Monday, January 27, 2014

What Could Go Wrong? Only Danger Is The High Probability Of (Trying To) Return To A Feudal Serf System. :(

(Commentary posted by Roger Erickson)




Warren Mosler: ECB proposals to buy loans to households and companies
"This is highly problematic.
If the ECB takes the risk, there is extreme moral hazard. 
If they don’t, [it's likely that net lending to consumers] won’t increase:"

Surely there are OTHER ways to raise aggregate demand among consumers? More income? Less taxes? Less fees? Less incentives to save excessively? Yada, yada? More Public Initiative?

Who runs these countries? The public? Or the public's nominal accountants?


10 comments:

Unknown said...

Would someone please explain what the reason(s) the ECB has in buying tranches of private sector bank loans to ward of deflation?

Deflation is already evident in several of the periphery nations of the EMU is it not?

Secondly, if there isn't any demand for loans due to lack of credit-worthy customers does this mean another wave of "liar loans" which the banks can roll over to the ECB sans recourse?

Tom Hickey said...

Warren says damned if they do (moral hazard) and damned if they don't (demand collapses and deflation sets in). Rock and hard place.

Matt Franko said...

good points Seve... I dont know if they have the equivalent of the GSEs over there to buy conforming housing loans... perhaps the ECB is going to perform this function for Europe..

If these loans go bad and they are all at the ECB I dont think there would develop a "banking crisis" ultimately... unless the banks STILL get caught with enough on the BS in transition to wipe them out...

rsp,

googleheim said...

What would Alexander de Tocqueville say/ do?

Jose Guilherme said...
This comment has been removed by the author.
Jose Guilherme said...

This intervention by Draghi at Davos really tells us a lot about the workings and mindset of the EU/eurozone of today.

Let's see what the guy’s proposal is: thousands or millions of Bank loans will be securitized, that is, collected and then divided into several packages (per criterion of risk, maturity, etc) so that banks may sell them back to the ECB, presumably at a profit for them (and thus escape the risk of companies failing to pay back the loans).

This is called creating a market for a new financial product. And the ECB will thus be the effective lender of last resort to thousands of companies. At the very least, it will be present at the end of the food chain: maybe the banks will keep collecting the interest paid by the companies that borrowed the money and then forward the sums to the ECB to preserve appearances.

It is this that Draghi wants. The ECB will become the LLR for companies and will encourage the banks to continue always to lend to them, in the knowledge that if something goes wrong the ECB ensures the value of the securities as a buyer of last resort.

But contrast this with the attitude of the ECB towards elected bodies, such as, you know, governments. Draghi doesn't want to have the ECB as a creditor or LLR to mere governments. No way, sir, that would be terrible. Governments will thus run the risk of becoming bankrupt one day - that should be even considered a “good” risk, because governments not guaranteed by their own central bank will be fated to obey all of the ECB’s philosophical diktats, including the duty to practice forever the religion of austerity.

Can you imagine what would happen if the Fed were to announce that from tomorrow it may not buy any Treasuries, but will instead proceed to a new type of open market operations: buying up bank’s loans?

I guess Janet Yellen probably wouldn't survive the mere announcement of such an intention, let alone its implementation. But in the new Europe being built today things are different from the U.S. where the Fed - for all its failings and shortcomings - is still a creature of an elected body (Congress).

In Europe, the ECB’s President is immune to criticism, with the possible exception of criticism coming from elements even more conservative than him.

Question: what can one say of a continent in which an individual chairing an unelected and unaccountable central bank can freely take the political initiative in matters of such importance – and this without raising even a murmur of criticism? (Mosler is American; on the European continent the musings of Draghi were mostly received with deafening silence).

Tom Hickey said...

Yeah, it's pretty breathtaking. I have been saying for some time that central banks stand at the pinnacle of a command system managing economies through monetary policy formulated by a small cabal of unelected and unaccountable "experts" who, it is argued, must be politically independent in order to operate efficiently and effectively. This is one of the cleverest hoodwinks in history, and this move shows it up for what it is, a power grab by oligarchs.

googleheim said...


Does anyone here at this blog run a business besides Mosler ?

This is called SBA loans where the government backs them.

The Germans will just use it as a way to attack what little liberty there is and use the ECB backing as a pretext to look for tax dodgers and graft and lose the whole point of moving forward.
That's because they are just mean like that.

On the other hand, the righteous right here in the USA who want to shut down the IRS and eliminate taxes all together want to shut down the SBA, dept of education and state department and Fed since they are all "unconstitutional."

What Draghi is doing is making a Small Business Admin backing for all loans big, middle tier, or small.

Roger Erickson said...

That's a good way to put it, gh.

The devil, as always, will be in the operational details, aka, the loan terms.

For what types of loan-terms will the ECB buy loans?

What is the process for unwinding asset ownership after bankruptcy or default?

That's most of what matters?

Depending on the terms, SBA-like, [gov?]-backed loans can either increase of decrease wealth disparity.

After reviewing context, it still looks a lot faster/leaner/better to just reduce taxes, increase Public Initiative and let DISTRIBUTED decision-making guarantee net outcomes.

It's ironically odd how capitalists supposedly set on the "price-mechanism" end up so dead-set on corporate racketeering and fascist price-fixing.

Capitalism without democratic checks & balances is like a fight-or-flight reflex without a neocortex. Great at HOW, but miserably failing at WHY.

Tom Hickey said...

The neoliberal presumption is that this should be done through the central bank acting as LLR and guarantor of the banks rather than of the nations that comprise the EZ. The latter would be the democratic solution, to which neoliberalism is opposed in that neoliberalism demands "market-based" solution by the private sector — backed by the central bank controlled by bankers, if anything should go wrong. But what could go wrong, right?