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The ECB holds the power of the purse, not the parliaments or the governments, all courtesy of article 123 of the EU treaty.

And in fact, the ECB has on several occasions over the past year threatened to crash the banking systems of entire countries as a way to get neoliberal shock-doctrine reform packages implemented.

But don't take my word for it, just read Stiglitz's latest piece:

The discussions before the crisis illustrated how little had been done to repair economic fundamentals. The European Central Bank's vehement opposition to what is essential to all capitalist economies - the restructuring of failed or insolvent entities' debt - is evidence of the continuing fragility of the Western banking system.

The ECB argued that taxpayers should pick up the entire tab for Greece's bad sovereign debt, for fear that any private-sector involvement (PSI) would trigger a "credit event," which would force large payouts on credit-default swaps (CDSs), possibly fueling further financial turmoil. But, if that is a real fear for the ECB - if it is not merely acting on behalf of private lenders - surely it should have demanded that the banks have more capital.


Indeed, the most curious aspect of the ECB's position was its threat not to accept restructured government bonds as collateral if the ratings agencies decided that the restructuring should be classified as a credit event. The whole point of restructuring was to discharge debt and make the remainder more manageable. If the bonds were acceptable as collateral before the restructuring, surely they were safer after the restructuring, and thus equally acceptable.

This episode serves as a reminder that central banks are political institutions, with a political agenda, and that independent central banks tend to be captured (at least "cognitively") by the banks that they are supposed to regulate.

Economics is politics by other means
by Migeru (migeru at eurotrib dot com) on Sun Aug 14th, 2011 at 06:52:02 PM EST
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