CNBC’s Head of News, one Patrick Allen produced this article (May 10, 2012) – European Central Bank Leveraged Like Lehman
– which several readers E-mailed to me suggesting that there was a
problem that had to be addressed and would prevent the ECB funding
member state deficit increases in pursuit of growth. The only problem I
am afraid to say is the “author” doesn’t know much about the subject
that he is writing about. This, sadly, in a general problem out there in
commentary land. The article was in fact reporting the views of one
Satyajit Das who gets a lot of airtime on national radio in Australia
and elsewhere but perpetuates many of the mainstream myths about the way
the monetary system operates and its limits and propensities. Das mixes
factual statements (which I agree with) with causalities and reasoning
(which I do not agree with). The journalists then build their stories
based on an uncritical precising of so-called experts like Das and the
myths then spread. Let us be absolutely clear. There is no meaningful
comparison between the ECB and Lehman or any central bank and any
private bank. Further, the ECB cannot go broke.
The CNBC article quotes extensively from Das article from April 20, 2012 – Europe’s debt crisis is back – in fact, it never left – where Das informed the Australian readership that:
Continue Reading : http://bilbo.economicoutlook.net/blog/?p=19402
The CNBC article quotes extensively from Das article from April 20, 2012 – Europe’s debt crisis is back – in fact, it never left – where Das informed the Australian readership that:
Economist Walter Bagehot advised that in a crisis, central banks should lend freely but at a penalty rate and secured by good collateral.Of-course, Walter Bagehot was an early editor of The Economist magazine which had been started by this father-in-law. He wrote the now-famous book – Lombard Street in 1873, which explored banking and finance in an international setting.
The ECB does not appear to have quite understood Bagehot’s commandment. The rate is below market rates, amounting to a subsidy to banks. The ECB and eurozone central banks have loosened standards, agreeing to lend against all matter of collateral.
In effect, the ECB is now functioning as a financial institution, assuming significant credit and interest rate risks on its loans.
If the European Financial Stability Fund (EFSF) was a Collateralised Debt Obligation, the ECB increasingly resembles a highly leveraged bank.
Continue Reading : http://bilbo.economicoutlook.net/blog/?p=19402
