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A critique of the ECB's liquidity policies

by Migeru Thu Feb 24th, 2011 at 02:23:28 AM EST

My views on the ECB's policies get airtime on Eurointelligence: A critique of the ECB’s liquidity policies

At the end of last week the financial community was awash with speculation surrounding a more than 10-fold increase in volume of the ECB's Marginal Lending Facility (MLF), which offers banks an overnight gateway to cash at a penalty rate. It turned out that Anglo Irish Bank and Irish Nationwide Building Society wanted to release some assets from the weekly collateral held by the ECB in its main financing operations.

This incident may have been much ado about nothing, but it provides an opportunity to take a closer look at the liquidity conditions in the Eurozone interbank market, and the picture isn't pretty. In its deflationary zeal, the ECB is draining an increasing amount of cash – in the form of one-week deposits - from the money markets to offset its modest purchases of sovereign Euro bonds.

Eurointelligence's editor Wolfgang Münchau did a good job of streamlining my turgid writing.


ET got a bit of promotion, too:

The author is a risk analyst at a major eurozone bank and blogs regularly at European Tribune (EuroTrib.com)
You can read the full article on the Eurointelligence site, and comment here.

Display:
Kudos, Mig! And to Münchau for offering you a spot.
by afew (afew(a in a circle)eurotrib_dot_com) on Thu Feb 24th, 2011 at 02:37:26 AM EST
What afew said. Great!

"Life shrinks or expands in proportion to one's courage." - Anaïs Nin
by Crazy Horse on Thu Feb 24th, 2011 at 04:05:14 AM EST
[ Parent ]
With a hat-tip to JakeS for coming up with this turn of phrase here on ET: A critique of the ECB's liquidity policies
The constituent rules of the eurozone appear to be based on the bizarre idea that sovereign debt is toxic until such time as it has been sanitized by going through the bid-offer spread of a major investment bank.


Keynesianism is intellectually hard, as evidenced by the inability of many trained economists to get it - Paul Krugman
by Migeru (migeru at eurotrib dot com) on Thu Feb 24th, 2011 at 04:42:49 AM EST
[ Parent ]
Some university should give you a Master's degree in Economics on the basis of the underlying research - and understanding. Now all you have to do is write another 50 pages of detail with about 70 foot-noted references to claim it. And, of course, pay the tuition for 3 or 4 semesters.

paul spencer
by paul spencer (spencerinthegorge AT yahoo DOT com) on Thu Feb 24th, 2011 at 11:19:06 AM EST
[ Parent ]
I think migeru deserved a "panegirico" in Spanish...and anothrr friend too..

http://avionesdecercanias.blogspot.com/2011/02/se-hacen-mayores-y-famosos.html

A pleasure

I therefore claim to show, not how men think in myths, but how myths operate in men's minds without their being aware of the fact. Levi-Strauss, Claude

by kcurie on Fri Feb 25th, 2011 at 06:22:04 AM EST
[ Parent ]
A critique of the ECB's liquidity policies
each failure of sterilization indicates that the ECB was trying to drain more than the entire spare liquidity of the private banking system for one-week lending. That this spare liquidity is less than €80bn should give the inflation hawks pause.

Clear something up for me. Sterilisation failed, you say, between December and February (this month), though last week it worked, to the tune of €76.5bn. Was that sum a target for the ECB, or was it as much as it could drain? (In the latter case, explaining "spare liquidity is less than €80bn").

by afew (afew(a in a circle)eurotrib_dot_com) on Thu Feb 24th, 2011 at 03:33:40 AM EST
The €76.5bn is how much the ECB wanted to drain, and the auction of weekly deposits was reported as a success.

However, the desired volume has been at that level since December, and failed to be filled by maybe 10%. Last June, the desired volume was something like 55bn and only 35bn got filled.

So, currently, the last time the deposit auction failed to be filled the desired volume was under €80bn. I argue that the ECB is paying up to a 2% premium for this liquidity, so if it fails to be filled it means the system-wide slack of 1-week liquidity is below €80bn.

You can access data for these auctions at the ECB: Open Market Operations page

20110021OT23/02/201102/03/201170.35 %0.7 %0.58 %-77 bn Ann. All.
"Ann" and "All" refer to "Announcement" and "Allotment".

On the right margin of the page there's the mother lode:

History All operations since 1999


Keynesianism is intellectually hard, as evidenced by the inability of many trained economists to get it - Paul Krugman
by Migeru (migeru at eurotrib dot com) on Thu Feb 24th, 2011 at 03:46:24 AM EST
[ Parent ]
Bloomberg has composed an index for the ECB's Securities Market Programme. (Link to interactive chart)

While the ECB doesn't publish the volume of its sovereign debt purchases, it does imply that its weekly deposit auctions are matching, and the tender in each auction is, obviously, public. Therefore one can take the weekly tender amounts as a proxy for the volume of bond purchases.

Keynesianism is intellectually hard, as evidenced by the inability of many trained economists to get it - Paul Krugman

by Migeru (migeru at eurotrib dot com) on Thu Feb 24th, 2011 at 03:56:16 AM EST
[ Parent ]
See Bloomberg's ECB Fails to Sterilize Bond Purchases With Deposits (February 1, 2011)
The European Central Bank failed to fully neutralize the liquidity created by its bond purchases for the third time since the program began.

The Frankfurt-based central bank said today it drained 68.2 billion euros ($93.9 billion) from money markets via seven-day term deposits, 8.3 billion euros less than the 76.5 billion euros it intended to absorb.

Also, it appears the conventional wisdom is entirely at variance with my analysis
The failure to drain the intended amount today adds further "downside pressure on overnight rates," said Christoph Rieger, head of fixed-income strategy at Commerzbank AG in Frankfurt.
Overnight rates may show a blip downwards on the day of the auction, but the 8-month trend in the interbank markets is up.

Note also this had been at the end of a run of bond purchases:

The ECB last week halted its bond purchases for the first time in three months.


Keynesianism is intellectually hard, as evidenced by the inability of many trained economists to get it - Paul Krugman
by Migeru (migeru at eurotrib dot com) on Thu Feb 24th, 2011 at 04:06:00 AM EST
[ Parent ]
The second failure was discounted for being at the end of the year: ECB Drains Less Cash Than Planned as Banks Stay Liquid Before End of Year - Bloomberg (28 December, 2010)
The European Central Bank failed to fully neutralize the extra liquidity created by its bond purchases for a second time since the program began in May.

The Frankfurt-based ECB said today it drained 60.78 billion euros ($80.66 billion) from money markets via seven-day term deposits, almost 13 billion euros less than the 73.5 billion euros it intended to absorb.

Banks tend to prefer to hold on to cash at the end of the year, when liquidity needs increase, said Karsten Junius, senior economist at Dekabank in Frankfurt. "The allotment therefore doesn't mean much for the situation in the money market," he said.



Keynesianism is intellectually hard, as evidenced by the inability of many trained economists to get it - Paul Krugman
by Migeru (migeru at eurotrib dot com) on Thu Feb 24th, 2011 at 04:22:30 AM EST
[ Parent ]
If you google for the first failure, you get not Bloomberg but Zero Hedge: Breaking: ECB Reports Failed Sterilization Auction, Demand For Fixed Term Deposits Comes At 0.6 BTC (06/29/2010)
A week ago, when noting the increasingly weaker results of the ECB's Term Deposit Operation, better known as liquidity sterilization, we said, to the usual ridicule: "With another auction next week, and then many more, all dependent on the amount of debt that Spain et al place "successfully", we expect the Bid To Cover to decline consistently, until we hit a 1 BTC and the ECB realizes its monetization program is a failure." It turns out we were right much sooner than expected: the ECB just reported a failed sterilization operation, attracting only €31.9 billion bids for the most recent, seventh sequential €55 billion auction, in which that amount of sovereign bond purchases had to be "laundered" through the system.


Keynesianism is intellectually hard, as evidenced by the inability of many trained economists to get it - Paul Krugman
by Migeru (migeru at eurotrib dot com) on Thu Feb 24th, 2011 at 04:40:27 AM EST
[ Parent ]
Zero Hedge's reaction to the second sterilization failure: Next European Leg Down? First Failed ECB Monetization Sterilization, As Central Bank Has E13 Billion Shortfall In Bond Bids (12/28/2010)
Today, to little fanfare, the ECB managed to obtain just E60.8 billion in tender interest for its most recent 7 Day SMP "peripheral bond monetization" operation, whereby it needed at least E73.5 billion to be able to offload all of its cumulative acquired sovereign bonds to other financial institutions: a de facto sterilization, which is why the ECB has so far been claiming it is not monetizing debt (as it constantly rolls the held balance on other bank balance sheets). That is no more: following today, the ECB is left with just under E13 billion in sovereign holdings and thus are not sterilized. ... And what is most disturbing is that this complete lack of interest (or telegraphed lack of bank liquidity) happened even as the marginal rate jumped by over 50%, from 0.6% to 1%- the same as the maximum rate allowed on an auction. ... Because despite what ING economist Martin Van Vliet told Reuters, "It has happened before but I wouldn't make too much of a big deal out of it", we would make a big deal out of it, as this has actually not happened before.
The entry is accompanied by a historical chart of all auctions up to that point.

Keynesianism is intellectually hard, as evidenced by the inability of many trained economists to get it - Paul Krugman
by Migeru (migeru at eurotrib dot com) on Thu Feb 24th, 2011 at 04:56:48 AM EST
[ Parent ]
What do you make of the overnight rate EONIA, that is supposed to rise as excess liquidity dwindles? It certainly spiked over the New Year, corresponding to a period where ECB sterilisation was failing, then fell and spiked again. It looks as if it's on an uptick at the moment after a considerable fall.

It's certainly become more volatile since mid-2010.

by afew (afew(a in a circle)eurotrib_dot_com) on Thu Feb 24th, 2011 at 05:25:15 AM EST
[ Parent ]
That chart is scary.

You could say the interbank market used to work like a clock. Or, more appropriate, like a beating heart (which is actually quasiperiodic, unlike a clock). The last 8 months look like cardiac arrest.

The reference levels here are the ECB's deposit and marginal rates of 0.25% and 1.75%

The ECB pays 0.25% overnight for excess bank reserves, so this is a lower bound for EONIA as banks can always park their excess cash at the ECB instead of lending to each other. The baseline EONIA level seems to be 0.32%, or 7 basis points (hundredths of a percent) above the ECB's deposit rate.

The ECB charges 1.75% overnight for collateralised lending to make up for reserve shortfalls, so this is an upper bound for EONIA as banks can always borrow from the ECB at the marginal rate if the other banks charge them more for overnight lencing. The EONIA appears to have reached 1.30% in Early January, which is scarily close to 1.75%

But most importantly, EONIA used to have single-day spikes but now rates stay elevated for weeks on end.

This actually bears looking at a longer data series.

Keynesianism is intellectually hard, as evidenced by the inability of many trained economists to get it - Paul Krugman

by Migeru (migeru at eurotrib dot com) on Thu Feb 24th, 2011 at 06:46:21 AM EST
[ Parent ]
The EURIBOR site sends you to Thomson Reuters for historical series, and then only two months back.

But here's a site with the data. The regular heartbeat picture has not been standard over EONIA's history. See the crises of 2001 and 2008 (from another site because larger):

For 2009:

It could be read as injection of liquidity then careful tending of same from mid-2009... Followed in mid-2010 by sterilisation having, as you suggest, a net draining effect. (Though I suppose someone else might see a different pattern, turtles etc).

There's a similar stable heartbeat pattern in mid-decade, presumably between higher upper and lower bounds?

by afew (afew(a in a circle)eurotrib_dot_com) on Thu Feb 24th, 2011 at 08:00:15 AM EST
[ Parent ]
I have a data series extending back to 2004Q4. I'll post tonight.

Keynesianism is intellectually hard, as evidenced by the inability of many trained economists to get it - Paul Krugman
by Migeru (migeru at eurotrib dot com) on Thu Feb 24th, 2011 at 08:53:09 AM EST
[ Parent ]
Now, would you describe this as "no signs of stress in the interbank market"?

Irish Banks Behind ECB Lending Surge - WSJ.com

The ECB's disclosure late last week that it had lent around €16 billion, or $21.90 billion--the highest levels since June 2009--under its emergency marginal lending facility left many financial-market participants searching for the cause.

...

The overnight facility used by the Irish banks carries a 1.75% interest rate. Irish banks are the euro bloc's heaviest users of the ECB's regular lending facilities, borrowing €126 billion in January, according to data from the Irish central bank. Some traders and analysts had speculated that the spike in ECB funding may have been caused by a liquidity crisis at a euro-zone bank.

Though the unexpected overnight-lending spike caught investors' attention last week, it didn't have much of an effect on bond yields or the euro because analysts didn't see evidence of broader stress in the banking system or short-term money markets.

It appears the analysts have a memory extending back only 24 hours. Over that time frame, yes, EONIA didn't show any signs of stress.

To be fair, my own view about the Irish MLF spike was that there was actually no cause for alarm since the banks responsible were already being restructured. But how you can claim that there are no signs of anything amiss in the interbank market escapes me. Last week's episode was simply due to Anglo Irish Bank and Irish Nationwide Building Society releasing some assets from being held as weekly collateral for the ECB's Main Refinancing Operations to being held as daily collateral for the MLF. This was done in preparation for a sale of €15bn-worth of deposits as part of the wind-down of the two banks.

Keynesianism is intellectually hard, as evidenced by the inability of many trained economists to get it - Paul Krugman

by Migeru (migeru at eurotrib dot com) on Thu Feb 24th, 2011 at 09:09:58 AM EST
[ Parent ]
Apparently no worries in this Tuesday 22 Feb report, with a contribution from an analyst we've see upthread:

MONEY MARKETS-LIQUIDITY PICTURE INCOMPLETE | Reuters

Banks opted to reduce their borrowing from the ECB at the central bank's seven-day tender, draining 17.5 billion euros. But markets awaited the results of tomorrow's three-month loan offering before changing their outlook on liquidity conditions.

The overnight interbank rate EONIA= -- which typically rises as excess liquidity dwindles -- was expected to continue its downward trend during the current maintenance period.

"Even if (ECB borrowing) would have fallen further I think the liquidity situation is abundant," said Commerzbank rate strategist Christoph Rieger. "Given that tomorrow we will have another 3-month LTRO with only 38 billion expiring ... I don't think overnight rates will increase on the back of these results.

Longer-term ECB loans worth 38 billion euros are due to expire this week, while banks have the opportunity to borrow as much as they need at a three-month tender on Wednesday.

Analysts said that with recent money market conditions proving volatile, the ability to lock in funding for longer duration at a stable rate had become more attractive and increased demand should see liquidity pumped back in to the system.

"tomorrow's three-month loan offering", which was yesterday, was fully taken up at €119.5bn.

"expected to continue its downward trend" - in fact EONIA went up again, from 0.497% on the 21st, to 0.531% on the 22nd, to 0.661% yesterday. Though that may only be an uptick.

by afew (afew(a in a circle)eurotrib_dot_com) on Thu Feb 24th, 2011 at 10:10:49 AM EST
[ Parent ]
afew:
The overnight interbank rate EONIA= -- which typically rises as excess liquidity dwindles -- was expected to continue its downward trend during the current maintenance period.
Right, the maintenance periods are likely responsible for the heartbeat pattern. See ECB: Publication of the indicative calendars for the reserve maintenance periods in 2010 and 2011
The European Central Bank (ECB) is today publishing indicative calendars for the Eurosystem's reserve maintenance periods in 2010 and 2011. For the first time, these calendars are being published for the next two years, thereby following the practice adopted in setting the schedules for the meetings of the Governing Council of the ECB.


Keynesianism is intellectually hard, as evidenced by the inability of many trained economists to get it - Paul Krugman
by Migeru (migeru at eurotrib dot com) on Thu Feb 24th, 2011 at 11:31:18 AM EST
[ Parent ]
It looks that in 2007 overnight rates were pushed to a lower bound and have stayed there, punctuated by somewhat regular spikes upwards. This could be roughly consistent with the contraction of the shadow banking system's credit creation. Anyone who understood the implications of this metric would have suspected that trouble might have been looming, and conversely, those who suspected trouble could have produced the contraction.

As the Dutch said while fighting the Spanish: "It is not necessary to have hope in order to persevere."
by ARGeezer (ARGeezer a in a circle eurotrib daught com) on Thu Feb 24th, 2011 at 09:20:34 AM EST
[ Parent ]
The second graph is 2009, monthly. It certainly looks like deliberate intervention in midyear.
by afew (afew(a in a circle)eurotrib_dot_com) on Thu Feb 24th, 2011 at 09:34:11 AM EST
[ Parent ]
This is a version of the chart I made for the Eurointelligence column

You can see the ECB last changed its interest rates on 13 May, 2009. That's when the heartbeat pattern begins.

The ECB's refinancing operations had switched to unlimited liquidity on 15 October 2008 (a month after Lehman and the week after the global markets crashed on a Friday and the IMF warned of "a global meltdown").

Keynesianism is intellectually hard, as evidenced by the inability of many trained economists to get it - Paul Krugman

by Migeru (migeru at eurotrib dot com) on Thu Feb 24th, 2011 at 09:45:53 AM EST
[ Parent ]
The second graph is 2009...

:-/  Thanks, I mistook the months for years. Makes more, if different, sense now. Certainly a dramatic change in pattern.

As the Dutch said while fighting the Spanish: "It is not necessary to have hope in order to persevere."
by ARGeezer (ARGeezer a in a circle eurotrib daught com) on Thu Feb 24th, 2011 at 10:39:19 AM EST
[ Parent ]


Keynesianism is intellectually hard, as evidenced by the inability of many trained economists to get it - Paul Krugman
by Migeru (migeru at eurotrib dot com) on Thu Feb 24th, 2011 at 03:49:50 PM EST
[ Parent ]
Pretty clear. The deposit-MLF band was brought down swiftly in early 2009 to its current level which started in May, 2009. EONIA was stabilised (with moderate spikes on the cusp of one maintenance period to the next). Then, soon after the beginning of bond purchases, EONIA becomes much more volatile, trending upwards.

The sign there is something else at work since mid-2010 is that the deposit-MLF band has not changed. "Something else" could be sterilisation, or possibly aliens learning to use a Wii.

by afew (afew(a in a circle)eurotrib_dot_com) on Thu Feb 24th, 2011 at 04:25:58 PM EST
[ Parent ]
or frickin' sharks with frickin' laser beams attached to their frickin' heads.

Keynesianism is intellectually hard, as evidenced by the inability of many trained economists to get it - Paul Krugman
by Migeru (migeru at eurotrib dot com) on Thu Feb 24th, 2011 at 05:06:58 PM EST
[ Parent ]
One can see that it might make sense to raise interest rates.

For instance, raise the deposit rate by 0.50% to 0.75%, raise the refinacing rate by 0.25% to 1.25%, and leave the marginal rate unchanged at 1.75%.

Keynesianism is intellectually hard, as evidenced by the inability of many trained economists to get it - Paul Krugman

by Migeru (migeru at eurotrib dot com) on Thu Feb 24th, 2011 at 05:16:03 PM EST
[ Parent ]
There's a similar stable heartbeat pattern in mid-decade, presumably between higher upper and lower bounds?

As my data set doesn't extend back beyond 2004, I plot only from then.

The plateau in the middle of the chart with the ECB rates at 3-4-5% corresponds to the initial period of the crisis. The ECB raised rates by 0.25% on June 13, 2007, a week before Bear Stearns kicked off the financial crisis by closing its subprime hedge funds. Then the ECB was in a wait-and-see mode until March (around the time that Bear Stearns finally failed). You can see EONIA is rather chaotic during that period.

The other major qualitative feature of the chart is that prior to the Lehman failure interbank rates hovered above the main refinancing rate. However, since 15 october, 2008 (the start of the steep downward rate movement from the peak) the ECB MRO has been on "fixed rate, unlimited tender", which has allowed the banks to hoard cash and has dropped the interbank baseline to the deposit rate.

The fact that the baseline of interbank rates remains close to the deposit rate would seem to indicate that the banks are still hoarding cash. However, the ECB has been withdrawing liquidity from the system. The MRO is still "unlimited tender" but other "liquidity support" (in the form of unlimited auctions at maturities longer than a week) is being withdrawn. Here I have argued that the "bond sterilization" is, in fact, withdrawing liquidity too.

So, banks are hoarding cash but spare liquidity is very tight. This might explain the growing instability in EONIA. It might be a sign of very unequal states of health among European banks.

Looking into this I found the following from last September (with my emphasis):

But the two-pronged approach, while messy, could work. If unlimited cash was available only in one-week rather than three-month portions by then, the ECB would still get the normal impact from a rate hike.

"If you wanted to continue providing unlimited liquidity while raising interest rates, the system in Europe would in many ways facilitate that quite easily," said Societe Generale economist James Nixon.

"The impact of a 25 basis point hike would be exactly the same. It would just mean that overnight rates, instead of being centred around the ECB's main refinancing rate, would sit at a small margin to the deposit rate." The ECB's deposit rate is currently 0.25 percent, while the benchmark is 1 percent.

That could all change, though, if the health of vulnerable banks suddenly improved. Excess cash in the system would soon disappear as banks sucked it up, driving market rates the 75 basis points towards the refinancing rate.

Such a move, although likely to take time, would be bigger than any single interest rate hike in the ECB's history, and all without the ECB's finger going near the interest rate trigger.

(Reuters: Bank aid may be no barrier to ECB rate hikes, September 23, 2010)

By "suck up excess cash" Nixon doesn't mean "hoard" (which is what they're doing as the vulnerable banks are unhealthy) but actually "use".

Keynesianism is intellectually hard, as evidenced by the inability of many trained economists to get it - Paul Krugman

by Migeru (migeru at eurotrib dot com) on Fri Feb 25th, 2011 at 02:24:10 AM EST
[ Parent ]
So the recent more prolonged spikes, taking EONIA above the refinancing rate a couple of times, could be the result of healthier banks looking for liquidity to use (ie lend and therefore inject into the economy), and having difficulty finding it because the ECB is tightening by sterilising bond purchases?
by afew (afew(a in a circle)eurotrib_dot_com) on Fri Feb 25th, 2011 at 04:40:37 AM EST
[ Parent ]
I'd say it's more about unhealthy banks scrambling for liquidity.

EONIA, unlike the ECB's MRO or MLF, doesn't require the posting of collateral.

So a bank all of whose clean assets are already pledged at the MRO needs to look at the unsecured interbank market. If they are paying more for Eonia than they would pay for 3-month Euribor it means the Euribor is closed to them.

A key difference between Eonia and Euribor is that Euribor is an offered rate whereas Eonia is the average rate at which actual overnight lending took place.

Keynesianism is intellectually hard, as evidenced by the inability of many trained economists to get it - Paul Krugman

by Migeru (migeru at eurotrib dot com) on Fri Feb 25th, 2011 at 04:54:01 AM EST
[ Parent ]
OK, got it. A little more reaches the light of day (mine, anyway) with each post.

Maieutics.

by afew (afew(a in a circle)eurotrib_dot_com) on Fri Feb 25th, 2011 at 05:01:46 AM EST
[ Parent ]
For me, too.

I understand a lot more now than a week ago, when I fired off the first inchoate version of my argument.

Appropriately, now I know more about how much I don't know. At least I have located a bunch of data I have yet to examine.

Keynesianism is intellectually hard, as evidenced by the inability of many trained economists to get it - Paul Krugman

by Migeru (migeru at eurotrib dot com) on Fri Feb 25th, 2011 at 05:24:37 AM EST
[ Parent ]
(channelling Unca Donald)

It is rightly acknowledged that people of faith have no monopoly of virtue - Queen Elizabeth II
by eurogreen on Fri Feb 25th, 2011 at 10:08:37 AM EST
[ Parent ]
And a spike about once a month. Interesting. Audits or reports of some kind? Liquidity-stress from real economy (pay-day or something)?

Banking practise details needed here, I suspect.

A vote for PES is a vote for EPP! A vote for EPP is a vote for PES! Support the coalition, vote EPP-PES in 2009!

by A swedish kind of death on Fri Feb 25th, 2011 at 06:38:05 AM EST
[ Parent ]
Migeru:
the maintenance periods are likely responsible for the heartbeat pattern
I have not yet attempted to correlate the ECB's reserve maintenance calendar with the spikes.

Keynesianism is intellectually hard, as evidenced by the inability of many trained economists to get it - Paul Krugman
by Migeru (migeru at eurotrib dot com) on Fri Feb 25th, 2011 at 06:43:44 AM EST
[ Parent ]
which cannot be a good metaphor/analogy.

Reminds me very much of 'over-control' of a process by trying to constantly adjust inputs to reach a target output mean and variation, when the effect of the input differentials (plus unknown/unstudied system variables, of course) is not well known. I've seen it, for instance, in dimensional 'control' of glass crucibles via power-level manipulation in the fusion process.

paul spencer

by paul spencer (spencerinthegorge AT yahoo DOT com) on Thu Feb 24th, 2011 at 11:10:54 AM EST
[ Parent ]
Do we need a defibrilator?

Keynesianism is intellectually hard, as evidenced by the inability of many trained economists to get it - Paul Krugman
by Migeru (migeru at eurotrib dot com) on Thu Feb 24th, 2011 at 11:20:50 AM EST
[ Parent ]
Perhaps a revolution.

paul spencer
by paul spencer (spencerinthegorge AT yahoo DOT com) on Thu Feb 24th, 2011 at 11:23:01 AM EST
[ Parent ]
Congrats!  Nicely done.

Be nice to America. Or we'll bring democracy to your country.
by Drew J Jones (pedobear@pennstatefootball.com) on Thu Feb 24th, 2011 at 05:56:11 AM EST
This is just awesome.. I read it , and it is too technical.. I hope bankers read it and get it, the parts about the ECB not doing his job are crystal clear, though. Now, you show it in your job, you get name, you improve your status in your work and you become "influential".. by God we need it.

A pleasure

I therefore claim to show, not how men think in myths, but how myths operate in men's minds without their being aware of the fact. Levi-Strauss, Claude

by kcurie on Thu Feb 24th, 2011 at 08:04:06 AM EST
what next? front pager at FT?
:)

"We can all be prosperous but we can't all be rich." Ian Welsh
by melo (melometa4(at)gmail.com) on Thu Feb 24th, 2011 at 11:19:25 AM EST
[ Parent ]
Congrats Mig. Careful you don't become one of the "serious" people...life's too short. I particularly liked the early speculation that the spike in overnight borrowing might just have been a "A fat finger mistake?"

Index of Frank's Diaries
by Frank Schnittger (mail Frankschnittger at hot male dotty communists) on Thu Feb 24th, 2011 at 09:21:38 AM EST
I don't know about becoming "serious" but I've become unintelligible... which is a bad sign.
I read it , and it is too technical.. I hope bankers read it and get it.


Keynesianism is intellectually hard, as evidenced by the inability of many trained economists to get it - Paul Krugman
by Migeru (migeru at eurotrib dot com) on Thu Feb 24th, 2011 at 09:28:03 AM EST
[ Parent ]
kcurie is well known for sand-bagging us about the true extent of his knowledge and perspicacity.

paul spencer
by paul spencer (spencerinthegorge AT yahoo DOT com) on Thu Feb 24th, 2011 at 11:12:19 AM EST
[ Parent ]
Really? Well I did get some things.. but some ideas.. really truly no clue.. I now know that I do not really get how the ECB works... I need to know how a balance sheet works .. and quickly if  want to get anything.

I think most bankers in eurointelligence will get the main idea... I do hope he gets a man editorial in the FT (the only real left-wing newspaper on Earth)

A pleasure

I therefore claim to show, not how men think in myths, but how myths operate in men's minds without their being aware of the fact. Levi-Strauss, Claude

by kcurie on Thu Feb 24th, 2011 at 11:47:53 AM EST
[ Parent ]
kcurie:
the FT (the only real left-wing newspaper on Earth)
Can you imagine saying that in 2007?

Keynesianism is intellectually hard, as evidenced by the inability of many trained economists to get it - Paul Krugman
by Migeru (migeru at eurotrib dot com) on Thu Feb 24th, 2011 at 12:02:04 PM EST
[ Parent ]
Well, in 2007 they were cheerleaders for the credit bubble. Still are, of course, but today the actual needs of the economy are somewhat more closely aligned with their recommendations.

A classic case of being right for all the wrong reasons, if you ask me.

- Jake

Austerity can only be implemented in the shadow of a concentration camp.

by JakeS (JangoSierra 'at' gmail 'dot' com) on Thu Feb 24th, 2011 at 06:31:40 PM EST
[ Parent ]
Remember they were one of my main source for my "watch out" diaries. They had Gillian Tett writing in extensive detail on the shadow banking system and other arcane corners of the markets.

The front page and headlines were cheerleading, but the full content of the paper was much more useful.

Wind power

by Jerome a Paris (etg@eurotrib.com) on Fri Feb 25th, 2011 at 04:11:34 AM EST
[ Parent ]
kcurie:
Well I did get some things.. but some ideas...

While I was reading the article I felt like I was starting to understand something. But I have to go back to the article to get that feeling back.  :-)

As the Dutch said while fighting the Spanish: "It is not necessary to have hope in order to persevere."
by ARGeezer (ARGeezer a in a circle eurotrib daught com) on Thu Feb 24th, 2011 at 01:43:28 PM EST
[ Parent ]
Then the article is a keeper!

Keynesianism is intellectually hard, as evidenced by the inability of many trained economists to get it - Paul Krugman
by Migeru (migeru at eurotrib dot com) on Thu Feb 24th, 2011 at 02:20:27 PM EST
[ Parent ]
Definitely, but I think you might consider posting your original. I suspect that Muchau's "turbidity reduction" efforts might have also deleted some content.

As the Dutch said while fighting the Spanish: "It is not necessary to have hope in order to persevere."
by ARGeezer (ARGeezer a in a circle eurotrib daught com) on Thu Feb 24th, 2011 at 07:44:26 PM EST
[ Parent ]
It doesn't seem so. He removed links to sources we have discussed in this comment thread, a jab at traders' attention spans, a quote from a clueful analyst, and broke some longwinded periods into bite-sized sentences. Some of the more conversational turns of phrase also disappeared.

Keynesianism is intellectually hard, as evidenced by the inability of many trained economists to get it - Paul Krugman
by Migeru (migeru at eurotrib dot com) on Fri Feb 25th, 2011 at 02:12:25 AM EST
[ Parent ]
I really do not get most of the letter.. I get humor much mroe better

http://avionesdecercanias.blogspot.com/2011/02/se-hacen-mayores-y-famosos.html

But I do get taht steilization is nonsense.

Buying public debt at fix amrket prices does not geenrate inflation, it makes the EC work as market-maker of last resort... tat's wat the ECB should be doing , at least to avoid anotehr financial catastrophe... not that this is good enough, but at least hey should do it.

Of course, ECB should be pushing for eurobonds, transfer payments , inflation in Germany and/or quantitaive easing and/or printing money to elimiante some private debt.

A pleasure

I therefore claim to show, not how men think in myths, but how myths operate in men's minds without their being aware of the fact. Levi-Strauss, Claude

by kcurie on Fri Feb 25th, 2011 at 06:26:33 AM EST
[ Parent ]
Ah, popularisation of technical content, one of my favourite topics. And now you have sort of asked for advice.

What you write always depend on audience but for a casual but interested reader, the following are problems:

* The conclusion. A clearly stated and important conclusion will help the reader in getting the big picture when the details are hard.

A critique of the ECB's liquidity policies

In its deflationary zeal, the ECB is draining an increasing amount of cash - in the form of one-week deposits - from the money markets to offset its modest purchases of sovereign Euro bonds.

A critique of the ECB's liquidity policies

The ECB treats the Euro as it were on the gold standard and not a fiat currency.

It is good that you state it early and return to it in the end, but it is to convulated and you fail to state why it is important.

The ECB is depressing the economy by treating the euro as gold coins instead of the fiat currency it is. (Or strangling in an even more casual setting.)

* Stumbling blocs. Having several terms that cause a bit of thinking in the same, dense sentence gives the reader a sentence that is hard to pass. The reader easily thinks that he or she is not the audience and moves on.

A critique of the ECB's liquidity policies

A consequence of this policy is the steady rise in interbank rates to a point that the Euribor 1-year is now touching 1.75 per cent, which is the rate of the MLF

Interbank rates, Euribor 1-year, MLF (a Phillipino guerilla? No, wait it says something in the beginning) and a number that might be relevant. Now this sentence might be perfectly adapted to an audience that uses these terms on a daily basis, but it easily becomes a stumbling bloc for those that do not.

With easy terminology it would go something like this A consequence of this policy is the steady rise in the rates when banks borrow from banks, to a point where it now touches the rate at which ECB borrows unlimited funds to banks.

But then again, that might be to easy for a banking audience.

* Over-information in graphs. For the knowledgable, the more information the better, but for the casual reader it is confusing. Correct me if I am wrong, but you only use ECB deposit, ECB MLF and Euribor 1-year for the argument, so the rest could be cut. And should be if you wanat easy understanding.

If studied, I would guess that most readers are stumbled by the paragraph above and then halts at the graph, upon which they mentally give up understanding it, even if reading the rest.

* Expanding the argument.

A critique of the ECB's liquidity policies

Since May the ECB has failed to fully sterilise its bond purchases on two occasions, first at the end of June and then from December to February. It does appear that this past week the ECB succeeded in draining €76.5bn of liquidity to match its Security Market Programme holdings. Each failure to sterilise worried the inflation hawks. This is one of the reasons why the ECB wants the European Financial Stability Facility to do the bond buying.

But the hawks are wrong.

You have already shown that ECB is strangling the economy:

In countries where variable-rate mortgages are indexed to the 1-year Euribor, such a rise in interbank interest rates near the bottom of the recession could spell trouble.

Now you are arguing about why. To be easy to follow, it should be founded in the conclusion (both before and after the main body of arguments) and marked upon commencing.

So what you want to show is:
The ECB is depressing the economy by treating the euro as gold coins instead of the fiat currency it is. This is done based on faulty ideas of public debt always being inflationary.

And then when the second part starts mark it by something like "if we look at why this is happening" and then dive into the murky world of inflation hawk ideas.

Being taken serious often depends of marking your belonging in the serious group by being hard to read for people outside your area, so it is a trade-off.

A vote for PES is a vote for EPP! A vote for EPP is a vote for PES! Support the coalition, vote EPP-PES in 2009!

by A swedish kind of death on Fri Feb 25th, 2011 at 07:31:56 AM EST
[ Parent ]
excellent advice.

it would actually be fun to see two versions side by side, the wonky and the lay, just to see how wide the freaking gap is.

that gap... that yawning gap, into which fall trillions, (never to be seen again?).

to enable the masses to crack the code, that's the challenge, so the masters of the universe know what they do is in the sunshine.

down with obfuscatory jargon (and the proverbial multitude of sins it covers), on with the rosetta stone tactics.

"We can all be prosperous but we can't all be rich." Ian Welsh

by melo (melometa4(at)gmail.com) on Fri Feb 25th, 2011 at 08:40:22 AM EST
[ Parent ]
You're right, of course.

I evidently wrote my column for what an economist audience, but I did try to assume less knowledge in the audience, which made the thing longer and at times more convoluted. Münchau cut that down significantly.

I'm reminded of The Onion classic Manmohan Singh - The First Sikh Prime Minister Of...Okay, Here's What A Sikh Is

As the first Sikh elected to India's highest office, Prime Minister Manmohan Singh has helped change the face of... okay, just so we don't get too ahead of ourselves here, we should probably explain what a Sikh is.


Keynesianism is intellectually hard, as evidenced by the inability of many trained economists to get it - Paul Krugman
by Migeru (migeru at eurotrib dot com) on Fri Feb 25th, 2011 at 10:50:45 AM EST
[ Parent ]
A swedish kind of death:

It is good that you state it early and return to it in the end, but it is to convulated and you fail to state why it is important.

The ECB is depressing the economy by treating the euro as gold coins instead of the fiat currency it is. (Or strangling in an even more casual setting.)

How about this?

Migeru:

(basically, the ECB likes to pretend that issuing fiat Euros is as difficult as shitting gold ingots).


Keynesianism is intellectually hard, as evidenced by the inability of many trained economists to get it - Paul Krugman
by Migeru (migeru at eurotrib dot com) on Fri Feb 25th, 2011 at 10:55:34 AM EST
[ Parent ]
The pain would have to be balanced against the utility. :-)

As the Dutch said while fighting the Spanish: "It is not necessary to have hope in order to persevere."
by ARGeezer (ARGeezer a in a circle eurotrib daught com) on Fri Feb 25th, 2011 at 04:43:54 PM EST
[ Parent ]
Works perfectly for me.

A vote for PES is a vote for EPP! A vote for EPP is a vote for PES! Support the coalition, vote EPP-PES in 2009!
by A swedish kind of death on Sat Feb 26th, 2011 at 03:38:47 PM EST
[ Parent ]
Good stuff, and rich thread.

Wind power
by Jerome a Paris (etg@eurotrib.com) on Fri Feb 25th, 2011 at 05:00:31 AM EST
I know more after taking a stab at afew's questions than I did when I finished writing the article.

Keynesianism is intellectually hard, as evidenced by the inability of many trained economists to get it - Paul Krugman
by Migeru (migeru at eurotrib dot com) on Fri Feb 25th, 2011 at 05:33:55 AM EST
[ Parent ]
So I'll commit a post to remove all doubt.

Bullet points :

  • The ECB is buying sovereign bonds, to help out EU nations who are running a deficit they are having trouble financing at market rates.
  • By doing so, all else being equal, they are creating money out of nothing.
  • Creating money out of nothing, according to the operating doctrine of the ECB, is inflationary and therefore a Bad Thing.
  • In order to cancel out the inflationary effect, the ECB soaks up the same amount of money they created, by borrowing it from banks.
  • The ECB is having trouble doing this, needing to increase its offer (interest rate) and still coming up short.
  • By competing for apparently scarce money, the ECB would appear to be freezing out other potential users, thereby stifling economic activity, and driving up inflation...

Completely wrong?

It is rightly acknowledged that people of faith have no monopoly of virtue - Queen Elizabeth II
by eurogreen on Fri Feb 25th, 2011 at 10:53:30 AM EST
The even simpler version seems to be that the ECB is paying banks to borrow its own money from them - and then discovering it's being overcharged.

Wacko-nomics FTW.

Although it is good news for banks. (Do we need a Good News For Banks macro yet?)

by ThatBritGuy (thatbritguy (at) googlemail.com) on Fri Feb 25th, 2011 at 12:56:57 PM EST
[ Parent ]
  • The ECB is buying sovereign bonds, to help out EU nations who are running a deficit they are having trouble financing at market rates.

  • By doing so, all else being equal, they are creating money out of nothing.

Well, that's what the ECB believes. Trouble is, the ECB doesn't understand what money is and how it works.

The second that the ECB accepted these sovereign bonds as collateral at the discount window, they became money. New money is being created when states run deficits (as long as their bonds are acceptable collateral at the discount window), not when the ECB happens to get off its ass and fix the interest rate on those bonds.

So what the ECB is doing here is exchanging bonds (which is money, since you can post it as collateral at the discount window) for ECB reserves (which is money because it is legal tender). This neither adds to nor diminishes the liquidity in the European interbank market. The banks want to make that transaction not to increase their liquidity (which it doesn't), but because it enables them to go from paying interest at the discount window to being paid interest on ECB reserves. From the bank's point of view, there's nothing not to like here.

The problem is that the ECB believes that the above operation increases available liquidity, when all it actually does is grant a subsidy to the banks. So the ECB tries to draw out the same amount of liquidity from the interbank market that they believe they put in. Unfortunately, while the liquidity they put in is a figment of their gold-standard delusions, the method they use to drain liquidity results in a very much real diminution of interbank liquidity.

The more fundamental problem is that the ECB tries to control interest rates by offering and withdrawing liquidity. There were excellent operational reasons for doing things that way under the gold standard, but under a fiat currency it is a monumentally moronic way of running a monetary system. Because under a fiat currency, the ECB can always simply dictate interbank rates and let the amount of liquidity in the system sort itself out.

(The reason it can't do that under a gold standard is that there is an upper limit to the amount of liquidity that can be sustained in a gold standard system without creating a window of opportunity for a speculative run on the central bank. But under a fiat currency it is not usually possible to stage a run on the central bank.)

- Jake

Austerity can only be implemented in the shadow of a concentration camp.

by JakeS (JangoSierra 'at' gmail 'dot' com) on Fri Feb 25th, 2011 at 08:09:34 PM EST
[ Parent ]
And this, ladies and gentlemen, is what my article is actually about.

So, in what may be my last act of "advising", I'll advise you to cut the jargon. -- My old PhD advisor, to me, 26/2/11
by Migeru (migeru at eurotrib dot com) on Sat Feb 26th, 2011 at 03:26:21 AM EST
[ Parent ]
eurogreen:
Creating money out of nothing, according to the operating doctrine of the ECB, is inflationary and therefore a Bad Thing.

...only if it is a public bank doing so.

Private banks may do so all day every day, but they inflate the cost of the money they create - which is shared admin costs and default costs - by paying fatcat salaries and returns to shareholders.

"The future is already here -- it's just not very evenly distributed" William Gibson

by ChrisCook (cojockathotmaildotcom) on Fri Feb 25th, 2011 at 08:13:38 PM EST
[ Parent ]


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