lowest possible level the exploitation of this omission by the market sharks, he took the pain to explain to Parliamentarians in details that ECB’s policy is to continue uninterrupted, supporting growth all over the euro area and not only in the North.

Alas, the financial markets and the banking leviathans which ‘own’ them have become totally uncontrollable, being able to create money values out of nothing, and thus usurping the real economy at will.

 

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