Guest Post: Central Banks – Words and Deeds

Tyler Durden's picture

Submitted by Pater Tenebrarum of Acting-Man blog,

Misconceptions About Central Bank Policies

On occasion of an address to economists at a conference in France, Bundesbank  president Jens Weidmann reminded the audience that 'the ECB cannot solve the crisis', because it is due to structural reasons and therefore requires structural reform. Weidmann rightly fears that governments will begin to postpone or even stop  their reform efforts now that the ECB has managed to calm markets down. In a Reuters article on the topic, a number of people are quoted remarking on ECB policy. What is so interesting about this is how far removed from reality general perceptions are when it comes to judging current central bank policies.

“The European Central Bank cannot solve the euro zone crisis, Bundesbank chief Jens Weidmann told economists on Sunday, pressing the bloc's governments to get their economies in shape and tighten their fiscal rules.


Weidmann addressed an economists' conference in Aix-en-Provence, southern France, only three days after the ECB broke with precedent by declaring that it intended to keep interest rates at record lows for an extended period and may yet cut further.


"Monetary policy has already done a lot to absorb the economic consequences of the crisis, but it cannot solve the crisis," Weidmann said in his speech. "This is the consensus of the Governing Council. The crisis has laid bare structural shortcomings. As such, they require structural solutions."


Weidmann, widely recognized to be the most hawkish member of the ECB's 23-man Governing Council, does not want the bank to intervene too strongly in tackling the bloc's economic crisis, thereby allowing governments to soft-pedal reforms.




"The euro zone is on the mend, it must be at peace, protected, be allowed to heal," Coeure told the same conference on Sunday to explain the ECB's decision to issue such forward guidance, while urging governments to tackle structural problems.


The EU's top economic official, Olli Rehn, welcomed the ECB's move, saying the step – taken in response to turbulence caused by the U.S. Federal Reserve's plan to slow monetary stimulus – was needed to preserve recovery in Europe. "The United States and Europe are at different points of the economic cycle. While the U.S. has a more restrictive approach, Europe needs to continue with a more accommodative policy," the EU monetary affairs commissioner said.”

(emphasis added)

So according to Olli Rehn, because the US and the euro-zone are 'at different points in the economic cycle', the Federal Reserve is 'more restrictive' and the 'ECB more accommodative'. Let us see if that is actually true.



Fed Credit

Federal Reserve credit outstanding  plus 12 month rate of change. The US monetary base has grown at a 46.3% annualized rate over the past quarter and 14.2% over the past year (data and chart via Michael Pollaro) – click to enlarge.



Now let's compare this to the growth in ECB credit to see if the ECB is indeed 'more accomodative' than the Fed at the moment. 



ECB credit

ECB credit outstanding plus 12 month growth. The euro-zone's monetary base has been shrinking at a 41.1% annualized pace over the past quarter, and is down 10.1% year-on-year- click to enlarge.




In short, the idea that the Fed is 'more restrictive' and the ECB 'more 'accomodative' is completely contradicted by the facts pertaining to the shared continuum we all dwell in, a.k.a. 'reality'. The Fed is currently inflating at breakneck speed, while the ECB is contracting central bank credit. The notion that the Fed is 'tighter' than the ECB is a fiction, based on what people at the central banks are saying, not on what they are actually doing.


Weidmann's Fantasies

As Jens Weidmann's additional remarks showed, he is apparently hoping that central banks can really become separate entities that worry solely about the value of the currency instead of being the nexus and handmaidens of the unholy alliance between the State and the banking cartel. In fact, the ECB's statutes indicate that the ECB was originally supposed to be such a central bank, but as we have seen, ways around the limitations imposed by the statutes are constantly found as soon as perceived emergency situations arise. Said Weidmann: 

“In addition to stronger rules, we need to make sure that in a system of national control and national responsibility, sovereign default is possible without bringing down the financial system. Only then will we really do away with the implicit guarantee for sovereigns."


The Bundesbank chief also called for euro zone governments to sever what he describes as the "excessively close links" between banks and sovereign governments, saying that European banks hold too many of their own governments' bonds. "This is because banks do not have to hold any capital against their government debt, as the risk-weight assigned to sovereign bonds is zero. To counteract excessive investment in sovereign bonds, Weidmann believes that the capital rules need to be changed to take account of risk and exposure levels.

"Only then will banks be able to cope with the repercussions of sovereign default."

(emphasis added)

In short, Weidmann wants to end the three card Monte, whereby commercial banks buy the bonds issued by governments because they don't have to put any capital aside for the purpose, which bonds they then can in turn pawn off to the central bank for refinancing purposes. They do this of course in exchange for enjoying the legal privilege of fractional reserve banking, which allows them to create money from thin air. Throughout antiquity, the practice of banks using demand deposits belonging to customers for their own business purposes was deemed to be fraudulent. The modern-day legal notion that a demand deposit is a 'loan to the bank' is likely the result of legal confusion that arose as a result of the medieval usury ban (for details on this see the paragraph on 'Two Different Types of Contracts').

Weidmann wants to see the connection between banks and sovereigns severed, a connection that has been fostered by governments over many centuries in order to enable them to spend more than they take in through tax revenues.

We still remember clearly that Nicolas Sarkozy, the former president of France, openly called for banks to engage in the sovereign bond carry trade shortly before the ECB granted its LTROs. The banks didn't need to be told twice. In Spain and Italy, where sovereign bond yield had shot up to reflect growing default risk as well as a growing risk that these countries would be forced to leave the euro, commercial banks bought record amount of sovereign bonds over the ensuing 18 months.

We would also remind in this context that after several bank 'stress tests' were conducted by the EBA (the European Banking Authority – the markets didn't really trust any of the stress tests, and rightly so as the insolvency of Dexia later showed), there was talk that sovereign debt would no longer be regarded as 'risk free' by regulators. This idea has been quietly dropped in the meantime. In short, it is practically certain that Weidmann's plea is going to fall on deaf ears.

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ebworthen's picture

One answer:  end central banks.

Yes, a fantasy, but the only answer.

TheFourthStooge-ing's picture

Central Banks - Turds and Screeds

They'll shit on you and tell you it's unicorn skittles.

GVB's picture

Looks like Weidmann had a chat with Reggie Middleton

Herd Redirection Committee's picture

Weidmann is just saying the right things.  If he didn't say this, it would have to be pointed out to him.  Just the latest in the classic "Say one thing, do another" CB charade.

as the risk-weight assigned to sovereign bonds is zero

(meaning banks can buy sovereign debt literally for nothing)

I remember learning that government debt is a 'risk-free asset' in Business School, and I'm pretty sure my hand shot up and I asked "Are you shitting me"?

falak pema's picture

one cannot end CBs in this day and age. One can nationalise them. One can sever their incestuous links to private banks, one can regulate FRB mechanisms, one can install commodity based checks to fiat dissemination, one can curtail wholesale banking and separate deposit banks from investment banks, one can ensure that bank interest spreads and rates are fairly regulated by making mrkt mecanisms transparent and having honest whistle blowers.

And one can control corporate lobbying to influence legislation and judicial practices.

All this requires honest governance which requires transparency and more direct democracy to avoid crony knee jerks. 

The people have to be involved, the media has to be transparent and democratic, not owned by the fat cats. 

This in not fantasy this is doable but needs constant people's involvement.

What we don't want is to move to arbitrary measures controlled by unelected "CZARS" where ever they come from.


Wanton1's picture

Hitler closed a central bank in a split second.


TPTB_r_TBTF's picture

How did that end for him?

Herd Redirection Committee's picture

I think it ended somewhere in South America, at least it did for most of the other high ranking Nazis!

asteroids's picture

What bozo's The CRISIS what in 2008. What the hell have you morons been doing all that time?

Dareconomics's picture

Governments will not stop this dynamic voluntarily, because to do so will start a periphery bond panic.  As long as the music is playing, everyone has to dance until the dance floor collapses from the weight of all those governments and institutions.

Cult_of_Reason's picture

Watch what they do, not what they say...

involuntarilybirthed's picture

Central Banks, like a government, need a debt/balance sheet ceiling.  A point which to manage.

JustObserving's picture

The US monetary base has grown at a 46.3% annualized rate over the past quarter and 14.2% over the past year

So why are gold and silver falling?  Is it a preemptive strike by the Fed?  It is a bizarro world.

BalanceOrBust's picture

Maybe the answer is that credit across the board is collapsing at a rate that is e4ven faster.  They are pumping air into a balloon with a hole. 

Maybe everything (including gold and silver, the dollar, stocks, bonds, and yes, even the dollar) were inflated through financial derivatives and the same CB "hot money". 

This does not explain why gold and silver are falling faster than other assets, but it does explain why they are falling.  We are in a deflationary spiral but don't yet know it because the amount of hot air from CBs is almost balancing out against the air lsot through the hole in the balloon.

So where is all that CB money going?  It is replacing the money created by 70 years of credit expansion which is now collapsing on itself. 

Where does this game end?  When debts have been inflated away and we can start from scratch. 

What does it mean to start from scratch? 

Well, you start with some commodity that is really hard to find and that is immutable and does not tarnish -- say gold.  And for a few years you use this commodity as a medium of exchange.  It has the virtue that it is equally difficult for anyone to create out of thin air and thus "levels" the playing field naturallly.

Then over time, you allow certain institutions (banks) with lots of gold to create promissory notes for that gold, so that you don't have to move heavy metal around -- paper is much easier.

Then those institutions realize that they can issue more paper promissory notes than they have gold because not everyone could possibly want all their gold back at the same time.

Then when these insitutions are threatened by claims against their gold, they can create a supersctructure over them that they own shares in (call it a "central bank") that provides "guarantees" that they can pay in gold.  This creates the reassurance needed for them to go on with printing their promissory notes.

Eventually, the central bank will also be threatened because it does not have any gold.  But that is okay, because the Government can pass a law that basically allows the Central Bank to confiscate all gold at the last market price and then to revalue it overnight to twice what it was worth in private hands.  Now the central bank has more gold and the banks promissory notes are much more credible. 

But eventually foreign governments will stop accepting the promissory notes and will demand gold instead.  Then the head of government just has to close the window and say... "all those things that we bought from you for promissory notes that you thought were as good as gold?  we keep those things, but the promissory notes you got for them are now just good as promises -- but you can buy these long term interest-bearing certificates instead.  Those are better than the gold that you wanted, because we will give you still more promissory notes for holding them."

Then everything will be good again... for a time... as till more promissory notes got created.

Then one day there will be a crisis because a lot of people who buy some exotic high interest-bearing certificates find out that those who issued the certificates can't actually pay those high rates of interest.  Suddenly, everone will want their promissory notes back.  But there won't initially be enough of them.  The solution?  It will be to print more promissory notes and distribute them as "reserves" to favoured institutions so that they can buy some of the interest-bearing certificates.  Of course, they will use some of these notes to buy other things... like stocks... but most will be for government issued interest-bearing certificates. 

The result is that confidence in the promissory notes' ability to buy interest-bearing certificates is restored. 

What a great system.  And if people lose confidence in the central banks, they can create another superstructure on top of them to guarantee the interest-bearing certificate.  And so on and so on....

Perfect... now how did we ever get here?  Oh yeah, we started from scratch.

Balanced Integer's picture

Meet the new boss, same as the old boss...eventually.

Herd Redirection Committee's picture

If the big players had no debt, it would end in deflation.

The richest fucks don't have any debt. BUT, and its a badonkadonk, their cronies are the most highly levered group in our entire society. 

So I'll spell it out for people, it will end with massive inflation.  They will play tricks, they will jawbone, they will even at some point intimate that the Federal Government will reduce deficits (all talk, might actually be true for 3-6 months at best).

But its a choice between the currency or the government at this point. One must go!

BalanceOrBust's picture

Interesting... can you provide more details on who the cronies are?  Also, what do you mean that it is the currency or the government?  Do you actually mean the currency gets massively devalued?   Do you mean revolution?  The statement is an interesting one, but I am not sure what you mean.

stinkhammer's picture

usurious fuckstains

benbushiii's picture

The FED may appear to be more restrictive than the ECB when viewed in the above graphs, but actually the FED through its new QE is buying Bonds and MBS securities of Euro sovereigns which entails printing dollars, then swapping or selling dollars for Euros.  It is important to note the FED has never specifically stated it is only buying U.S. paper.  This does prop the Euro and prop the EURO debt, but it also creates a short dollar position and places debt on the FED's books that is questionable as to repayment (though it produces the near-term) effect of kicking the can further down the road.  If it were not for the Central Banks, none of the developed world nations would be able to keep up the sham of debt issuance.

Dr. Engali's picture

Bankers are liars it. In other news water is still wet.

sschu's picture

Weidmann wants to see the connection between banks and sovereigns severed, a connection that has been fostered by governments over many centuries in order to enable them to spend more than they take in through tax revenues.

This would imply that the large banks need to stand on their own without the support of government and government would have to live within its means or borrow on the open market at market determined rates.

Hahahahahahahahaha!  That is a funny one, really.



buzzsaw99's picture

I have no idea why he chose to extensively quote that maggot. Let it all burn.

NipponMarketBlog's picture



"Weidmann wants to see the connection between banks and sovereigns severed."


I guess Kuroda-san won't be taking any advice from Weidmann then....

PontifexMaximus's picture

Jens weidmann is fighting a losing battle, angela want's mario to do the job. Weidmann is allowed to ride his (personal) philippica against the ECB policy. But angela and mario are "making" the ECB monetary policy. So, poor weidmann, seulement pour la galerie!

Ghordius's picture

not so sure about that. he leads the hawks, and as a group they are influential, not only vote-vise

hyperbole2000's picture

Evolution of human social conciousness occurred with the separation of church and state. Except for a few neandrathal Theocracy worshiping inbreeds. Prior to this evolution, protest against the state was deemed heresey by their allie (the church) resulting in one being burned alive on a stake.

Evolutionary progress will occur when separation of bank and state occurs. Wiith such constitutional protection one can protest the banks without beeing deemed a traitor by their allie (the state) or one can protest the state with being branded a commie by their allie (the banks).

Ghordius's picture

how about separation of corporation and state? an end of all corporative privileges? why does a paper person have more rights than a living human? banks are just the most pampered, privileged of the bunch

this from someone that set up more companies than I can remember after two glasses

Ghordius's picture

"...the idea that the Fed is 'more restrictive' and the ECB 'more 'accomodative' is completely contradicted by the facts pertaining to the shared continuum we all dwell in, a.k.a. 'reality'. The Fed is currently inflating at breakneck speed, while the ECB is contracting central bank credit. The notion that the Fed is 'tighter' than the ECB is a fiction, based on what people at the central banks are saying, not on what they are actually doing."

Yet it's an important part of the FED's & megabanks narrative to sell the opposite notion, including the idea that the FED is supporting eu debt and the EUR

In fact, any other cb would, at this stage, buy as much foreign bonds as national ones. Not the FED, this would strike too many as the begin of a new age

SAT 800's picture

"The ECB cannot solve the crisis" is correct, and all you really need to remember. The reason? The "crisis" was caused by the Euro. When the Euro goes away; the nations will be able to work out their programs. The Ukraine is doing much better now that it's not part of the Soviet Union.