by Michael Roberts
Last Thursday, Mario Draghi, the current head of the European
Central bank, soon to be replaced by Christine Lagarde from the IMF,
announced a parting gift to banks and financial markets. The ECB
decided to reintroduce its bond purchasing programme in order to inject
yet more billions into Europe’s banks in order to persuade them to lend
onto industry and boost lagging growth.
This was the return of quantitative easing (QE) by the ECB. But this
time there was to be no time limit on the E20bn monthly of ECB
purchases. It was to be forever – QE to infinity! Also, the ECB would
purchase not just the government bonds of debt-ridden Italy, Spain etc
but also much riskier assets like corporate bonds.
Draghi also announced a new two-tier interest rate system for bank
cash reserves held at the central bank. These reserves have spiralled
as banks took cash from ECB purchases of government bonds they held, but
instead of lending that cash on in loans to the wider economy, the
banks just put them back in the central bank as deposits.
The ECB decided the the interest rate was to be held at zero for
excess reserves, thus making sure that banks could not lose money if
they were forced to offer negative rates to their borrowers. Banks can
now also raise funds at negative rates and deposit these funds at the
central bank up to six times the required reserve amount and get a zero
rate, thus boosting profitability.
This two-tiered idea is seen by some mainstream monetary economists as revolutionary.
In effect, the ECB is boosting bank profits with its own capital at
risk. Bank profits rise while the ECB buys government bonds at priced
which offer negative rates and banks with large excess reserves’ can
lend at a profit to those with low reserves. But this ‘revolutionary’
measure is just about the last desperate measure of unconventional
monetary policy.
The monetarists are hopeful that boosting bank profitability will
lead to an expansion of lending to business and households and get the
Eurozone out of its renewing depression. This assumes that the problem
is the banks not being prepared to lend because it is not profitable for
them. But is that the reason for low loan growth rates and
investment? It’s not the supply of money or bank profitability that is
the problem, but the demand for loans. Nobody wants to borrow to invest
or spend even at zero or negative rates, because revenues and profits
are stagnant, inflation and wage growth are low and, above all, export trade has collapsed.
You can take a horse to water (and you can make it a huge lake of
water) but you cannot make it drink if it is not thirsty. Even the
central bankers, like Draghi, are admitting now that monetary policy has
failed. And even supporters of the revolutionary new policy are not
confident: “Dual rates is monetary rocket-fuel. In contrast to
standard negative rates, to forward guidance, or QE, the marginal
effects of these policies are increasingly powerful. I am not
convinced that this specific combination of measures will suffice to
generate enough demand to create an acceleration in Eurozone activity –
but it will help.” Eric Lonergan.
The great new instrument to save capitalism from stagnation or a new slump is fiscal policy. “There
are more and more people saying that monetary policy cannot be the only
game in town, and if you don’t want more and more monetary policy the
only instrument that is left is fiscal policy.” Ex-ECB board member.
Draghi called for action by European governments, particularly those
with ‘fiscal space’, eg Germany to run budget deficits and spend. So
far, Germany has been reluctant to do so. But if it decides to up the
ante fiscally, then we can test the Keynesian solution to capitalist
recessions. I’ll make a prediction: that won’t work either.
If you have opinions about the subject matter of posts on this blog please share them. Do you have a story about how the system affects you at work school or home, or just in general? This is a place to share it.
Tuesday, September 17, 2019
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