Mario Draghi spoke, last Thursday, and everyone must have thought his announcements were important... because right after his speech, stock markets went up and the euro fell against the dollar! What caused this abrupt temperature rise in the markets? Let’s recall the announcement: The base rate goes down from 0.15% to 0.05% (who can believe this will change anything?) and the deposit rate for banks depositing with the ECB goes down from -0.1% to -0.2% (the intent of which is to discourage banks from depositing and encourage them to make loans to businesses)... Again, no one thinks that this could jumpstart credit.
Then comes the important announcement: the ECB will buy new assets, starting this October, and will do so in large volumes. The European central bank will be acquiring asset-backed securities, or ABSs (business credit, commercial notes, real estate loans etc.). This is called securitization: the bank puts together small business loans in a “package” that becomes, thusly, a new autonomous financial product generating money flows (loan payments from businesses) that it sells back to the ECB in order to recuperate some liquidity. As a funny aside, the U.S. equivalent, in real estate, was the “subprimes”... The ECB will also be buying bonds issued by banks (a bank may finance itself by issuing bonds, like a corporation or a sovereign country).
This makes it very interesting for banks, for two reasons: one, unload some of their bad loans and, two, raise some fresh money, all thanks to the ECB. And, in order to finance this asset buying, the ECB will, of course, create money out of thin air... After the LTROs and other bailout plans for banks, the ECB keeps on going full steam ahead with “quantitative easing”.
The amounts announced are quite high and they will push the ECB’s balance sheet from 2 trillion euros to 2.7 trillion, or 700 billion euros more of assets, most of which are of an average or unsound quality... On the other hand, this represents 700 billion euros of fresh money for the banks, and this money will not be used for loans to businesses, with the economy in stagnation, but rather for their profitable “market banking” sector. This is why markets liked Drahi’s announcement: because it will not create growth, but it will create bubbles, for sure.
In so doing, the ECB is going against Germany, the staunch guardian of monetary orthodoxy, at a time when the all-new anti-euro party (AfD) is making its first electoral gains. Angela Merkel, seeing her party and its conservative allies being attacked on their own ground, cannot accept that. It will be interesting to watch her arm-wrestling with Mario Draghi.
There is another problem that needs to be addressed, that of the deep conflict of interest of the ECB: In order to fulfill its banking supervision mission, the ECB will begin to evaluate the balance sheets of European banks in November. It will be judge and party, comptroller, with the power to force a bank to re-capitalise while, at the same time, will be the one with the liquidity to buy their assets. This is exactly the process by which things degenerate into bubbles and crashes, when there is too much concentration of power, there is hardly any counter-power in existence, and when market logic makes way for crony capitalism. Mario Draghi is leading us on a more and more perilous road.