Mario Draghi, European Central Bank president: Will his
surprise decision
to cut interest rates and embark on large-scale
purchases of asset-backed
securities and others, bring disaster?
ECB Move Tempts Collapse of Global 'House of Cards' (Der Standard, Austria)
"Investors
and banks are becoming increasingly reckless because secure investments no
longer bring returns, so greater risks must be taken. The consequences: The number
of high-yield corporate bonds has tripled in the last three years, and the
percentage of borrowers with low credit scores is rising by leaps and bounds. Added
to that is the flight to material assets, above all luxury real estate. … The
central banks have turned the global economy into an enormous house of cards
that will sooner or later come crashing down. Rather than slamming on
the brakes, they are carelessly upping the ante."
The European Central Bank has opened the floodgates, hampering
necessary debt reduction
Mario Draghi is now drawing on an embarrassment of riches. On top of another interest rate cut, he has announced a program for the purchase
of securities [now infamous asset-backed securities, government bonds and others] intended to dispel fears of deflation and stimulate the
economy. That the European Central Bank will conjure up an economic turnaround
with these measures is doubtful, considering the fact that the previous policy of opening the
cash floodgates has fizzled. That this will encourage negative
incentives, however, from price bubbles to supporting zombie banks, is obvious.
Noquestion: The pressure onDraghihas increasedsignificantlydue to the strongeconomic downturnand decline ininflation. Geopoliticalrisksthreaten toplunge
theeurozoneinto its thirdrecessionin six years. That a "tripledip"intimesofrecord
unemploymentand indebtednesswould
be devastatingis indisputable.Nevertheless,
the ECBis marchinginthe wrong direction, andwithits policies is undermining much-neededrelief for theeconomyand cleanup
of thefinancial industry.
The risk of deflation shouldn't be downplayed, but the price
structure must be seen in context. Declining energy and commodity prices, as
well as the necessary structural adjustments within the euro zone periphery
(wage restraints, spending cuts) inevitably put pressure on inflation. The
process is undoubtedly painful, but the only alternative in a common currency
union would be permanent cross-financing of countries that have lost access to
export and capital markets.
Posted By Worldmeets.US
Nor will the ECB's actions do away with the fluctuating cash flow
from the central bank to economic players. Businesses, households, and
governments are heavily in debt and are again in the process of trying to
regain a sustainable balance. Does Draghi want to drive the real economy deeper
into the red, destroying confidence that was so laboriously rebuilt? Confidence
is also the key to the recovery of the financial system, which the central bank
is attempting to achieve with stress tests that are now underway. New cash
injections, on the other hand, allow many of the shakiest institutions to stay
alive and prevent skeletons in their closets from coming to light. With these
life-prolonging pills for zombie banks, the danger of persistent stagnation is
growing according to the Japanese model.
At the same time, the risks are growing rapidly. Since the
financial crisis broke, the major central banks have pumped $20 trillion into
the markets, and new shock waves are to be expected if we phase out of crisis
mode. Low interest rates are enticing households to pile up more and more debt,
and the debt-to-income ratio has risen globally from 155 to 175 percent
over the past six years. Investors and banks are becoming increasingly reckless
because secure investments no longer bring returns, so greater risks must be
taken. The consequences: The number of high-yield corporate bonds has tripled
in the last three years, and the percentage of borrowers with low credit scores
is rising by leaps and bounds. Added to that is the flight to material assets,
above all luxury real estate.
The central banks have turned the global economy into an
enormous house of cards that will sooner or later come crashing
down. Rather than slamming on the brakes, they are carelessly upping the ante.
*Andreas Schnauder is Der Standard's chief economics editor
