Here Comes QE In Financial Drag: Draghi's New ABCP Monetization Ploy

Tyler Durden's picture

Submitted by David Stockman via Contra Corner blog,

You can smell this one coming a mile away:

The European Central Bank and Bank of England on Friday outlined options to reinvigorate the market for bundled bank loans, which was “tarnished” by the global financial crisis, saying a better-functioning market for asset-backed securities can help boost lending to the private sector, particularly small businesses.

Yes, the ECB is now energetically trying to revive the a market for asset-backed commercial paper (ABCP) - the very kind of “toxic-waste” that allegedly nearly took down the financial system during the panic of September 2008. The ECB would have you believe that getting more “liquidity” into the bank loan market for such things as credit card advances, auto paper and small business loans will somehow cause Europe’s debt-besotted businesses and consumers to start borrowing again  thereby reversing the mild (and constructive) trend toward debt reduction that has caused euro area bank loans to decline by about 3% over the past year.

What they are really up to, however, is money-printing and snookering the German sound money camp. That is, the ECB is getting set to launch QE in financial drag by purchasing or discounting ABCP while loudly proclaiming that it’s not “monetizing” any stinking sovereign debt!

And that gets to the heart of monetary central planning. It doesn’t matter what the central bank buys with the digital credits it transfers to sellers. Purchasing government debt, Fannie Mae securities, IBM bonds or corporate equities, as has been done by the BOJ and Bank Of Israel under the new Fed Vice-Chairman, has a common effect.  That is, it raises the price of the purchased “assets” relative to what would obtain in the unfettered market, and injects fiat liquidity into the financial system in a manner that promotes speculation and excessive risk-taking.

Thus, if some clever Wall Street operators could figure out how to bundle sea shells and securitize them, central bank purchase of the resulting ABCP would be no different than purchase of treasury notes or Fannie Mae paper.

Unfortunately, the German keepers of the flame of financial orthodoxy have been too narrow in their focus on central bank “monetization” of government debt. To be sure, they are correct in maintaining that central bank purchase of sovereign debt inexorably promotes fiscal profligacy among the politicians. The fact that the debt of nearly ever DM government has soared to 100% of GDP and beyond since the era of monetary central planning got going in the 1990s is undeniable evidence.

But the true economic sin lies in the fiat credit generated by central banks monetization, not the particular type of “asset” purchase by which it is accomplished. Stated differently, debt which is priced at honest market rates and is funded by new savings from businesses or households is economically healthy; it involves a deferral of current consumption in order to finance a longer-lived project or productive asset that promises a return in excess of the funding cost.

By contrast, central bank balance sheet expansion - that is, monetization of government debt or asset-backed sea shells - results in borrowing without saving; investment without honest hurdle rates; and the re-rating of existing asset prices based on carry trades, not an elevation of expected economic returns.

So in clearing the way to “monetization” of ABCP, the ECB is simply heading down the path of Bernanke/Yellen style quantitative easing though a transparent gimmick that may or may not bamboozle the Germans. But it most certainly will succeed in snookering the financial press as the post below from the ever gullible Brian Blackstone of the WSJ clearly conveys.

But here’s the thing. The ABCP market is not a place where hard-pressed business borrowers or consumer’s can find a new source of credit outside the banking system. Instead, it is a financial engineering arena in which banks will have a chance to mint phony overnight profits through an accounting expedient known as “gain-on-sale”.

What that means is that when credit card receivables or small business loans are “bundled” by their commercial bank issuers and sold into an off-balance conduit which issues ABCP against these “assets”, the life-time profits of these loans can be booked instantly. Indeed, modern technology allows the credit card swipe to be booked as a profit nearly the same nanosecond as it happens, and accounting convention allows the profits from a 7-year car loan issued at 110% of the vehicle’s value to be recorded virtually at the time it rolls off the dealer lot.

The smoking gun with respect to the current ECB ploy is contained in the graph below for the US ABCP market. As is evident, it went parabolic in the run-up to the 2008 meltdown, but has virtually vanished since. In fact, current outstandings of about $250 billion are 80% below the July 2007 peak.

But there is nary a word in the financial press about credit card or auto loans being too “tight” in the US for a simple reason. Banks are more than happy to issue new loans to credit-worthy business and consumer borrowers and hold them to maturity on their own balance sheets. After all, with $2.7 trillion of “excess reserves” parked at the New York Fed, “funding” is not an issue. Moreover, the whole point of the Fed’s interest rate repression regime is to create an artificially large profit spread on bank loan books in order to revive dodgy balance sheets.


So we get back to the same old ritual of Keynesian central banking: namely, if you only have a hammer, everything looks like a nail. In truth, the only tool that central banks actually have is monetization of existing assets and sea shells. Accordingly, they invent excuses for more of the same, and devise clever stratagems to disguise what they are doing.

In the present instant, the ECB and its acolytes have been gumming for several months now about “low-flation”. But that is ridiculous—if the claim is viewed in any context except the run-rate of the last few hours or quarters.

Yes, during the last 12 months, euro area inflation has come in near what used to be viewed as salutary price stability at 0.8%. But in the three years before that it averaged about 1.9% or about as close to the ECB’s so-called inflation target as your can get. Indeed, moderate inflation is endemic in the European economies. It has averaged 1.8% since the eve of the 2008 crisis and essentially the same since 1997.


In short, Europe has more than enough inflation and doesn’t need a revived ABCP market to generate loans for the un-creditworthy. Today’s announcement is just part of Draghi’s desperate attempt to deliver QE next week in a manner which will not elicit a loud “nein!” from his German overseers.

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The Duke of New York A No.1's picture

The Germans are easily Snookered ... just ask the Gold vault custodians at the NY Fed.

Silver Bug's picture

No matter what they say it is QE to infinity. They know nothing else and know they cannot solve the problems the world now faces. The money printing will continue until it all comes crashing down. Diversifying and moving into realy honest money is your only hope.

Keep Stacking my Friends.

Joebloinvestor's picture

Those bankers have to have capital available to pay all those fines.

crazytechnician's picture

WTF is Capital ? That used to be something of value , now Capital is just something they can conjure out of thin air at the press of a few buttons. What is the point of having a system where all risk is taken off of the table ? they make a bet and win , they make a bet and lose , so they simply get a taxpayer funded bail-out and they still win. Great - Win / Win with Zero Risk - until the whole fucking system implodes -

ebworthen's picture

"Liquidity" = central banker speak for ass lube to rape the public treasury and the taxpayer.

CrashisOptimistic's picture

I remain suspicious that the orders to Draghi that he NOT execute any form of QE did not come from Germany.

They came from Moscow.

If he dares dilute the Euro, they will raise gas and oil prices -- regardless of what NYMEX has to say about it. 

Sudden Debt's picture

oh it's a bit like crossing the crossroad when the lights are red and it's 17h on a monday...

But the article missed the best part.


when they say that, it means it's defcon 4 already for the banks.

Dadburnitpa's picture
    DEFCON 5 Normal peacetime readiness
    DEFCON 4 Normal, increased intelligence and strengthened security measures 
    DEFCON 3 Increase in force readiness above normal readiness 
    DEFCON 2 Further Increase in force readiness, but less than maximum readiness 
    DEFCON 1 Maximum force readiness.
Thom_333's picture

I like the "Execute Unrestricted Warfare" order better then that pansy DEFCON grading

Aurora13's picture

We have given so much power to Central Banks , relying on them to fix problems they largely created. Yet banks can only do what they do, in this case creating more financial smoke and mirrors.

If you only have a hammer everything looks like a nail.

crazytechnician's picture

Central Banks have simply become a one-trick pony , with debt saturated economies it's now totally impossible to raise Interest Rates so now the only one lever they have left to pull is the start lever on a printing press.

AdvancingTime's picture

A mirage is a naturally occurring optical phenomenon in which light rays are bent to produce a displaced image of distant objects. Joining the idea of a mirage and contagion with the reality of collapsing debt forms an interesting subject.

It is important to remember all debts and obligations do not come due at the same time. Also, it must be noted when a bill is not paid or defaults it often starts a long and drawn out legal battle, this collection process that may extend years without harsh consequences. This my friends is the reality of modern life in America and much of the world. More on this subject in the article below.

q99x2's picture

Get rid of banks and banking and replace governments with open source software.

crazytechnician's picture

It's already happening. Won't be long before governments get replaced with software as well.

Bring it on.

limacon's picture

Occupy Wolf Street 

Sheep dream of selling wolves a pension plan .

Nothing says goodbye like a lambchop .

BlowsAgainsttheEmpire's picture

"Moreover, the whole point of the Fed’s interest rate repression regime is to create an artificially large profit spread on bank loan books in order to revive dodgy balance sheets."


No kidding . . .

Racer's picture

I read on a consumer forum recently about someone who asked for the 0% credit option for a sizeable purchase but was refused because they thought they couldn't afford to pay for it.

They paid for it in full and walked away with the item they wanted.

The reason they found out later why they weren't 'approved' for credit... because they had no debt and had no 'credit' history of payments!

buzzsaw99's picture

better hurry up and buy that crap before the ecb does bitchez! [/sarc]


U4 eee aaa's picture

Meet the new crooks....same as the old crooks

Oldwood's picture

It is interesting that the world governments have created so much money over the last six years, yet their concern is that we are not spending what little we have saved. There may be some economic principle involved here that escapes me, but I don't understand. I know I have a bias here but I swear it seems like all they want is for each and every one of us with zero savings, zero independence, zero security other than what they can provide. A significant number of people are already more than comfortable with the idea of full government dependency, as we see in this conversation, but they want us all. It feels like the invasion of the body snatchers. We must all be part of the collective.

MarcusAurelius's picture

Well I have to say that my new favorite icon here is "headbangers". For the longest time it was "sudden debts" icon. However in relation to this post I have been calling for a EURO collapse for a long time now. Of course the EURO was in a bull market so no one noticed that it was really sideways (like the Dollar) waiting to collapse. 1.5000 Euro...Ok.

Atomizer's picture

Another experiment that won't work.

buyingsterling's picture

David Stockman's articles are always excellent. It's a credit to ZH that he posts here. Grant/Stockman Fed/Treasury

supermaxedout's picture

"The million-dollar question is still unanswered,"  "How will they distinguish between high quality securitization that they want to promote and the more funky stuff that caused problems in the past that they want to discourage?"

In case someone forgot how the US  brought us into this mess:

It all started when an Integrity telemarketer called Ms. Halterman in 2006,

starring: HSBC, Wells Fargo, S&P, Moodys, etc.

There is nothing wrong with securisation but not when fraudulent banks and rating agencies  like these are involved.

It is very easy to be on the safe side. The ECB has only to come up with a blacklist consisting of banks and lenders which do not have the full trust of the ECB because of their criminal behaviour triggering the subprime crisis.

The ECB can not remove their banking licences but the banks involved in these crimes should simply be banned to participate in the ECBs securisation scheme.  This will solve most of the problem.

This brings down the number of the participating banks drastically and therefore also the risk that the ECB has to come to the rescue one day.

Please mr. Draghi, kick these criminal banks out of our banking system. They do Europe no good.



tradewithdave's picture

"Please Mr. Draghi"....

"Pretty please with a cherry on top..."

There, fixed it.

AdvancingTime's picture

The more and more I study derivatives it now appears the main goal of QE may have been to hold up the underlying value of assets that feed into and support the massive derivative market more than help the economy. QE has up to now stopped an implosion of derivatives and the resulting contagion and shock that would have spread throughout the financial system. It seems Draghi is engaged in the same thing, it will only make things worse. More on this house of caards in the article below.

d edwards's picture

The globe is awash in derivitives, so their should be plenty of so-called "assets" to bundle.

Last of the Middle Class's picture

Worlds's 3 biggest lies have changed: 1. It's not Q.E.  2. Inflation is under control. 3. I'll just stick the head of it in.