Ask the boss

Nicolas Sarkozy, French president, on Friday outlined what he expected would happen as a result of the central bank’s move.

“Italian banks will be able to borrow [from the ECB] at 1 per cent, while the Italian state is borrowing at 6-7 per cent. It doesn’t take a finance specialist to see that the Italian state will be able to ask Italian banks to finance part of the government debt at a much lower rate.”

The article is here.  My earlier comments, sadly neglected by an otherwise attentive blogosphere, were here.


In other words, this is yet another bailout for the banks.

Isn't that what modern economies are for?

If by economies you mean states, then yes. The state exists to help protect rent seekers.

Ok... So how long until the ECB is technically insolvent?

Aound the same time as the Fed.

Is it possible that the ECB tacitly got Italy to promise that it won't engage in that practice as a pre-condition to opening its spigot? Of course, what's an Italian's word worth; but may not be too darn bad in the short run.

"the Italian state will be able to ask Italian banks to finance part of the government debt at a much lower rate."

After the banks get their vig of course.

And in reply to your previous post:
"Is this transfer of the subsidy to the sovereign a bug or a feature of the plan?"

What of the ECB's structure that gives private banks preference over its own member states? Is that a bug or a feature?

I take the FT on a Saturday. I'll be interested to see whether Cameron's action has driven the FT's euro-lickspittle journalists wild with rage.

Sarko's played a blinder, so far. Outfoxed Merkel on the Treaty by cornering Cameron.

"Italian banks will be able to borrow [from the ECB] at 1 per cent, while the Italian state is borrowing at 6-7 per cent. It doesn’t take a finance specialist to see that the Italian state will be able to ask Italian banks to finance part of the government debt at a much lower rate."

So the banks and state will own each other. This is the end result of state-run fiat money.

From EU Council this morning:

"euro area and other Member States will consider, and confirm within 10 days, the provision of additional resources for the IMF of up to EUR 200 billion (USD 270 billion), in the form of bilateral loans, to ensure that the IMF has adequate resources to deal with the crisis. We are looking forward to parallel contributions from the international community"

"We are looking forward to parallel contributions from the international community" OF COURSE YOU ARE.

I always thought the IMF's charter was for developing nations...not freeloading southern Europeans.

No, the IMF is about saving fixed exchange rates. Thus, it is indeed about freeloaders.

No, the IMF is about protecting banks, and bondholders, and lenders. And, if they can get the state to pay for the banks problems, ala Ireland and Iceland, so much the better.

Hey, you should be happy. The EU is committed to austerity. They will surely prosper when the next crisis appears, as they will quickly cut their spending to arise from the ashes.

The EU is the land of Austrian economics. Be Happy. All will be well because they have committed to balancing their budgets by constitutional means.

I am going to readjust my portfolio. To lighten up on Europe.

im confused. where in Austrian economics is there support for a central bank? or is this some kind of snark that only Keynesians can understand?

No snark. Just ask yourself this question: is the fiscal policy the EU is now committed to follow one which will increase or decrease instability. Ask yourself this question: if there is a recession, what is the fiscal policy of the EU at that point.

Hoover policies.

Remind me what the alternative to austerity is when you are, say, Italy, your debt is at 120% of GDP, and your interest rate is at 7% and rising. Is it to borrow your way to 150% of GNP at 9%?

Print money just like Sarkozy expects the ECB to do. You will never get Bill to understand just how ridiculous his argument really is.

Further, it is their job to match the money supply to the level of GDP and the potential for growth. It's really weird to claim that a shortage of money supply, if that is the bottleneck, is an Austrian position. I kind of doubt even Hayek thought that when people talk about his lack of appreciation of deflation. Give us the power to manage money and then we can talk. Until then, this is the government's. Just because they are doing it wrong in the same direction we would advise BEFORE the debt spiral doesn't put it in our lap.

The alternative is defaulting, leaving the EU and striking out on your own. No democracy is going to tolerate a decade of deflation and stagnation just to make bondholders and Eurocrats happy. Bond markets seem remarkably willing to forgive sovereign default after a few years.

Of course, the even scarier scenario in contained in the "no democracy" part of that sentence -- some attention was devoted to the fact that the Greek PM was shuffling around military generals when austerity was in the news.

In short, the answer to the question "how much worse could it get" for the peripheral countries is "a lot."

Yancey, Andrew, and FE: For all of my children this Christmas, I am going to give them some clothes of the same size in honor of the the EU's agreement.

Hoover increased government spending and decreased (drastically) the money supply. The EU is trying to do the exact opposite.

Norman, We can get into a debate on the magnitude of Hoover's spending, but you can't say the ECB has increased the money supply.

If the ECB really does monetize like Sarkozy expects, it is time for Europeans to start putting their savings somewhere else.

' is time for Europeans to start putting their savings somewhere else.'

Europeans already do - just look at what Italians put their savings into - it has even been posted here several times. Basically, Italians place a major part of their savings in real things - their house, for example. The Italians are quite typical that way - most people prefer real things as savings in Europe, at least in my experience.

That is because 'fiat' is not some new term that is frightening people who never thought it would apply to the pieces of paper they considered money. For a trivial example, one locally prominent former software executive has a minor part of his portfolio sitting in a professional hockey team, and another somewhat larger part in a professional soccer team - it combines revenue, enjoyment, and status in one simple package. And functions equally well using marks, euros, dollars ....

Isn't your idea of using "houses" as a store of value iffy? I can think of many alternatives to fiat money more stable and liquid than a house.

'Isn’t your idea of using “houses” as a store of value iffy?'
No - property means not paying rent, which can further mean renting out to others for a stream of income, or if a larger household (think multi-generational), thus increases the resources available for the household.

It is a very basic, almost primitive perspective, found pretty much throughout all of Europe, though with a number of regional variations (urban/rural, as an example). And it is one that has survived, more or less, over numerous centuries, over a wide number of forms of government, not merely governments themselves, easily 20 forms of currency in a place like Florence (around 2-3 changes of currency per century - almost absurdly low, though one can argue about the role of gold for several of those centuries, when things like double entry bookkeeping and continent spanning banking were being introduced).

The store of value of a house is of having somewhere to sleep and eat - it's pretty basic, and has nothing to do with 'money' if one considered money to be a plaything - as many commenters here seem to, without thinking out the implications (or maybe some are just smart to realize they haven't thought out the implications, and that is a scary prospect - Italians, for example, have had centuries of dealing with such things, and the implications are extremely well known, to the point of yawning boredom).

Now imagine you'd heeded this advice circa 2005 and invested all your savings in an extra American house. An house to live is fine; but as an investment needs abundant caution.

Savings, by definition, has to be about cash liquidity preference if these discussions are to mean anything. If people choose to hold real estate, that is not savings because to do so they have to put the cash into circulation.

I heard the Spanish housing market wasn't a good place to put your money into.

Well, has eurogeddon happened yet? Because someone forgot to tell the foreign exchange markets, which have made the euro worth about 1 cent more than when eurogeddon was predicted -

A result that I'm fairly certain is not a good one. All things equal, I would not be surprised if there were have been restrained exclamations of joy is the euro had sank a good 5% or more - but the race to the bottom for competitive advantage in currency manipulation isn't working as well as it used, apparently. Even with all of S&P most dire public pronouncements.

Well since, as you point out, everyone is racing to the bottom, where else is there to put it. If the ECB collapses there won't really be any safe harbor, and this action at the very least puts armageddon back by n days, so if you think about it the euro is in better shape today than it was last week.

I really don't understand this silly long termism that everyone seems so focused on, the long term seems to have very little to do with prices when everyone thinks everything is crap.

This whole thing is just fascinating. Is the eurozone really moving so fast that they didn't notice the line they just crossed? The one where they surrendered a major part of the sovereignty they had left to Germany... -ahem-, I mean the EU? Arguing whether austerity is an acceptable course for Italy at this point sort of harkens back to a similar discussion in '37 or so. I mean sure, this new plan might keep the trains running on time, but didn't we already go down this road once?

Props to Cameron. Britain may have lost some clout in the EU, but it's stronger in the end, because they still have sovereignty. Decisions about British fiscal and financial policy are still theirs to make.

Check back in a few years and ask whether it made the slightest difference. I'm guessing as soon as it becomes sufficiently painful, they will ignore the EU rules (again).

Sovereigns can't be compelled. I think that's going to be lesson everyone looks back on in the end.

+1 Why should Britain, with its own currency, decide to surrender it sovereignty for no reason.

Although I don't like the ECB giveaway to private Italian banks, if that's the political cover they need to actually start lending, it's well worth it. The end result is not that positive in the group maximizing sense, but game is mostly over -- Germany got what they wanted, France kept its head above water and the new money and the austerity will be enough to keep a lid on the speculators.

Moral hazard for all! Hurray!

Seriously though, how long before this dissolves into money-printing to finance the welfare state? I'm betting 2-5 years. There just aren't any disincentives large enough to sway sovereigns.

The EU is saying: We don't trust our banks, or the market, for our banks to properly value a sovereign bond when they purchase it.

Ever thought about what the EU banks were thinking when they had a "good buy" to buy "cheap" Greek bonds to beef up their AA asset class.

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