The Mañana Bankers

How bad do conditions have to get before the Federal Reserve and the European Central Bank take new steps to support economic growth? We are about to find out. Despite ample evidence that the economy is weakening, Fed chairman, Ben Bernanke, and Fed policy committee decided on Wednesday not to undertake any additional monetary stimulus. Then, on Thursday, E.C.B. also punted. Its president, Mario Draghi, not only failed to deliver on the bold action he signaled last week when he said he would do “whatever it takes” to save euro, he failed to deliver on any action, even a token clip in ECB’s benchmark interest rate. (source: Editorial – NYTimes – 03/08/2012)

Instead, he said that central bank purchases of government bonds in Spain and Italy would depend on those countries’ adherence to commitments to restructure their budgets and economies, an echo of self-defeating austerity arguments advanced by Germany in the face of deepening recession. While Draghi expressed readiness to intervene, he did not outline how or when aid would be delivered, sowing doubt instead of confidence. The markets were generally calm on Wednesday after Fed announced its wait-and-see approach, in part, because Fed dampened investor disappointment by strongly indicating that it would act soon. But markets were rocked on Thursday by Mr. Draghi’s perceived flip-flop, with stocks dropping and bond yields rising again to dangerous levels on Spanish and Italian debt. That means trouble for everyone. Euro crisis is arguably the biggest threat to United States economy, as recession in Europe saps growth here and imperils globally interconnected banking systems. Even short of calamity, rocky stock markets are bad for growth and jobs, in large part because corporate executives often tie their plans for expansion and hiring to company’s stock price. All of which raises the question: What are Bernanke and Draghi waiting for? Slower growth? Higher unemployment? Lower output? In United States, growth in second quarter of the year came in at 1.5%, down from 2% in the first quarter and 4.1% at the end of 2011. Joblessness is stuck above 8%, and that figure understates the weakness of a job market that is also plagued by low-wage and part-time work. Manufacturing has slowed, while housing, the traditional linchpin of economic recovery is, by Fed’s own analysis, still depressed. Europe is in even deeper trouble, several countries in or near recession, unemployment in double digits.

Bernanke and Draghi are justifiably concerned that their crisis-fighting tools, which boil down to various ways to lower borrowing costs, will, at best, only ameliorate rather than reverse the current economic slowdown. Even so, that could make a positive difference. Of course, they are right that full recovery will require action by elected government officials. In United States, Mr. Bernanke has told Congress repeatedly that near-term stimulus measures should be coupled with longer-term plans for deficit reduction. Congressional Republicans, who do not seem to want economy to improve before Election Day, have refused to heed the advice. In Europe, Mr. Draghi has stressed to little effect that monetary policy cannot substitute for Europeanwide institutional reforms that are needed to hold the euro zone together, including a banking union. It would, indeed, be better if the monetary policy were combined with fiscal policy and structural reforms. But elected officials are balking, and, in the meantime, the entire global economy is slowing given weakness in both the United States and Europe. Central bankers have the autonomy to act and the tools to help the recovery. It is past time to use them. 


Acerca de ignaciocovelo
Consultor Internacional

5 Responses to The Mañana Bankers

  1. Professor Uziel Nogueira says: The NYT Editorial misses a fundamental point. The US-EU are caught up in a debt trap from which there is no easy way out, except austerity. The FED-ECB cannot solve the problem by PRINTING dollars-euros and buying public debt. If printing money were the solution for unsustainable debt, Latin America would have been the most developed and prosperous place in the world during the second half of the 20th century. The ONLY solution is to reduce the public debt. This can be done by curtailing spending and increasing taxes or a combination of the two. The US has the privilege of postponing a fiscal adjustment because the rest of the world is inundated by tons of dollars and T-Bills. The Euro zone does not.The good news or bad news is that the ball is in the POLITICIANS court. Now is time for the US and EU to find out whether their political system is superior, or not, to the Chinese. Political system competition is the new game in this first decade of the new century. May the best competitor win!

  2. Maybe this is why central bankers typically don’t like to say much. In what seemed a rare communications blunder by one of Europe’s most politically polished technocrats, the president of the European Central Bank, Mario Draghi, set off a market rebellion Thursday as investors who were apparently hoping for a bold euro rescue plan instead heard a general statement of good intentions. Mr. Draghi signaled that the bank, in what would actually be a marked departure from current policy, was willing to start buying government bonds to hold down the borrowing costs of troubled euro zone countries like Spain. But the bank put the onus on political leaders to move first, and left open some crucial questions about how quickly and forcefully it would seek to tame unruly financial markets. Coming almost exactly a week after Mr. Draghi incited a market rally by pledging to “do whatever it takes to preserve the euro zone,” his admission Thursday that whatever it takes might actually take weeks or months resulted in a Draghi rout. Stocks indexes started falling quickly and deeply in Europe almost as soon as Mr. Draghi began speaking at a news conference. And the downdraft carried over to Wall Street after the American markets opened. Borrowing costs for Spain and Italy, as measured by the yields on their bonds, spiked back up almost to the levels they were at before the Draghi rally started a week earlier. “From a communication point of view, he misguided the markets,” said Jörg Krämer, chief economist at Commerzbank in Frankfurt. “He raised expectations which he could not fulfill.” Mr. Krämer and other economists had warned in recent days that market expectations were too high after Mr. Draghi’s vow in London last week and his assurance that whatever the European Central Bank might be hatching, “it will be enough.” And in many respects the bank’s statement Thursday was its strongest declaration yet that it would not tolerate excessive borrowing costs for euro zone countries. It is just that the giddiest of investors were not ready for a return to technospeak. The bank is prepared to “undertake outright open-market operations of a size adequate to reach its objective,” Mr. Draghi said Thursday. Interest rates demanded by investors “that are related to fears of the reversibility of the euro are unacceptable,” Mr. Draghi said, “and they need to be addressed in a fundamental manner.” But by the time he said words that at a normal European Central Bank news briefing might sound like a steely statement of resolve — “the euro is irreversible” — many investors were too busy putting through their sell orders to listen. There were also the old-style caveats, including Mr. Draghi’s cautioning that the central bank would buy bonds only after a country asked for aid, which none have yet done, and only after the European bailout fund first exercised its power to buy bonds.

    “It’s up to the politicians — the same old story we’ve heard the last two years,”

    said Carsten Brzeski, a senior economist for the Dutch bank ING in Brussels (…..)

  3. Professor Uziel Nogueira says: Spain and Italy are now the epicenter of the euro zone debt crisis. The last misstep by Mario Draghi reveals two important points. First, Germany refuses to pay for play. No additional Germany’s taxpayers money to increase the bailout fund of Eu$ 500 plus billion. Second, Germany’s economic authorities will not accept any move from the ECB to buy Spanish and Italian debt. What is next then for Spain and Italy? The results are not difficult to anticipate. The most important one is that financial markets will keep up the pressure on both countries’s debt. Nothing that can be said or done by politicians that significantly lowers interest rates from the current levels. There is no escape from a debt trap, except declaring default as Argentina did in 2001. To keep the economy solvent, Spain and Italy will attempt to reduce considerably the budget deficit in the next two years. However, public reaction will prevent such spending reduction to take place as we’ve seen in Greece. The two economies will become more dependent on the finite amount of money of the bailout fund.

    The scenario becomes ugly for Italy and Spain if Greece decides to leave the euro.

    Euro deposits from these two countries fleeing to Germany and other euro zone banks will accelerate. Bank runs cannot be discarded.

    For Spain-Italy, the euro zone in 2012 became Hotel California of Eagles: “Relax”, said the night man, “We are programmed to receive”. “You can check-out any time you like”, But you can never leave !!!

  4. (…..) Die Welt writes: “The ECB would be well-advised to give way to politicians this time. With his grandiose announcement that he would save the euro at any price, Draghi has already come dangerously close to a red line that a central banker should never cross. The border between fiscal and monetary policy — which has already been blurred to the point of being unrecognizable — would be completely nullified if the ideas being discussed were to become a reality.” “It is also sham for politicians to reject the collectivization of debt or any form of a transfer union, only to leave it to the ECB to finance sovereign debt through the back door by printing more money — to everyone’s detriment. Draghi and his colleagues are responsible for the euro, but they are not democratically elected officials. Within their constraints, they can certainly help save the currency union. But the decision is a political one. … Fresh billions alone, regardless of their form, won’t solve the problem” (…..) The Financial Times Deutschland writes: “It would be nice if (everyone could agree on the course communicated by Draghi on Thursday) so as not to limit the psychological effect of the announcement. But there was opposition from Germany, once again from Bundesbank head Jens Weidmann, who apparently was the only one on the Governing Council to vote against Draghi’s plan. Draghi isn’t the only one who is disgruntled. It is indeed inadvisable to sacrifice ECB unanimity. The Bundesbank head is fostering distrust where the opposite is needed….” “With Weidmann isolated, there is more: Not just the central bank heads from Austria, Luxembourg and Finland — who have often voted with him in the past — were of a different opinion this time. The second German on the Governing Council, Jörg Asmussen, was as well. It will be interesting to see how Weidmann positions himself in coming weeks. If he remains opposed to the plan, its credibility would be threatened. In such a case, hopes for a half-way peaceful late summer on the markets would be dashed”.

  5. Regina Caldas says:

    The BCE work like a snail.


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