Best of the Week
Most Popular
1. Ray Dalio: This Debt Cycle Will End Soon - John_Mauldin
2.Stock Market Dow Plunge Following Fake US - China Trade War Truce - Nadeem_Walayat
3.UK House Prices 2019 No Deal BrExit 30% Crash Warning! - Nadeem_Walayat
4.What the Oil Short-sellers and OPEC Don’t Know about Peak Shale - Andrew_Butter
5.Stock Market Crashed While the Yield Curve Inverted - Troy_Bombardia
6.More Late-cycle Signs for the Stock Market and What’s Next - Troy_Bombardia
7.US Economy Will Deteriorate Over Next Half Year. What this Means for Stocks - Troy_Bombardia
8.TICK TOCK, Counting Down to the Next Recession - James_Quinn
9.How Theresa May Put Britain on the Path Towards BrExit Civil War - Nadeem_Walayat
10.This Is the End of Trump’s Economic Sugar High - Patrick_Watson
Last 7 days
Gold Stocks Triple Breakout - 15th Dec 18
The stock market fails to rally each day. What’s next for stocks - 14th Dec 18
How Low Could the S&P 500 Go? - 14th Dec 18
An Industrial to Stock Trade: Is Boeing a BUY Here? - 14th Dec 18
Will the Arrest of Huawei Executive Derail Trade War Truce? - 14th Dec 18
Trump vs the Fed: Who Wins? - 13th Dec 18
Expect Gold & Silver to Pullback Before the Next Move Higher - 13th Dec 18
Dollar Index Trends, USDJPY Setting Up - 13th Dec 18
While The Stocks Bulls Fiddle With The 'Fundamentals,' Rome Burns - 13th Dec 18
The Historic Role of Silver - 13th Dec 18
Natural Gas Price Setup for a Big Move Lower - 13th Dec 18
How to Get 20% Off Morrisons Weekly Supermarket Shopping - 13th Dec 18
Gold Price Analysis: Closer To A Significant Monetary Event - 13th Dec 18
Where is the Stock Market Santa Claus Rally? - 12th Dec 18
Politics and Economics in Times of Crisis - 12th Dec 18
Owning Precious Metals in an IRA - 12th Dec 18
Ways to Improve the Value of Your Home - 12th Dec 18
Theresa May No Confidence Vote, Next Tory Leader Betting Market Analysis and Forecasts - 12th Dec 18
Gold & Global Financial Crisis Redux - 12th Dec 18
Wow Your Neighbours With the Best Christmas Projector Lights for Holidays 2018! - 12th Dec 18
Stock Market Topping Formation as Risks Rise Around the World - 11th Dec 18
The Amazing Story of Gold to Gold Stocks Ratios - 11th Dec 18
Stock Market Medium term Bullish, But Long Term Risk:Reward is Bearish - 11th Dec 18
Is a Deleveraging Event about to Unfold in the Stock Market? - 11th Dec 18
Making Money through Property Investment - 11th Dec 18
Brexit: What Will it Mean for Exchange Rates? - 11th Dec 18
United States Facing Climate Change Severe Water Stress - 10th Dec 18
Waiting for Gold Price to Erupt - 10th Dec 18
Stock Market Key Support Being Re-Tested - 10th Dec 18
May BrExit Deal Tory MP Votes Forecast, Betting Market Analysis - 10th Dec 18
Listen to What Gold is Telling You - 10th Dec 18
The Stock Market’s Long Term Outlook is Changing - 10th Dec 18
Palladium Shortages Expose Broken Futures Markets for Precious Metals - 9th Dec 18
Is an Inverted Yield Curve Bullish for Gold? - 9th Dec 18
Rising US Home Prices and Falling Sales - 8th Dec 18
Choosing Who the Autonomous Car Should Kill - 8th Dec 18
Stocks Selloff Boosting Gold - 8th Dec 18

Market Oracle FREE Newsletter

How You Could Make £2,850 Per Month

Crush Labor and Impose Economic Austerity, Draghi’s ECB Real Goal in the Eurozone

Politics / Euro-Zone Dec 26, 2011 - 12:15 PM GMT

By: Mike_Whitney

Politics

Best Financial Markets Analysis ArticleImagine if your banker offered to lend you a $150,000 to make up for the money that you’d lost on your home since the housing bubble burst in 2006. And, let’s say, he agreed to lend you this money for 3 years at rock-bottom rates of 1 percent provided that you post the contents of your garage  (ie. rusty bikes, a bent basketball hoop, an old dollhouse, and rodent-infested luggage) as collateral on the loan.


Would that seem like a good deal to you?

On Wednesday, the European Central Bank (ECB) made this very same offer to over a hundred underwater banks in Europe, awarding them $640 billion (489 euros) in dirt-cheap 3-year loans in exchange for all manner of dodgy collateral for which there is currently no market. Now you, dear reader, know that when you try to sell something on Craig’s List and there’s very little interest; you have to drop the price in order to attract a buyer. That’s just how supply-demand dynamics work in a free market, right?

Au contraire. In fact, this rule never applies to bankers. When the junk assets on a bank’s balance sheet begin to fall in value, the banks just ring-up their big brother at the ECB or the Fed and demand a bailout, er, I mean, “swap liquidity for collateral that is temporarily impaired.” But the truth is, the garbage that the banks have accumulated–particularly the sovereign bonds from Italy, Spain, Greece, etc–is not merely “impaired”. These bonds will never regain their original value because the loans were made at the peak of a bubble.  So, there’s as much chance that Greek bonds will bounce back in three years as there is that that tacky $650,000 McMansion you bought in Encinito in 2005 will claw its way back to par.

That’s not going to happen.

So, the $640 billion that the ECB forked out on Tuesday, is basically a whopping-big gift to the banksters that will probably never be repaid. And if you have any doubt about this, then just take look at the Fed’s balance sheet which has exploded to nearly $3 trillion. You’ll notice that the $1.45 trillion in mortgage-backed securities (MBS) that Bernanke bought from the banks two years ago has not gone down at all, mainly because no one in their right-mind would buy these turkeys. And, if the Fed were to put their stash of MBS up for auction; the sale would further depress the assets on the banks balance sheets triggering another financial crisis. (In fact, this actually happened about a year ago when the government experimented with bonds from the AIG fund. Not only did the auction fail, but it also sent the equities markets into a nosedive) So, just as the Fed will eventually have to account for the losses on their pile of MBS,  so too will EU banks have to writedown the losses their sovereign bonds. That will push many of the banks into bankruptcy, which will undoubtedly trigger another round of loans. When financial institutions are insolvent, their only choice is to extend and pretend. Obviously, the ECB sees its job as helping with this fakery.

This is a familiar pattern with central banks. They create the easy money and loose regulatory environment where bubbles emerge, and then they provide “limitless” liquidity so their friends don’t lose money on the inflated value of their assets. That’s what Tuesday’s  $640 billion boondoggle was really all about, propping up toxic bonds that are worth a mere fraction of their original value.

So far, though, Draghi’s Long-Term Refinancing Operation (LTRO) has been a spectacular flop. While interbank lending rates have dropped ever-so-slightly (3-month Euribor fell from 1.404 to 1.410 percent), the banks have not been using the loans to buy more sovereign bonds (which would push down bond yields for struggling sovereigns) or to increase their lending.   Instead, they’ve parked a good portion of the money in overnight deposits at the ECB. Here’s the scoop from the Wall Street Journal:

“Use of the European Central Bank’s overnight deposit facility reached a new record high for the year Thursday, suggesting recent measures by central banks and policy makers still aren’t enough to restore confidence in inter-bank lending markets.

Banks deposited €346.99 billion ($453.38 billion) in the overnight deposit facility, up from €264.97 billion a day earlier and a previous high for the year of €346.36 billion, reached earlier this month.

The high level reflects ongoing distrust in inter-bank lending markets, where banks prefer using the ECB facility as a safe haven for excess funds rather than lending them to other banks.

The high deposit level also suggests markets aren’t fully convinced that the ECB’s massive long-term loan allotment is enough to fortify the currency bloc’s banking sector. The central bank extended nearly half a trillion euros in long-term loans to euro-zone banks Wednesday, hoping to ease fears of a new credit crunch as banks struggle to borrow from markets.” (“ECB Overnight Deposits Reach New 2011 High”, Wall Street Journal)

Can you believe it? So, while most of the loans were used to roll over existing debt, $453.38 billion was stuck back in the vaults of the ECB for safekeeping.  In other words, the banks are just as distrustful of each other as they were before the lending facility was launched. And the same is true of the yields on Spanish and Italian debt which Draghi thought would drop after he pumped a half a trillion euros into the banking system. Here’s the story from Reuters:

“Spanish and Italian bond yields crept higher on Thursday and underperformed German debt as markets grew sceptical that banks would use funds borrowed from the European Central Bank to buy lower-rated government bonds.

Banks borrowed a huge 489 billion euros from the ECB at an unprecedented offer of three-year loans on Wednesday, which some had expected to be reinvested in Spanish and Italian debt and help ease borrowing costs.

But, those looking for an immediate boost to Italy and Spain were likely to be disappointed. Traders said the preference was to reinvest some of the funds into safe-haven paper rather than pick up the higher yields on offer from some of Europe’s more troubled states.

“What happened yesterday is not a silver bullet to the crisis… but it is too soon to see the impact yet,” said Niels From, strategist at Nordea in Copenhagen.” (“EURO GOVT-Spain, Italy yields rise; hope of ECB relief wanes”, Reuters)

Unbelievably, the benchmark Italian 10-year BTP rose above the 7 percent mark again on Friday morning signalling renewed stress in the bond market. So while Draghi’s program may have breathed new life into a few teetering banks, it has failed miserably of all its main objectives.

So why has Draghi handled the crisis the way he has?  Why did he sit on his hands for so long while interbank lending slowed,  overnight deposits climbed to new records,  sovereign bond yields skyrocketed, and all the gauges of market stress got so much worse?

The obvious answer to this question is that Draghi’s been using the crisis to pursue his own agenda.  He wants to push through his so called  ”fiscal compact” that enshrines harsh budget discipline and  labor-battering austerity measures into law so that national budgets will come under the control of financial elites (aka–ECB-designated “technocrats”) Naturally, nations aren’t going to surrender that kind of authority without a fight, so Draghi let the crisis get out-of-hand so there would be less resistance. Here’s how economist Dean Baker sums it up:

“The people who gave us the eurozone crisis are working around the clock to redefine it in order to profit politically. Their editorials – run as news stories in media outlets everywhere – claim that the euro crisis is a story of profligate governments being reined in by the bond market. This is what is known in economics as a “lie”.

The eurozone crisis is most definitely not a story of countries with out of control spending getting their comeuppance in the bond market…It is a story of countries victimized by the mismanagement of the ECB….People should recognize this process for what it is: class war. The wealthy are using their control of the ECB to dismantle welfare state protections that enjoy enormous public support”.

Draghi’s real goal is to implement the labor reforms and “adjustments” that big finance demands. He’s already succeeded in deposing two democratically elected leaders in Greece and Italy and replacing them with bank-friendly stooges that will carry out his diktats. Now, he’s on to bigger things, like slashing the social safety net, crushing the unions, and reducing the eurozone to third world poverty.

By Mike Whitney

Email: fergiewhitney@msn.com

Mike is a well respected freelance writer living in Washington state, interested in politics and economics from a libertarian perspective.

© 2011 Copyright Mike Whitney - All Rights Reserved Disclaimer: The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. Information and analysis above are derived from sources and utilising methods believed to be reliable, but we cannot accept responsibility for any losses you may incur as a result of this analysis. Individuals should consult with their personal financial advisors.

Mike Whitney Archive

© 2005-2018 http://www.MarketOracle.co.uk - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.


Post Comment

Only logged in users are allowed to post comments. Register/ Log in

6 Critical Money Making Rules