The recently adopted quantitative easing (QE) approach by the ECB, in concert with the negative deposit policy rate (NDPR) introduced last summer, has set off a number of nested disequilibrium dynamics that may unwittingly introduce a material increase in systemic risk for the eurozone, and perhaps beyond.
Lord Keynes anticipated what he termed a “euthanasia of the rentiers”, as he expected active monetary policy would be successful in reducing long-term interest rates, and the share of the population living off of bond coupons would eventually just wither away. By way of contrast, if the following assessment is correct, Draghi may have signed a mutually assisted suicide pact with finanzkapital in the eurozone.
The logistics of implementing QE (including questions about whether there are enough bonds for the ECB to purchase, as well as the related market “liquidity” concerns), or whether or not QE represents what Lord Turner refers to as “open monetary financing”, are not the real problem, or at least not the most compelling ones. Rather, the implementation of QE with a large and increasing share of the bond market displaying negative yields to maturity (NYTM) presents a number of serious challenges to financial stability in the eurozone.Naked Capitalism
To cut to the chase, the ECB’s QE and NDRP measures may be setting investors up for a discontinuous price event, much like what was experienced in the equity market meltdown back in October 1987. Even if a disruptive yield spike is avoided, or even contained and reversed by ECB heroics, pursuing QE under NYTM market conditions may lead to a significant dampening down of bank and insurance company profitability. In the extreme, the solvency of key eurozone financial institutions could once again come under question. This could further complicate the ECB’s chances of achieving their 2% inflation goal, as it may dampen the bank lending channel as a key transmission mechanism for unconventional monetary policy.
The entire set up, in other words, begins to take on many of the characteristics of Andrew Haldane’s Doom Loops. In this case, however, the ECB may unintentionally be setting off nested Doom Loops that will feed on each other, and thereby magnify systemic risks quicker than investors and policy makers might otherwise imagine possible. Below is a concise sketch of the main elements of the Doom Loop dynamics the ECB may have set in motion.....
Rob Parenteau: Draghi’s Doom Loop(s) – More Than Just the Euthanasia of the Rentiers
Rob Parenteau
7 comments:
My "concern" is for the operating balances needed by the ECB and the member NCBs, IMF in this environment .... these might dry up... might create a political crisis if so....
Could become "euthanasia of the institutions...."
"Could become "euthanasia of the institutions...."
Which is what needs to happen..... but what you replace them with, because they will be replaced, matters and Im not sure I like the people who would be in charge of replacement
Theres a part of me though that just wants to see these guys royally f@ck it up (as if they already haven't) because they really want to keep most of it under control and they WILL lose control of it possibly. This could get uglier than even they want.
There is no doubt in my mind that "they"have wanted this hardship on everyone else but when the hardship spreads to them...... sh!t gets real!! as the boyz say.
"Never let a crisis go to waste."
motto of disaster capitalism
Greg yes I share some of the same concerns...
Right Tom they will botch the whole thing and yet somehow come out of it better than they went in!!!
No mystery there. As long as they hold the power, they will make others ("the little people") eat their mistakes and screw ups.
The mistake here I feel as I posted on NEP is that he hasn't taken into account the Primary Dealers and the requirements placed upon them to make markets.
So when if the ECB removes its bid, then the Primary dealers have to bid - and trigger any liquidity management backup protection they have, which will normally be routed by the NCB in the territory of the nation in question.
It's very important to remember in the Eurozone that the ECB isn't the sole source of Euros. The NCBs can, to a limited extent, create them as well by expanding their own balance sheet.
Neil,
Does the "ECB" have an actual trading desk?
rsp,
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