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- Jake Friends come and go. Enemies accumulate.
But I would not care to place any expensive bets on the proposition that such drastic measures will less harmful to the domestic German economy than a transfer union. You'd be trading a harmless fix for a harmful one to avoid offending the eccentricities of a handful of Hayekian preacher men in the Bundesbank.
In other news:
In Germany, some media were already decrying the "death" of the Bundesbank after it failed to prevent the plan while some analysts said the ECB was taking on a role closer to that of the US Federal Reserve.
But everybody always shouted at me that this isn't so and that the Bundesbank has as a part of an ancient conspiracy super secret powers and can somehow control the ECB by raising its brow.
I feel vindicated.
Perhaps someone should inform the BuBa that it no longer has any importance and should shut up?
The wordiness is an compensation for the lost influence.
And as you admitted by throwing in along with the press, media is much more relevant.
54% of Germans want the Constitutional Court to say No Most commentators are heavily discounting a Yes, or Yes but vote by Germany's Constitutional Court on the ESM next week. Spiegel Online reports of a poll showing that 54% of Germans want the court to say No. Only 25% want the Court to reject the case. The poll shows that the German public has become increasingly hostile (a sentiment no doubt whipped by the Bundesbank and comments such as those above.) 53% are against transferring further competences to the EU, while 43% want Greece out of the eurozone. Der Spiegel made the point that a No vote by the Constitutional Court would also automatically killed off Draghi's OMT. In another article, Spiegel reports on the political reaction to the decision. Most of it is unremarkable. But we were struck by a comment from Jurgen Trittin, head of the Greens in the parliament, who said that the OMT would greatly increase the risk that Germany's ESM contribution and credit guaranties would be defaulted on. He said by refusing eurobonds, Angela Merkel has forced the ECB to monetise debt through the backdoor.
Most commentators are heavily discounting a Yes, or Yes but vote by Germany's Constitutional Court on the ESM next week. Spiegel Online reports of a poll showing that 54% of Germans want the court to say No. Only 25% want the Court to reject the case. The poll shows that the German public has become increasingly hostile (a sentiment no doubt whipped by the Bundesbank and comments such as those above.) 53% are against transferring further competences to the EU, while 43% want Greece out of the eurozone. Der Spiegel made the point that a No vote by the Constitutional Court would also automatically killed off Draghi's OMT.
In another article, Spiegel reports on the political reaction to the decision. Most of it is unremarkable. But we were struck by a comment from Jurgen Trittin, head of the Greens in the parliament, who said that the OMT would greatly increase the risk that Germany's ESM contribution and credit guaranties would be defaulted on. He said by refusing eurobonds, Angela Merkel has forced the ECB to monetise debt through the backdoor.
And they have never said no to an european treaty before.
The court will either decide the law can be put in force or it will decide there must be a ruling in the matter (next year or so). I find the former is more likely. The court will NOT decide on the constitutionality next week.
And in in the current situation a stay would be enough to wreck the eurozone.
Seriously:
I think Asmussen is because of his long career inside the finance ministry more used to public diplomacy and the necessity of compromise. He is also used to support his boss in public, in this case Draghi.
Weidmann is more a product of the absolute and irresponsible Bundesbank culture.
Not much of an explanation but the best I can muster.
Weber (and Stark)
resigned. And Weidmann is outvoted again and again.
The reaction from Germany was one of outrage. At the press conference, Draghi said that one member vote No - no prizes for guessing who. Draghi said different central banks expressed different views, but all converged to this policy. As reported by Frankfurter Allgemeine and others, a Bundesbank spokesman quoted him as saying that he rejected the OMT on the grounds that it was too close to monetary financing, and that they would risks for taxpayers. The FT's editorial headline says: Mr Draghi's audacious gamble. The comment said that the SMP fell short for technical reasons, which the OMT has fixed. But it warned that the heavy lifting has yet to be done. Italy and Spain still have to apply for a programme. And the process of closer integration remains subject to political risks. While the non-German press seemed mostly impressed, the Germans went on a verbal rampage. Holger Stelzner writes in Frankfurter Allgemeine that the decision means a formal end of the separation between monetary and fiscal policy in Europe. The southern countries can now continue to amass at low interest rate, without having to worry about financial markets. The northern countries are also happy, not having to keep asking their parliaments for more money. He says the conditionality can never be applied in practice. Will the ECB stop buying bonds because Italy refuses to reforms its dismissal laws? He concludes with a reference to the German constitutional court, and wonders what the courts view on this policy will be? Marc Beise, writing in Suddeutsche Zeitung, defends the Bundesbank. He said the truly bad aspects of Draghi's decision was that the ECB left no doubt that it wants the euro to survive (Yes, we, too, had to read that sentence twice.) He writes this is not a statement a central banker should make. This is for politicians. He says the ECB has crossed an important line with its decision, but it is not irreversible. They will not be able to save the euro against Germany. Note that these are Germany's two most important newspapers, straddling a wide ranging of public opinion from the right (FAZ) to the centre-left (SZ). Interestingly, Bild Zeitung was relatively more moderate than the "serious" newspapers. Nicolas Blome dressed up his commentary in a pseudo-factual Q&A, in which he says that inflation will come, of course, but not immediately.
At the press conference, Draghi said that one member vote No - no prizes for guessing who. Draghi said different central banks expressed different views, but all converged to this policy. As reported by Frankfurter Allgemeine and others, a Bundesbank spokesman quoted him as saying that he rejected the OMT on the grounds that it was too close to monetary financing, and that they would risks for taxpayers.
The FT's editorial headline says: Mr Draghi's audacious gamble. The comment said that the SMP fell short for technical reasons, which the OMT has fixed. But it warned that the heavy lifting has yet to be done. Italy and Spain still have to apply for a programme. And the process of closer integration remains subject to political risks.
While the non-German press seemed mostly impressed, the Germans went on a verbal rampage.
Holger Stelzner writes in Frankfurter Allgemeine that the decision means a formal end of the separation between monetary and fiscal policy in Europe. The southern countries can now continue to amass at low interest rate, without having to worry about financial markets. The northern countries are also happy, not having to keep asking their parliaments for more money. He says the conditionality can never be applied in practice. Will the ECB stop buying bonds because Italy refuses to reforms its dismissal laws? He concludes with a reference to the German constitutional court, and wonders what the courts view on this policy will be?
Marc Beise, writing in Suddeutsche Zeitung, defends the Bundesbank. He said the truly bad aspects of Draghi's decision was that the ECB left no doubt that it wants the euro to survive (Yes, we, too, had to read that sentence twice.) He writes this is not a statement a central banker should make. This is for politicians. He says the ECB has crossed an important line with its decision, but it is not irreversible. They will not be able to save the euro against Germany.
Note that these are Germany's two most important newspapers, straddling a wide ranging of public opinion from the right (FAZ) to the centre-left (SZ).
Interestingly, Bild Zeitung was relatively more moderate than the "serious" newspapers. Nicolas Blome dressed up his commentary in a pseudo-factual Q&A, in which he says that inflation will come, of course, but not immediately.
They will not be able to save the euro against Germany.
Fascinating... Logically, if "Germany" doesn't want the Euro any more, it should leave, rather than destroy it. It is rightly acknowledged that people of faith have no monopoly of virtue - Queen Elizabeth II
Marc Beise, writing in Suddeutsche Zeitung, defends the Bundesbank. He said the truly bad aspects of Draghi's decision was that the ECB left no doubt that it wants the euro to survive (Yes, we, too, had to read that sentence twice.)
the treaties assume a permanent euro and Draghi is obligated to operate on the basis of the treaties. Otherwise he is violating his duties in a way he could be impeached.
[...] He said the truly bad aspects of Draghi's decision was that the ECB left no doubt that it wants the euro to survive [...] He says the ECB has crossed an important line with its decision, but it is not irreversible. They will not be able to save the euro against Germany.[...]
Am I actually reading these words? -----sapere aude
And as people (though not the markets) seem to expect higher future inflation already... Peak oil is not an energy crisis. It is a liquid fuel crisis.
bond rates would adapt going forward, taking into account the higher inflation.
In any event, it would denude the value of outstanding portfolios without precipitating cascading bankruptcies the way the alternative option for denuding the value of outstanding bond portfolios (which is to say default) would.
Except I don't see why the short-run rates should not be affected by inflation. Except due to the current liquidity trap, I suppose. Peak oil is not an energy crisis. It is a liquid fuel crisis.
Empirically, this breaks down more and more the farther you go from the overnight rate, for various reasons that I will not pretend to fully understand (but which are presumably related to the absence of a consensus on long-term policy rate volatility coupled with credit constraints on potential arbitrageurs preventing the actual construction of the hypothetical tracking portfolios which could enforce the relationship). But it holds up quite well for the short-maturity end.
Basically, you can offer people a loan from today to tomorrow (where "tomorrow" means "a month to a quarter from now") at today's rate and from tomorrow to the day after tomorrow at the rate you think will obtain tomorrow, plus a payment for the risk that the rate you think will obtain tomorrow is not, in fact, the risk that turns out to actually obtain tomorrow.
If you know what the central bank is doing today (which you do, because the CB tells you) and you can predict the upper limit on how much it is going to change what it is doing tomorrow (which you can for small enough values of "tomorrow," because the CB makes changes in a gradual manner) then there exists an equation which will tell you what the arbitrage-free price of that risk you took on is.
But a loan from today to tomorrow and another loan from tomorrow to today (at a rate agreed upon today) is just a loan from today to the day after tomorrow. So they should have the same total interest cost.
Now repeat this entire setup to add a loan from the day after tomorrow to the day after the day after tomorrow.
Now, in principle you can do this for the whole yield curve, and it does hold very well for the short maturity end. But there are three places it can break down as you go further out the yield curve:
First, the equation that tells you what the fair markup of a forward rate is depends on knowing the boundaries of the variation in what the CB is going to do. You probably know that a month into the future. You might know it a year into the future. Five years? Not so much. Ten years? Fuggetaboutit.
Second, the equation that tells you the fair markup only holds if people are actually able to borrow and sell forward contracts that are overpriced and borrow cash to buy forward contracts that are underpriced. Now, if you were a loan officer at a major bank and some City puke came along and told you that he had spotted an opportunity for making free money, but it required that you let him borrow money for eight years, and that he was right about how much the central bank would change the interest rate during those eight years...
... then you'd tell him to go play on the highway.
So for the long maturity end of the yield curve the arbitrage-free price may not actually obtain, even if there is a consensus on what the volatility would likely be. Because people's credit lines are limited.
And third, even if the first arbitrage relation were in force (if nothing else then because every bond trader has read the same sort of books I have, and the only unpardonable sin for a bond trader is to fuck up while everyone else does not), the arbitrage relation between forwards and annuities may not hold. Because if you tell a banker that you've found an arbitrage opportunity between annuities and forwards, then he'll go "yeah, that's what Long Term Capital Management thought too," and tell you to go play on the highway.
(Incidentally, this is why I do not usually unpack the jargon until someone asks me to. I didn't even manage to get rid of all the financespeak in this one.)
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