ECB faces mutiny

**ECB faces mutiny from national bank governors as recession deepens
The European Central Bank is capitulating. **

By Ambrose Evans-Pritchard
Last Updated: 8:04PM GMT 23 Feb 2009

For months the ECB held sternly to the high ground of orthodoxy as the US, Japanese, British, Canadian, Swiss and Swedish central banks slashed rates towards zero and embraced quantitative easing, but a confluence of fast-moving events is now forcing it to move.

The credit default swaps that measure bankruptcy risk on the debts of Ireland, Austria and a clutch of Latin Bloc states have vaulted to dangerous levels. In the case of Ireland, the slump is spilling on to the streets. Some 120,000 marched through Dublin over the weekend to protest austerity measures.

The slow fuse on Eastern Europe’s banking crisis has detonated, leaving Austrian, Belgian, Italian and other West European banks with $1.5 trillion (£1 trillion) in exposure.

It is happening just as industrial output collapses in the eurozone’s core states. Germany’s economy contracted at 8.4pc annualised in the fourth quarter. ECB president Jean-Claude Trichet said on Monday that “a process of negative feedback” has set in where the banks and the real economy are pulling each other down in a self-reinforcing spiral. Eurozone credit is contracting. Banks are rationing credit as deleveraging gathers pace.

Rob Carnell, global strategist at ING, said the ECB has been painfully slow to acknowledge the global deflation tsunami sweeping across Europe.

“It seems divorced from reality. It is clearly nonsense to talk about inflation now: it has been negative on average for six months. The eurozone purchasing managers’ index has fallen twice as fast as in the US, so the ECB should be acting even faster than the Fed,” he said.

Mr Trichet said the ECB has increased its balance sheet by €600bn (£525bn) since the Lehman collapse in September. The bank is providing “unlimited liquidity” in exchange for a wide range of collateral, including mortgage bonds issued for the sole purpose of extracting ECB funds.

But the ECB’s leading voices have adamantly refused to contemplate going to the next stage: buying bonds and other assets with “printed money”. They see that as the Primrose path to hell. This week the tone has abruptly changed, suggesting that a majority of the 16 national bank governors on the ECB council are having second thoughts.

The apparent ring-leader is Cypriot member Anastasios Orphanides, a former Fed official and a world authority on deflation traps. He said on Monday that the ECB may have to go beyond “zero-bound” rates and revealed that an “internal discussion” was under way.

Italy’s Mario Draghi is in the “activist-easing” camp. “The experience in the US in the 1930s and Japan in the 1990s suggests that it is necessary to fight, in the early phases of the crisis, the tendency for real interest rates to rise,” he said.

Finland’s Erkki Liikanen is of the same opinion. “We are facing the worst financial crisis in our time. It is important not to exclude, ex ante, any measures.”

Julian Callow from Barclays Capital said 10 ECB governors are now doves.

This amounts to a mutiny against the Bundesbank-dominated executive in Frankurt. It is no great surprise. They have to answer to their democracies. The plot is thickening.

Ambrose is a professional shit-stirrer!

If the euro does fall apart, AEP will deserve all the credit/blame.

They’re playing to the crowd it seems. and ZIRP is implied as a better answer because what now ? … 07658.html

View of the Day: Why the European Central Bank is right
By Stephen Gallo

Published: February 23 2009 17:23 | Last updated: February 23 2009 17:23

The European Central Bank is ahead of the policy curve rather than behind it, and the euro will ultimately benefit from the ECB’s reluctance to adopt unconventional stimulus measures, according to Stephen Gallo, head of market analysis at Schneider FX.

“ECB policymakers are among the few who see the futility of believing that monetarism can fight a crisis caused by excess liquidity and debt accumulation by churning out more of it,” he says.

Markets must put aside the notion that western economies need to return to the state they were in for much of the past two or three decades, Mr Gallo says.

“This idea ignores the fact that the strong growth and low inflation seen for much of this period was a credit-driven illusion induced by deficit nations like the US and UK.”

He points to historical precedents where printing money, now under the guise of “quantitative easing” or “credit easing”, has failed.

“It is absurd to assume that the exponential growth in the monetary base will not eventually produce nasty side effects. The flood of cheap goods from developing nations is the main reason that the historical link between inflation and the supply of money has been weak.

“Although the euro faces huge challenges ahead, the architects of monetary union clearly anticipated a new paradigm where economic growth had to be procured by means other than a flow of cheap credit – namely, price stability.”

Is it possible that the Bundesbank will lose control of ECB policy and the doves/debt monkeys will take over and set policy?

Small countries like Cyprus and Malta should never have been given a vote on ECB policy. Observer status would have been good enough. Orphanides is way out of line.

What historical precedents?

The Netherlands, most of the 1970s, the 1930s in the US (it was the war that beat the recession), Japan (even though they didn’t do real easing, they did do huge deficit spending which has roughly the same effect).

Thanks YM.

I think I have highlighted the chief flaw in the ECB’s thought process.

They want “price stability”. Where prices neither shrink nor rise excessively. Not in itself a bad goal. But is it an achievable goal? If it is an impossible goal, then it is, in and of itself, surely wrong and insane to be chasing it?

How can the dream of “price stability” ever become a reality when the market in question is flooded with ever-cheaper goods from Chindia?

How can the ECB hope to square that circle?

AFAIK, the ECB are furiously keeping rates too high, depite the fact that it has no effect on the price of goods, as the goods are produced in Chindia, which pays Chindian costs, not Eurozone costs to produce.

The effect of what the ECB does is simply to make Eurozone producers progressively less competitive than the Chindians.

The ECB is furiously pushing on a string, working like mad to no effect.

geez pritchard ya euroskeptik! are you trying to outdo even yourself? If you actually manage to do that which gallery will you play to in the future?

As the American are gearing up to do - border controls, import quotas, preferred suppliers, etc. - protectionism.

All of those areas are matters where the ECB has no role or power.

I agree with you to some degree. Keeping inflation in the eurozone at 2% while import prices were dropping like a stone was madness. There was price deflation and the solution that was sought was to rebalance this by a credit induced price inflation. TBH, I’m not sure Mr. Greenspan understands the difference between price deflation/inflation and money/credit inflation/deflation. The two are not interchangable, though they do affect each other. The ECB, at the time under Mr. Duisenberg, followed the Fed down, as did all other banks around the world. Not to do so would have been to allow a competitive devaluation to rob them of their exports.

The situation is a little different this time. There really is money/credit deflation as the previous credit bubbles burst. But this doesn’t mean they have to or can do something about it. Cheapening money to zero cost has had no discernable effect in Japan. Exports are plummeting regardless of price. In addition, the strength of currencies seems to me to be less related to interest rates and more related to the strength of the underlying governments and banking systems. The eurozone is engaged on a pretty spectacular competitive devaluation in this regard, almost as good as the one in the UK.

Personally, I don’t think the ECB is either a puller or a pusher. It acknowledges the existence of string, watches it carefully and reacts accordingly when it moves - in my view the ECB follows the bond markets and sets rates accordingly.

I do agree with WGU that protectionism is on the way. I believe it will be at the outside borders of the EU, will feed into a central EU fund and the income from it will be borrowed against to provide bailouts for the individual states, administed by the ECB in a quasi-IMF role within the EU. I also believe that financial markets are likely to become severely clipped with competitive regulation - capital flows will be restricted between markets that are not tightly regulated.

Article could just as easily have been entitled “ECB faces slight disagreement”. :neutral_face:

Funny that you should use a phrase generally employed to outline the hopelessness of ZIRP and monetary stimulus policies, in order to defend them.


ECB giving up on its inflation fighting mandate,former Fed official fighting for inflationary policies,mere coincidences?you might not like AEP on this site,but he is certainly getting close to the truth on this one.The ECB cannot fool all of the people all of the time.

Um, Alan Greenspan and Ben Bernanke are also world leading authorities on escaping deflationary traps. They certainly know the theory, shame they’ve failed the practical…

I think “Easy Al” certainly never had a problem with deflation on his watch YM!:the dot com bubble?, the housing bubble?The bond market bubble?Bernanke is doing his utmost to start the biggest hyperinflationary period the world has ever seen,his work has only just started,he hasn’t failed the course yet,it’s only time for the half term report.

“Benjamin tries hard but must pay more attention to the bigger macro economic picture,I’m sure that with a more concerted effort in the second half,he will produce the excellent results we know he is capable of delivering.” B minus.

So Mr. Orpahides wrote in this:
“Monetary Policy in Deflation: The Liquidity Trap in History and Practice” … _id=512962
this concluding line:

I hate to damn a man on one article, but he seems like a bit of a tit.

  1. He quotes himself by name :unamused:
  2. He appears to suffer, like many bankers, it appears to me, from the belief that monetary policy is the be all and end all of the economy. He makes no mention of european re-armament in the late thirties as being a driver or the recovery then. Or indeed of any other event external to central bank monetary policy. He is, to put it bluntly, sufferring from regulatory capture.
  3. He has set up a straw man. A liquidity trap in the 1930s? All the way through to the recovery? I don’t think so. Up until the point that the banks were reconstituted? Yes, probably. After that? Plenty of liquidity. Not much willingness to use it, but plenty of liquidity. Same with Japan. The initial crisis is a liquidity trap. Once the mechanisms at the Central Bank are set up to provide unlimited liquidity, there is no more liquidity trap.

What there is then is a solvency trap. Nobody knows who is going to go bust. Everyone knows that there is a problem because they can see from their own balance sheets that they are screwed and they copied all their methods by stealing juniors from the companies with the biggest profits in the boom, so they know that everyone else is screwed too. But how much screwed? How long to lend for? What risk premium?

This is why Japanese zombie companies are still going bust. These companies were fatally damaged during the boom and have not been cleaned up during the deflation. They were and are insolvent. They cannot swim. They are in a pool of liquidity with the weight of their bad debts hanging from their ankles. Adding more liquidity is not going to save them.

Because these goods aren’t going to be ‘ever cheaper’ - in fact they were getting dearer by the day until the recession hit. Inflation in both china and india were running at savage levels.

The germans have the best track record of central bank policy of almost any western country - i’d rather them running the show than a bunch of inflate and devalue specialists from the PIGS.