the ECB has no capital of its own, it’s a mere facade

Conflict erupts over ECB’s return to “quantitative easing”
Nick Beams, WSWS, Oct 14 2019

A bitter conflict, characterised by one leading banking economist as a “War of the Roses” has broken out in European banking and financial circles over last month’s decision by the ECB to further loosen its monetary policy. At its meeting on Sep 12, the ECB’s governing council decided to send its base interest rate further into negative territory. It is reducing the rate from -0.4% to -0.5% and resuming its €2.6t asset purchasing program, after a hiatus of nine months, at the rate of €20b/month. There was an immediate response. Reflecting the long-standing opposition to the quantitative easing policies in German financial circles, the Bild tabloid depicted the outgoing ECB president Mario Draghi as “Count Draghila”—a vampire, sucking dry the investments of savers. This has been a continuing theme of this section of the press. On this occasion, however, it received support from higher levels. The day after the meeting, Klaus Knot, the head of the Dutch national bank, issued a statement calling the ECB’s actions “excessive.” Jens Weidmann, president of Germany’s Bundesbank said Draghi was “overshooting the mark” and Robert Holzmann, the head of Austria’s central bank, said the decision was a “possible mistake.”

Two weeks after the decision, the rift over the ECB decision was highlighted by the decision of the German representative, Sabine Lautenschläger, to resign from the ECB’s executive board. A known opponent of a further easing of monetary policy, her term did not expire until 2022. According to the initial reports of the September meeting, as many as nine members of the 25-member governing council spoke out against the decision. The extent of the opposition has been confirmed in the minutes of the meeting released last week. These show that while there was broad agreement on the need to take action to counter the ongoing slowdown in the eurozone economy, there was significant opposition to the package announced by Draghi. Most of the opposition centred on the decision to resume bond purchases. The minutes recorded that “a number of members” argued that the case for such action was “not sufficiently strong.” In announcing the decision, Draghi told a news conference there was a “clear majority” in favour of the measures,” and that an “ample degree of monetary accommodation” was needed to ensure 2% inflation over the medium term. However, it has since emerged that the decision to restart the bond-buying program was taken over the objections of ECB officials. Three members of the ECB’s governing council leaked the contents of a letter sent to Draghi by the central bank’s monetary policy committee days before the decision which advised against the resumption of asset purchases. Reporting on the leak last week, the Financial Times said:

Opponents of Draghi’s loose monetary policy fight a rearguard action to put pressure on Christine Lagarde for her to change course after she takes over at the ECB on Nov 1.

It is not the first time the committee’s advice has not been followed, but it is a relatively rare occurrence. The ECB did not officially comment on the leak but the ECB vice-president Luis de Guindos called for internal critics on the governing council not to make public their dissent, saying:

There are 25 of us, and for sure there are sometimes different views, but when a decision is taken by a clear majority, it is important to defend it. It would be much better if we tried to reduce the level of surrounding noise.

However, in view of the widening differences, the “noise” level seems certain to rise, not decrease. This is because there is a deepening rift over the direction of monetary policy in view of its failure to provide a real boost to the eurozone economy. Pointing last week to the intensification of the conflict, Carsten Brzeski, chief economist for Germany at ING, said:

The ECB seems to be in the middle of a War of the Roses. Christine Lagarde’s first task as new ECB president will be to fix the rift.

The widening divisions make that a tall order. The extent of the gap was highlighted by a statement signed by former German, Austrian, Dutch and French central bankers earlier this month. It said the loose monetary policy of the ECB was based on “the wrong diagnosis” and risked eroding the ECB’s independence. The statement reflected long-standing opposition within German financial circles to the ECB bond-buying program on the grounds that it is not legal. It said:

As former central bankers and as European citizens, we are witnessing the ECB’s ongoing crisis mode with growing concern. The ECB essentially justified its ultra-loose policy in 2014 by the threat of deflation. However, there has never been any danger of a deflationary spiral and the ECB itself has seen less and less of a threat for some time. This weakens its logic in aiming for a higher inflation rate. The ECB’s monetary policy is therefore based on a wrong diagnosis… From an economic point of view, the ECB has already entered the territory of monetary financing of government spending, which is strictly prohibited by the Treaty. Suspicion that behind this measure lies an intent to protect heavily-indebted governments from a rise in interest rates is becoming increasingly well-founded. There have been numerous claims emanating from German financial and political circles that the ECB makes policies that favour southern European countries and involve a redistribution of wealth.

The statement said negative interest rates would only “favour the owners of real assets” and “create serious social tensions.” It warned that lowering interest rates on safe investments such as government bonds had longer-term consequences for financial stability, noting:

The search for yield boosts artificially the price of assets to a level that ultimately threatens to result in an abrupt market correction or even a sharp crisis.

In a comment published in the Financial Times yesterday, Draghi’s predecessor Jean-Claude Trichet disagreed with the memorandum, writing:

I see success, continuity, unprecedented challenges and a question about the limitations of monetary policy.

He claimed that as a result of the ECB policies, in response to the worst financial crisis since the second world war, “resilience was assured.” In contrast to Trichet’s measured tone, the level of the underlying tensions was indicated in a blistering editorial published in the same newspaper on Oct 6. Characterising the statement as a “roar of the dinosaurs,” it said:

There is only one thing that could match the hollowness of the complainants and that is the hollowness of their complaint. Their memorandum reveals them as the Bourbons of central banking: they have learned nothing and forgotten nothing … If the history of the euro and the global economy demonstrates anything, it is that the true risk both to the eurozone economy and the ECB’s mandate is a policy that is too tight, not one that is excessively loose … The ECB’s hard money dogma reflects a deeper disagreement that predates the euro, over whether Europe is governed in Germany’s image or Germany in Europe’s.

The editorial pointed out that low interest rates are a global phenomenon, as is the economic slowdown, with central banks keeping rates at historic lows.

The Federal Reserve has reversed its tightening, and thinks it may have gone too far in selling off bonds bought in quantitative easing. If the signatories are right, it is not just the ECB but the entire outside world that is mistaken.

However, this is not a refutation of the claim that the supply of endless amounts of cash to the financial markets contains within it the seeds of another financial crisis. It merely points to the inherent contradictions in the policies of the ECB and the other major central banks. A decade of so-called “unconventional monetary policies” has failed to bring about a genuine revival of economic growth. The low-interest rate regime has not led to increased capital investment and industrial expansion but has only created the conditions for another financial meltdown. This is because by lowering the yield on government bonds and other more secure financial assets, the monetary policies of the world’s central banks have promoted the search for yield through investments in ever riskier financial assets. Those are likely to be the first hit in a global recession, the signs of which are becoming ever more evident.

Pindostan & China reach limited trade deal
Nick Beams, WSWS, Oct 12 2019

Pindostan & China have reached a partial and very limited agreement on trade following talks held in Washington on Thursday and Friday. It provides for a pullback by Pindostan of a tariff hike on $250b worth of Chinese goods that had been threatened for next week. In return China has increased purchases of Pindo agricultural products and agreed on the need for stabilization of the Chinese currency. The limited agreement was described by Trump as a “substantial phase one deal” following a meeting yesterday with Chinese vice-premier and chief trade negotiator Liu He at the White House. The full text will be finalised in discussions between Pindo & Chinese boxtops over the next five weeks. China has agreed to purchase an additional $40b to $50b worth of Pindo agricultural products, and gave a commitment to further open its economy to the operation of international financial services. It has also agreed to tighten control of intellectual property in response to continuous Pindo allegations of theft. In addition, the two sides reported progress on other matters without providing details, including intellectual property and currency movements. No agreement was finalised on a pact to deal with currency manipulation, but Steven Mnuchin said discussions were “almost complete.” The reaching of a deal is the result of a shift by the Trump administration. In the lead up to the talks, Trump made clear on numerous occasions that he was not inclined to make a limited agreement, and preferred a big deal or not one at all. But facing the possibility of a sharp fall on markets if negotiations had broken down and amid the ongoing pressure created by the Demagogs’ impeachment investigation, Trump appears to have decided to claim a win. The markets responded enthusiastically, with the Dow up 500 points at one point during the day before finishing up by more than 300 points.

For all the celebrations on Wall Street, however, the agreement is very limited, described by one financial analyst in a comment to the Financial Times as “cosmetic.” While China will make additional purchases of agricultural products, they may not even reach the level attained before the trade conflict broke out. Overall, the Chinese concessions have been described as “relatively minor,” essentially a repackaging of measures it had agreed to in previous rounds of talks. Pindostan has made little movement. None of the existing tariffs will be removed or even reduced. The major component of deal is the Pindo decision to suspend the threatened hike in tariffs on $250b worth of Chinese goods from 25% to 30%, which had been set to take effect next week. At this point, the agreement does not appear to include the withdrawal of a 15% tariff on more than $150b worth of Chinese consumer products, scheduled to come into effect on Dec 15. Major areas of conflict have not been included. The deal does not cover the Commerce Dept’s actions against Huawei and other Chinese technology firms that have been placed on the department’s “entity list.” This means that companies have to apply for a licence to supply these firms with components, with the presumption that it will not be granted. In discussions with Pres Xi Jingping on the sidelines of the G20 summit in June, Trump agreed to ease the restrictions on Huawei. So far, however, no licences have been signed. The agreement makes no move towards resolving the core issues that Pindostan laid out at the start of the conflict in May 2018. These centre on its opposition to the state subsidies to major Chinese firms and the development of new technologies as part of the “Made in China 2025” program of the Xi regime. Key sections of the Pindo military intelligence apparatus have made it clear, particularly over the last year as the trade war has escalated, that they regard China’s technological development as an existential threat to the economic and military dominance of Pindostan. This is reflected in the escalation of bans and restrictions on Huawei and other Chinese high-tech firms, coupled with a push by the administration to secure allies in the China conflict.

Speaking at a meeting in Australia this week, as the trade talks went ahead in Faschingstein, Commerce Sec Wilbur Ross made a pitch for Australian support on the basis that when investment was taken into account, Pindostan rather than China was Australia’s most important economic partner. Ross said Pindostan was addressing “fundamental issues” in its relationship with China. He repeated accusations that China engaged in forced technology transfers, cyber intrusions and intellectual property theft, and that it distorted international markets through the payment of industrial subsidies to state-owned enterprises. None of these key issues has been touched in the interim agreement, and they will be the subject of what Trump has called phase 2. It remains to be seen how the most strident anti-China hawks in the administration will react to yesterday’s agreement. But it falls far short of what figures such as Peter Navarro have been advocating. This week the WSJ cited a memo prepared by the Hudson Institute’s Michael Pillsbury who advises the administration on its China policy. The memo outlined a series of measures aimed at restricting or denying China’s access to Pindo capital markets and restricting its growth. The recommendations included limiting investments in pension funds, developing legislation to deny China access to Pindo capital, advancing relations with Taiwan and backing legislation to impose sanctions in response to Beijing’s actions in the South China Sea. Such measures may be on the back burner for now, at least in the period leading up to the signing by Trump and Xi of the “phase one” agreement expected to take place next month. However, once this truce is over, all the key issues in the conflict will come to the surface.

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