Trichet May Rewrite ECB Rule Book to Tame Greek Risk … European Central Bank President Jean-Claude Trichet, who capitulated on a January pledge not to relax lending rules for the sake of one country, may have to sacrifice more principles to prevent Greece from bringing down the euro. Trichet yesterday diluted rules for the second time in a month to guarantee the ECB will keep taking Greek government bonds as collateral for loans. The central bank may have to extend that to other nations, renew a program of lending unlimited cash to banks for a year, and even start buying government debt if the 110 billion-euro ($146 billion) bailout plan for Greece fails to stem the euro's slide, economists said. "Rather you break the rule book than the euro area," said Jacques Cailloux, chief European economist at Royal Bank of Scotland Group Plc in London. "We're far from being out of the woods. There is now a real opportunity for the ECB to take the lead." – Bloomberg
Dominant Social Theme: Emergency measures are absolutely necessary.
Free-Market Analysis: It is often a bit hard to figure out what is going on in the domain of high finance because the reporting is nearly impermeable. But if people understood clearly, they would probably be enraged. This article from Bloomberg is a case in point. What it really is reporting is that the ECB will print as much money as necessary to fund the Greek government so long as the larger market is unwilling to lend to Greece. While it may work for a while, funding government deficits by printing money out of thin air simply increases inflation and eventually promises significant price inflation. And this will create other problems that the article hints at. Here's some more from the article, also excerpted above:
"Despite fundamental differences, it remains impossible to rule out a self-fulfilling crisis," UBS AG Chief European Economist Stephane Deo wrote in a research note to clients. "To the extent that markets become illiquid the ECB would have to respond." The next response to a broadening loss of confidence in euro-area finances would be for the ECB to channel cash through banks, either by lending them more for longer in its regular auctions or by weakening collateral rules further, Deo said. Another option would be to accept bank loans to governments as security, he said.
The bank's policy makers may move as soon as their May 6 meeting in Lisbon to reintroduce unlimited three-month loans, Citigroup Inc. economists led by Juergen Michels said today. The ECB may have to go even further and buy government bonds if it is to stabilize financial markets and avoid a return to recession as governments slash spending to appease investors, said David Owen, chief European economist at Jeffries Group Inc. in London. "There is a good chance the ECB will ultimately have to resort to quantitative easing," he said.
Harvinder Sian, a senior fixed-income strategist at Royal Bank of Scotland, wrote in a report today that "markets should be alert to the risk of ECB bond buying, as early as today." While the ECB is prohibited from buying assets directly from authorities, it can buy them on the secondary market. Trichet said on May 2 that "at this stage, we have absolutely no decision on the purchase of government bonds."
Such a strategy remains unlikely because it would be a "red line which the German government would not allow to be crossed," said Marco Annunziata, chief economist at UniCredit Group in London. "Purchases of government bonds would be a straight monetary financing of excessive fiscal deficits, which is anathema to the Bundesbank and German government." Still, the ECB said yesterday that it would accept all Greek government debt as security when lending to banks, reneging on Trichet's pledge in January that it would not loosen lending requirements "for the sake of any particular country."
The last paragraph is the really important one. It is telling us that if the ECB starts to print money to buy Greek bonds that no one else will buy, the Germans, collectively (having had too much experience with the terrors of price inflation in the past 100 years), will take some sort of definitive action (maybe seek to pull out of the EU?). Of course, it won't be socialist German leaders who will initiate the action. The electorate will drag them into it.
The kinds of draconian measures that the ECB is contemplating reminds us that the crisis is far from over. It all sounds so official, so complex and so … necessary. But what is the reality? The reality is that what is being contemplated is printing money out of thin air to pay for Greek government profligacy. The Greeks have promised themselves many wonderful things that they now cannot pay for. And the EU is going to step in and buy Greek bonds with electronic money that has no intrinsic value.
A small group of men got together about 50 years ago to set up the European Common Market to ensure that nothing like World War II would ever happened again. Despite other hypotheses, we believe the group was driven by an Anglo-American axis that wanted to see Europe consolidated under a single currency and political system. In any event, the EU has been built up in the modern era using numerous lies that have disguised the true intentions of its leaders. At every critical juncture, Europeans were assured that ambition was to create a functional economic union. In fact, such a union would not work without political integration. And those at the top knew it.
The EU elites created a common currency that could not outlast a serious economic downturn. They basically patched together a bunch of dysfunctional and debt ridden national currencies, all in the hope of creating a false illusion of strength. The ultimate idea was that a financial crisis would force the EU to become a political as well as an economic force. While that is taking place today, the Internet and the technology of advanced communications has made it very difficult for the elite to promote the necessary dominant social themes that would justify the kind of political action that is necessary. The patchwork currency-quilt is starting to unravel and the warm fuzzy feelings associated with being in bed with the EU along with it.
The EU, in our opinion, encouraged the socialist profligacy that has led to current account deficits. The leaders of the EU knew that the stability of the currency would inevitably create a temptation to leverage additional government spending, especially for Southern EU countries. This was supposed to create a crisis to lead to a more political union. But now the crisis has seemingly backfired. To combat it, the EU is willing to print as much money as it needs to float the Deficits of the Profligate.
What we see from this is that the crisis itself was manmade – intended to further consolidate wealth and control in the hands of those who stand in the shadows and run Europe nonetheless. Further, we see the powers-that-be are willing to print money out of nothing to ensure that the EU does not truly go bust. This is what the Bloomberg article is telling us in its impenetrable manner.
The media and the academic institutions that provide the justification for this sort of financial system are as much as fault as the EU itself. The entire program – along with the culture of the European professional upper classes – seems positively Swiftian. It piles absurdity upon absurdity and then through various devices and creative communication attempts to create complexities in the hopes that people won't see through to what is really going on. But such strategies seem to be working less well these days.