ECB's Counterproductive QE: Whatever It Takes Morphs Into "As Long As It Takes"

-edited

The ECB cut interest rates 10 basis points to -0.50% and promised more QE. Trump is howling.

As Long As It Takes

The ECB cut rates today and issued a 5-Point Press Release Statement emphasis mine.

(1) The interest rate on the deposit facility will be decreased by 10 basis points to -0.50%. The interest rate on the main refinancing operations and the rate on the marginal lending facility will remain unchanged at their current levels of 0.00% and 0.25% respectively.

(2) Net purchases will be restarted under the Governing Council’s asset purchase programme (APP) at a monthly pace of €20 billion as from 1 November. The Governing Council expects them to run for as long as necessary to reinforce the accommodative impact of its policy rates, and to end shortly before it starts raising the key ECB interest rates.

(3) Reinvestments of the principal payments from maturing securities purchased under the APP will continue, in full, for an extended period of time past the date when the Governing Council starts raising the key ECB interest rates, and in any case for as long as necessary to maintain favourable liquidity conditions and an ample degree of monetary accommodation.

(4) The modalities of the new series of quarterly targeted longer-term refinancing operations (TLTRO III) will be changed to preserve favourable bank lending conditions, ensure the smooth transmission of monetary policy and further support the accommodative stance of monetary policy.

(5) In order to support the bank-based transmission of monetary policy, a two-tier system for reserve remuneration will be introduced, in which part of banks’ holdings of excess liquidity will be exempt from the negative deposit facility rate.

In the Press Conference Introductory Statement the ECB commented on the "continued shortfall of inflation with respect to our aim", noting that "incoming information indicates a more protracted weakness of the euro area economy and muted inflationary pressures."

"The risks surrounding the euro area growth outlook remain tilted to the downside. These risks mainly pertain to the prolonged presence of uncertainties, related to geopolitical factors, the rising threat of protectionism and vulnerabilities in emerging markets," said Mario Draghi.

Danish Central Bank Cuts to -0.75%

"Naive Boneheads"

Yesterday, Trump called Jerome Powell and the Fed "Naive Boneheads"

Trump Howls Politely Today

In a Tweet today, Trump was unusually polite.

Trump complained about the strong dollar, Euro depreciation, and Europe getting paid to borrow money.

Counterproductive Policy

A few days ago, Eric Dor, Director of Economic Studies at the IESEG School of Management in Paris emailed an article with some interesting charts regarding the Counterproductive Interest Rate Policy of the ECB.

I discussed Dor's article in Questioning Lagarde as Gross Interest Income in Germany Heads Towards Zero

Email from Lacy Hunt

Shortly after posting Dor's take, Lacy Hunt at Hoisington Management, pinged me with these comments.

"Dor's article is outstanding. This is consistent with the great theoretical economics of the late Stanford economist Ronald McKinnon who argued that even before interest rates fall below zero, the counterproductive feedback loops outweigh the benefits of the lower rates even if the interest rates are lower in real as well as nominal terms. If you are not familiar with McKinnon's economics, I strongly urge you to do so."

Ronald McKinnon

On October 6, 2014, the LA Times reported Ronald McKinnon Dies at 79; Economist Opposed Fed Asset Purchases

Ronald McKinnon, a retired professor of economics at Stanford University who warned Federal Reserve policy makers including former Chairman Ben Bernanke that its large-scale asset purchases would harm the economy, has died. He was 79.

McKinnon specialized in international trade and finance, economic development and monetary theory and policy during his five decades at Stanford. The author of numerous academic papers, he also wrote eight books, including “The Unloved Dollar Standard: From Bretton Woods to the Rise of China” (2013). In addition, he worked as a consultant to central banks, the World Bank and the International Monetary Fund.

In the early 1970s, McKinnon helped introduce the concept of financial repression, the idea that government intervention in credit markets impedes economic growth.

In 2010 McKinnon was one of 23 economists and investors who wrote an open letter to Bernanke, then the Fed’s chairman, calling for him to end the central bank’s quantitative easing program of buying bonds to keep interest rates low.

“We disagree with the view that inflation needs to be pushed higher, and worry that another round of asset purchases, with interest rates still near zero over a year into the recovery, will distort financial markets and greatly complicate future Fed efforts to normalize monetary policy,” the letter said.

In addition to his scholarly work, McKinnon wrote opinion pieces for the Wall Street Journal, the Financial Times and other financial publications. He was critical of U.S. government pressure on China to speed up the appreciation of its currency to end trade imbalances between the two countries.

“Focusing on the yuan-dollar rate is a serious distraction, and it’s time for the U.S. to back off from bashing China over problems that are born mostly at home,” he wrote in a 2010 Bloomberg News column.

Well-Deserved Spotlight

The ECB will pursue QE for as long as it takes, even if it doesn't work at all (and it doesn't).

Thanks to Lacy Hunt for throwing a well-deserved spotlight on Ronald McKinnon.

Mike "Mish" Shedlock

Comments (45)
No. 1-18
Bam_Man
Bam_Man

The post-Bretton Woods, debt-based fiat monetary system has already far exceeded its shelf life. We can expect ever more bizarre Central Bank shenanigans, as they desperately try to keep it going.

Six000mileyear
Six000mileyear

There is no need for lower interest rates (or a central bank for that matter) when financial markets will gladly buy stocks and lend money.

RonJ
RonJ

"Counterproductive Policy"

Pushing on a string doesn't work very well.

EEngineer
EEngineer

If your goal is to create a federal Europe where national governments and banks beholden to the ECB/EU, this is the policy you would take. As the ECB acquires more and more sovereign debt it's grip on those governments grows ever tighter. It's all over save the crying when the silk scarf of easy bond sales is revealed to be the leash of debtor's prison. It'll probably take another decade to play out though.

Matt3
Matt3

I find it amazing that policy makers can maintain the confidence to continue and increase current policy despite the evidence that it hasn't worked. Reminds me of the "shovel ready program". When it didn't work, the answer as to why was that it just wasn't big enough. Same mentality here! Are these people really too arrogant to even consider that they may not be right?

abend237-04
abend237-04

This latest Draghi blunder utterly destroys Powell's efforts to restore sanity to interest rates, reducing him to being simply the slowest central banker in a race to the bottom.

Country Bob
Country Bob

Several research reports looked at this latest ECB flop. Not only would the program not work if it actually went on and on, as Mish et al explained -- there is the second problem that the program will violate German law in less than 12 months.

Germany's high court has already ruled TWICE that limits on concentrations of holdings and the loss reserves, both of which were codified into law, are legally binding and Merkel (and/or her successor) must obey them. No exceptions, no "temporary" excuses. The Bundestag will need to appropriate more money (not credit / promises) and do so in a new law -- or else the chancellor must obey the existing legal limits.

No matter what Draghi or Lagarde have to say, and no matter how ineffective this nonsense has already proven in Japan and Europe and the USA -- the ECB can only throw credit at the problem for, at most, 12 months.

So Lagarde can "do whatever it takes, and this time we are serious", but she can only do it for 12 months OR LESS. After that, the AfD and other opposition groups can have the chancellor arrested. Yup, Germans take their laws seriously. "You vill follow ze rules or you vill be arrested"

Bundesbank officials who act on behalf of the ECB are also subject to prosecution.

So this latest bout of rubbish from the ECB already has an expiration date, no matter what the politicians lie about

goldendase
goldendase

"McKinnon specialized in international trade and finance, economic development and monetary theory and policy during his five decades at Stanford."

Oh yeah? If he's so smart, how come he's dead?

Country Bob
Country Bob

@Mish Editor Not sure if you have access, but according to a friend who has seen the report, Credit Agricole says the ECB will run out of authority in only SIX months. It can't even continue for a full year. I have not seen that report, but I have seen two others saying 12 months is it.

Agree with you that Draghi's program won't work if it were allowed to happen, and agree with other comments that it is more likely to be counter productive... but it can't last more than a 12 months, and if CA report is correct only six months.

The German high court already ruled (twice) that the limits are law and are enforceable. Merkel (or whomever the chancellor is next year) and Bundesbank officials could be subject to arrest. Germans take their laws seriously.

Hedge funds and big banks are already running simulations about when the ECB's authority will run out, and sending the results to their "favored" clients. But the quick consensus seems to be a year or less.

FromBrussels
FromBrussels

The financial system would ve been ever so healthy on a european scale and even globally without that fckn insane, disruptive, freaky euro currency ; it was blatantly unfair and totally undemocratic to shove that shit down our throats or up our a***s ! ...and to think they were supposed to be intelligent people those that came up with this common monstrosity...Megalomania is a bad advisor the future will show.... Well some fools will say they re having a good time flying into Barcelona or Rome without having to buy Pesetas or Lira...I guess...

Tony Bennett
Tony Bennett

Lagarde November?

Draghi needs to keep stock mar, er ... for this to work another 2 months.

With near mutiny today, can he?

Wow, you know Lacy Hunt? Impressed.

L.Ron.Hoover
L.Ron.Hoover

"They get paid to borrow money, while we are paying interest!"

We? I thought Trump was a gazillionaire... why does he need to borrow money? I don't borrow money. Who is he talking about?

Webej
Webej

B U Y I N G T I M E

Whatever It Takes Morphs Into "As Long As It Takes". Not really a transformation. It's stalling, buying time, and hoping against hope that it somehow just turns out for the better, or at least, until after the policy-maker /politician's stint.

Nobody admits to insolvency. Someone else always declares it ("enforcer" shows up as the gambler thinks of new cash-flow excuses and promises). Everything since 2008 is accounting gimmicks. Recapitalizing banks is a gimmick -- real capital is produced and saved, not created ex nihilo. Bad banks, cancerous CB balance sheets, buying up your own stock as a business model ...

Gimmixxxx Galore.

avidremainer
avidremainer

Tariff wars, currency wars, savers being denied a just reward. Worse savers wondering wether today's the day the whole system collapses. Haven't we seen this sort of thing before?

Onni4me
Onni4me

On the street level people seem very stretched with their cash here in one of the EU member country. Houses and flats cost a normal person 35 years loan to pay if they are in any good location. Madness, if one even considers such and "investment". Luckily, banks are tightening loaning even the ECB seems to float endless virtual currency everywhere. I used to be quite happy during 1980's and 1990's but somewhere after the 2008 people seem to be very tight on money. I suppose they have loaned what they can in credit cards and such and have mortgages to pay for the next couple decades... This system makes people poorer whatever the supporters of the EU say. Bubbles are blown in every asset group. Reminds me of the late 1980's just before the crisis. Banks were lending anyone with a clean credit record 50000 Marks which would make a real nice holiday for people who could not afford - or intend - to pay it back. Now I see similar ads from high interest lending companies (not banks this time). I believe the implosion is imminent in 2-3 years. Or sooner...

caradoc-again
caradoc-again

How can it ever be normalized when to do so will probably create carnage amongst zombies with increased unemployment, not gradually but likely as an avalanche?

Harry-Ireland
Harry-Ireland

Maybe I've been reading too many conspiracy-theories. But I just can't call it a coincidence that an IMF'er is being brought in to run the show at the ECB. Was this all orchestrated? What's next? SDR's?

MorrisWR
MorrisWR

ECB gave a huge shot to my EUR/USD position. I am waiting for the Fed to see if they help as well.