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The Irresponsible ECB

Daniel Roland/AFP/Getty Images

The Irresponsible ECB

Ultra-loose monetary policy stopped being appropriate long ago, and is especially inadvisable now, with the global economy – especially the developed world – experiencing an increasingly strong recovery. As recent stock-market turbulence shows, refusal to normalize policy faster is drastically increasing the risks to financial stability.

FRANKFURT – The Dow Jones Industrial Average’s recent “flash crash,” in which it plunged by nearly 1,600 points, revealed just how addicted to expansionary monetary policy financial markets and economic actors have become. Prolonged low interest rates and quantitative easing have created incentives for investors to take inadequately priced risks. The longer those policies are maintained, the bigger the threat to global financial stability.

The fact is that ultra-loose monetary policy stopped being appropriate long ago. The global economy – especially the developed world – has been experiencing an increasingly strong recovery. According to the International Monetary Fund’s latest update of its World Economic Outlook, economic growth will continue in the next few quarters, especially in the United States and the eurozone.

Yet international institutions, including the IMF, fear the sudden market corrections that naturally arise from changes in inflation or interest-rate expectations, and continue to argue that monetary policy must be tightened very slowly. So central banks continue to postpone monetary-policy normalization, with the result that asset prices rise, producing dramatic market distortions that make those very corrections inevitable.

To be sure, the US Federal Reserve has moved away from monetary expansion since late 2013, when it began progressively reducing and ultimately halting bond purchases and shrinking its balance sheet. Since the end of 2015, the benchmark federal funds rate has been raised to 1.5%.

But the Fed’s policy is still far from normal. Considering the advanced stage of the economic cycle, forecasts for nominal growth of more than 4%, and low unemployment – not to mention the risk of overheating – the Fed is behind the curve.

…click on the above link to read the rest of the article…

Latvia Bank Crisis: Central Bank In Chaos As ECB Blocks Payments By Third Largest Bank

One day after we reported that the central bank governor and ECB Governing Council member Ilmars Rimsevics was detained by Latvia’s anti-corruption authority on Saturday on suspicion of accepting a bribe of more than €100,000, prompting both Latvia’s Prime Minister and the president to call on Rimsevics to resign, Latvia appears to have a full-blown banking crisis on its hands, after the European Central Bank froze all payments by Latvia’s third largest bank, ABLV, following U.S. accusations the bank laundered billions in illicit funds, including for companies connected to North Korea’s banned ballistic-missile program.

Latvia’s Central Bank governor Ilmars Rimsevics

The troubles started on February 14, when Latvia began investigating  ABLV over suspicions of illegal trading related to North Korea’s weapons system. The investigation was launched after the Treasury Department charged the bank with having “institutionalized money laundering as a pillar of the bank’s business practices,” which proposed preventing the bank from opening an account in the U.S.

That decision immediately made ABLV a pariah to other financial institutions, effectively cutting its access to the dollar and funding flows from the world’s most important market, and forcing it to rely exclusively on the ECB as it sole-source of funds.

As the WSJ reported, in proposing the ban on ABLV, Treasury said the bank managed transactions for clients connected to several long-sanctioned North Korean firms.

These include North Korea’s Foreign Trade Bank, the institution that manages Pyongyang’s foreign-currency earnings, revenue that U.S. and United Nations officials say go directly to North Korea’s nuclear and missile programs.

According to the Treasury, ABLV’s alleged illegal activity also included funneling billions of dollars in public corruption proceeds from Azerbaijan, Russia and Ukraine through shell company accounts.

…click on the above link to read the rest of the article…

Central Banks Will Let The Next Crash Happen

Central Banks Will Let The Next Crash Happen

If you have been following the public commentary from central banks around the world the past few months, you know that there has been a considerable change in tone compared to the last several years.

For example, officials at the European Central Bank are hinting at a taper of stimulus measures by September of this year and some EU economists are expecting a rate hike by December. The Bank of England has already started its own rate hike program and has warned of more hikes to come in the near term. The Bank of Canada is continuing with interest rate hikes and signaled more to come over the course of this year. The Bank of Japan has been cutting bond purchases, launching rumors that governor Haruhiko Kuroda will oversee the long overdue taper of Japan’s seemingly endless stimulus measures, which have now amounted to an official balance sheet of around $5 trillion.

This global trend of “fiscal tightening” is yet another piece of evidence indicating that central banks are NOT governed independently from one another, but that they act in concert with each other based on the same marching orders. That said, none of the trend reversals in other central banks compares to the vast shift in policy direction shown by the Federal Reserve.

First came the taper of QE, which almost no one thought would happen. Then came the interest rate hikes, which most analysts both mainstream and alternative said were impossible, and now the Fed is also unwinding its balance sheet of around $4 trillion, and it is unwinding faster than anyone expected.

Now, mainstream economists will say a number of things on this issue — they will point out that many investors simply do not believe the Fed will follow through with this tightening program.

…click on the above link to read the rest of the article…

Conflict between Fiscal & Monetary Policy

We are moving into a crisis of monumental proportions. There has been a serious fundamental problem infecting economic policy on a global scale. This conflict has been between monetary and fiscal policy. While central banks engaged in Quantitative Easing, governments have done nothing but reap the benefits of low-interest rates. This is the problem we have with career politicians who people vote for because they are a woman, black, or smile nicely. There is never any emphasis upon qualification. Every other job in life you must be qualified to get it. Would you put someone in charge of a hospital with life and death decisions because they smile nicely?

Economic growth has been declining year-over-year and we are in the middle of a situation involving low-productivity expansion with high and rapidly rising budget deficits that benefit nobody but government employees.  Once upon a time, 8% growth was average, then 6%, and 4% before 2015.75. Now 3% is considered to be fantastic. Private debt at least must be backed by something whereas escalating public debt is completely unsecured. The ECB wanted to increase the criteria for bad loans, yet if those same criteria were applied to government, nobody would lend them a dime.

Monetary policy, after too long a phase of low-interest rates and quantitative easing, has created governments addicted to low-interest rates. They have expanded their spending and deficits for the central banks were simply keeping the government on life-support – not actually stimulating the private sector. Governments have pursued higher taxes and more efficient tax collection. They have attacked the global economy assuming anyone doing business offshore was just an excuse to hide taxes.

…click on the above link to read the rest of the article…

Don’t Expect A Central Bank Bailout This Time, ECB’s Nowotny Warns

To all those hoping for a sign or signal from central bankers that the recent correction in US stocks was necessary and sufficient for intervention, here are some disappointing examples of what they have said recently:

“If stock prices or asset prices more generally were to fall, what would that mean for the economy as a whole?” asked outgoing Fed Chair Yellen during her exit interview, selling the all-time highs. “The financial system is much better capitalized. The banking system is more resilient,” the former US central banker added, listing her accomplishments. “I think our overall judgment is that, if there were to be a decline in asset valuations, it would not damage unduly the core of our financial system.”

That was that moment when the “Yellen Put” instantly vanished, and stocks – predictably – plunged, while the industry’s most obviously ill-conceived financial innovations – inverse VIX ETFs – collapsed to essentially zero in the space of thirty minutes on the first day of new Fed chair’s Jay Powell tenure.

* * *

“I think it’s basically a market event, and these things can be healthy,” stated Dallas Fed president Robert Kaplan, diagnosing Monday’s -4.1% S&P 500 epileptic fit. “I don’t think it will have economic implications. 2018 will be a strong year in America. We’re at or near full employment. I continue to expect three rate hikes this year,” explained the former Goldman banker.

* * *

This is the most predicted selloff of all time because the markets have been up so much and they have had so many days in a row without meaningful down days,” said Philly Fed president Bullard. “Something that has gone up 40% like the S&P tech sector would at some point have a selloff.” he added philosophically.

…click on the above link to read the rest of the article…

ECB Forced to postpone New Stricter Credit Rules Indefinitely

The ECB’s was forced to suspend its new stricter credit rules indefinitely concerning bad loans. The banks were screaming “you idiot”  for it would have pushed way too many banks over the edge, particularly in Italy. With the Italian elections coming in March, the new rules would have been a major issue why Italy should also exit the EU.

The ECB originally sought to introduce new rules for dealing with new bad loans previously.  As of January, banks were expected to cover all loans, which are now classified as default risk. There was no possible way that could be accomplished.

In Italy, their domestic banks would be oppressed and that fewer new loans would ever be issued. This was finally seen as a major negative consequence for the economy. Only with an extreme rebellion by the banks was the ECB forced to back off.

This illustrates the banking crisis that is still brewing in Europe even after nearly 10 years of quantitative easing. There is little prospect for this crisis to be fixed. All that can happen is to postpone the inevitable.

Our Outlook For 2018 Interest Rates to Stay Low. The Consensus View is That Europe’s Banks Are Recovering But We Are Not So Sure.

The Interest Rate Outlook

Despite their shortcomings, European banks do not seem on the verge of collapse and few commentators, analysts or policymakers think that there will be any systemic wobbles in 2018. We do not necessarily disagree; with ECB interest rates still zero to negative and a raft of generous credit facilities open to banks on softish terms there is little doubt that monetary policy has helped and will continue to help Europe’s banks. We would venture to say that supporting the banking system has been the main objective of ECB monetary policy for a decade now. Keeping rates at around zero not only ensures that mark-to-market profits are maximised, but also enables banks whose depositors might have lost confidence and withdrawn funds to fill the gap by borrowing from central banks at no cost.

The opposite view is that banks are struggling to make money in this low interest rate environment and that profits will rise when rates increase. There are three difficulties with this counter. Firstly, the market for high quality lending business remains very competitive, not least because low rates have helped many banks stay in business that might otherwise have folded. Secondly a raft of fintech businesses have emerged seeking to pick off this ‘low hanging fruit’. Fintech businesses of course have low overheads. Many are targeting the SME market. Larger corporations with internal treasury functions have always been able to borrow at skinny margins. In the retail market the European Union’s new Payment Services Directive will make it easier for third parties, with the customer’s permission, to access secure information and initiate customer payments. This is expected to put pressure on large banks’ pricing power, pushing them closer to market average pricing.

…click on the above link to read the rest of the article…

ECB Spawned Mass Culture of Financial Dependency that’s Now Very Hard to Undo

ECB Spawned Mass Culture of Financial Dependency that’s Now Very Hard to Undo

Right at the front of the monetary welfare queue is the government of Italy.

As the Eurozone economy continues to grow, pressure is rising on Europe’s biggest bond buyer, the ECB, to withdraw from the market, a process it has already begun. No one believes that more than the head of Germany’s Bundesbank, Jens Weidmann, who recently told Spanish newspaper El Mundo that the ECB should soon set a date to end its multi-trillion euro asset-buying program.

”The prospects for the evolution of prices correspond to a return of inflation to a level sufficient to maintain the stability of prices,” he said. “For this reason, in my opinion, it would be justifiable to put a clear end to the buying of bonds by establishing a concrete date (for ending the program).”

Weidmann, who is hotly tipped to replace Draghi in 2019, has been one of the most vocal critics of the ECB’s QE program.

“Central banks have become the largest creditors of nation states,” Weidmann noted. “With our program of bond purchases, the financing conditions of Member States depend much more directly on monetary policy than in normal times. This could lead to political pressure on the ECB board to maintain lax monetary policy for longer than would in fact be justified from the perspective of price stability.”

Though it has lowered its asset purchases to €30 billion a month, the ECB has pledged to keep buying until at least September. But with the Eurozone economy growing faster than it has since the crisis and inflation comfortably above 1%, the ECB is widely expected to wind down the program thereafter. “If the economy continues to do so well, we could let the program run out in 2018,” ECB rate-setter Ewald Nowotny told Sueddeutsche Zeitung.

…click on the above link to read the rest of the article…

Stressful Year Ahead for Spanish Banks

Stressful Year Ahead for Spanish Banks

The “spillover effects.” 

Just how much more stress Europe’s banking system can bear will be one of the big questions of 2018. This year was already a pretty stressful year, what with two major Italian banks being put out of their misery while, another, Monte dei Paschi di Siena, was brought back from the dead. In Spain, 300,000 shareholders and subordinate bondholders mourned the passing of the country’s sixth biggest bank, Banco Popular, which was acquired by Santander for the measly price of one euro.

Now, a whole new problem awaits. A report published by Spain’s second largest lender, BBVA, has warned about the potential impact on the sector’s profitability of new rules on provisions due to come into effect in early 2018.

Until now, banks only had to report losses when loans began deteriorating — i.e. when the defaults began. But the introduction in January of a new accounting rule, known as IFRS 9, will force banks in Europe to provision for souring loans much sooner than at present. One direct result will be that banks will have to hold more capital on their books, and that will have a detrimental impact on their profits.

If next year’s stress test by the ECB sets the same macroeconomic conditions and parameters as those used in 2014, banks holding just over one-fifth of the market share in Spain — measured in risk-weighted assets — would have to undertake provisions exceeding 200 basis points, the BBVA report predicts. That would leave some entities with a solvency rating lower than 9% — i.e., on the brink or even below the minimal level required by European regulation.

…click on the above link to read the rest of the article…

Stranger Things

     The hidden agenda in the so-called tax reform bill is to act as stop-gap quantitative easing to plug the “liquidity” hole that is opening up as the Federal Reserve (America’s central bank) makes a few gestures to winding down its balance sheet and “normalizing” interest rates. Thus, the aim of the tax bill is to prop up capital markets, and the apprehension of this lately is what keeps stocks making daily record highs. Okay, sorry, a lot to unpack there.

Primer: quantitative easing (QE) is a the Federal Reserve’s weasel phrase for its practice of just creating “money” out of thin air, which it uses to buy US Treasury bonds (and other stuff). The Fed buys this stuff through intermediary Too Big To Fail banks which allows them to cream off a cut and, theoretically, pump the “money” into the economy. This “money” is the “liquidity.” As it happens, most of that money ends up in the capital markets. Stocks go up and up and bond yields stay ultra low with bond prices ultra high. What remains on the balance sheets are a shit-load of IOUs.

The third round of QE was officially halted in 2014 in the USA. However, the world’s other main central banks acted in rotation — passing the baton of QE, like in a relay race — so that when the US slacked off, Japan, Britain, the European Central Bank, and the Bank of China, took over money-printing duties. And because money flies easily around the world via digital banking, a lot of that foreign money ended up in “sure-thing” US capital markets (as well as their own ). Mega-tons of “money” were created out of thin air around the world since the near-collapse of the system in 2008.

…click on the above link to read the rest of the article…

It’s More Than Just the Absences of Acceleration, It’s the Synchronization Where There Should Be None

According to the latest ECB figures, as of yesterday total “liquidity” added to the European banking system for that central bank’s ongoing monetary “stimulus” was just shy of €2 trillion. The outstanding balance in the core current account (reserves) held on behalf of the banking system was €1.296 trillion. In the deposit account, banks are holding €686 billion at -40 bps in “yield.”

To create all these euro-denominated numbers, the European Central Bank through its constituent National Central Banks (NCB) has purchased €2.21 trillion through its three main active LSAP’s (Large Scale Asset Purchases): the PSPP, or QE, which buys up sovereign bonds and is the reason for running them through the NCB’s (out of original concern exactly who would bear any default risk); the CBPP3, or the third time the ECB has bought covered bonds from banks; and the Corporate Sector Purchase Program which is self-explanatory.

The numbers given above don’t appear to balance because of the way all this stuff is accounted for. The NCB transactions of QE and other material operations actually subtract from the ECB’s asset side because it isn’t doing them, becoming instead -€1.21trillion in so far accumulated autonomous factors. On the other side, the liability side of the simple balance sheet, there are outstanding €769 billion in normal liquidity operations (OMO) at the MRO.

The net of all these hundreds of billions and trillions is actually unclear. I don’t mean that in an accounting sense, for all the euros are there in the various statements. Rather, what these massive transactions have produced where it counts is truly negligible.

…click on the above link to read the rest of the article…

ECB and the Coming Banking Crisis

 

QUESTION: Mr. Armstrong; Your post of November 16th where you state that the ECB is looking to freeze accounts in a banking crisis, does that mean they will no longer honour the claimed insurance of €100,000 per account?

PH

ANSWER: No. They will not pretend to eliminate that insurance, they just will “suspend” it as a bank holiday. But you gloss over another problem. The insurance of  €100,000 is NOT per account, but PER PERSON. So taking €1 million euro and spreading among 10 banks does not thereby provide insurance for the whole lot. The same is true in the USA. The ECB is proposing supplementing it with discretionary powers to suspend bank withdrawals. To say that the entire program will be terminated is an exaggeration. Nevertheless, it reflects the realization that the European banking system is in serious trouble. I recommend that Europeans should have a stash of cash, and if you have a lot of cash in your account, put some into dollars in the States before it is too late.

Protect Your Savings With Gold: ECB Propose End To Deposit Protection 

Protect Your Savings With Gold: ECB Propose End To Deposit Protection 

– Protect Your Savings With Gold: ECB Propose End To Deposit Protection
– New ECB paper proposes ‘covered deposits’ should be replaced to allow for more flexibility
– Fear covered deposits may lead to a run on the banks
– Savers should be reminded that a bank’s word is never its bond and to reduce counterparty exposure
– Physical gold enable savers to stay out of banking system and reduce exposure to bail-ins

EU deposit protection scheme

It is the ‘opinion of the European Central Bank’ that the deposit protection scheme is no longer necessary:

‘covered deposits and claims under investor compensation schemes should be replaced by limited discretionary exemptions to be granted by the competent authority in order to retain a degree of flexibility.’

To translate the legalese jargon of the ECB bureaucrats this could mean that the current €100,000 (£85,000) deposit level currently protected in the event of a bail-in may soon be no more.

But worry not fellow savers as the ECB is fully aware of the uproar this may cause so they have been kind enough to propose that:

“…during a transitional period, depositors should have access to an appropriate amount of their covered deposits to cover the cost of living within five working days of a request.”

So that’s a relief, you’ll only need to wait five days for some ‘competent authority’ to deem what is an ‘appropriate amount’ of your own money for you to have access to in order eat, pay bills and get to work.

The above has been taken from an ECB paper published on 8 November 2017 entitled ‘on revisions to the Union crisis management framework’.

It’s 58 pages long, the majority of which are proposed amendments to the Union crisis management framework and the current text of the Capital Requirements Directive (CRD).

…click on the above link to read the rest of the article…

Weekly Commentary: “Not Clear What That Means”

Weekly Commentary: “Not Clear What That Means”

November 15 – Bloomberg (Nishant Kumar and Suzy Waite): “Hedge-fund manager David Einhorn said the problems that caused the global financial crisis a decade ago still haven’t been resolved. ‘Have we learned our lesson? It depends what the lesson was…’ Einhorn said he identified several issues at the time of the crisis, including the fact that institutions that could have gone under were deemed too big to fail. The scarcity of major credit-rating agencies was and remains a factor, Einhorn said, while problems in the derivatives market ‘could have been dealt with differently.’ And in the ‘so-called structured-credit market, risk was transferred, but not really being transferred, and not properly valued.’ ‘If you took all of the obvious problems from the financial crisis, we kind of solved none of them,’ Einhorn said… Instead, the world ‘went the bailout route.’ ‘We sweep as much under the rug as we can and move on as quickly as we can,’ he said.”
October 12 – ANSA: “European Central Bank President Mario Draghi defended quantitative easing at a conference with former Fed chief Ben Bernanke, saying the policy had helped create seven million jobs in four years. Bernanke chided the idea that QE distorted the markets, saying ‘It’s not clear what that means’.”

Once you provide a benefit it’s just very difficult to take it way. This sure seems to have become a bigger and more complex issue than it had been in the past. Taking away benefits is certainly front and center in contentious Washington with tax and healthcare reform. It is fundamental to the dilemma confronting central bankers these days.
…click on the above link to read the rest of the article…

Draghi Speech: Everything Is Awesome In Europe, No Signs Of Systemic Risks

Draghi Speech: Everything Is Awesome In Europe, No Signs Of Systemic Risks

Mario Draghi gave the keynote speech at the Frankfurt European Banking Congress this morning in which he focused on the strong outlook for the Eurozone economy and how his monetary policy is playing a vital role. The speech was peppered with upbeat phrases and adjectives like solid, robust, unabated, endogenous propagation, resilient, remarkable and ongoing. According to Draghi.

The euro area is in the midst of a solid economic expansion. GDP has risen for 18 straight quarters, with the latest data and surveys pointing to unabated growth momentum in the period ahead. From the ECB’s perspective, we have increasing confidence that the recovery is robust and that this momentum will continue going forward.

Draghi is confident that future growth will be unabated for three reasons.

  • Previous headwinds have dissipated;
  • Drivers of growth are increasingly endogenous rather than exogenous; and
  • The Eurozone economy is more resilient to new shocks.

In terms of previous headwinds, Draghi notes that global growth and trade have recovered, while the eurozone has de-leveraged.

For some years global growth and world trade have been a drag on the recovery. Now, we are seeing signs of a sustained expansion. Global PMIs remain strong. The share of countries in which growth has been improving relative to the previous three years has risen from 20% in mid-2016 to 60% today. And this has fed through into a rebound in world trade, which is growing at its strongest annual rate in six years, and may well become a tailwind going forward.

Domestically, a key headwind in the past has been the necessary deleveraging by firms and households. But this is also now diminishing as debt returns to more sustainable levels.

…click on the above link to read the rest of the article…

Olduvai II: Exodus
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Olduvai
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Olduvai II: Exodus
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Olduvai III: Cataclysm
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