In Which We Read That The "Proper Role Of A Central Bank Is To Counteract Market Turbulence Before It Happens"

Tyler Durden's picture


Submitted by Ben Hunt of Epsilon Theory

Here We Go Again

From an Epsilon Theory perspective, the scariest, most market risk-creating event of the past 48 hours had nothing to do with Iraq, nothing to do with Israel, nothing to do Russia. It was Mario Draghi’s press conference.

Yesterday Draghi re-launched the Great Fiscal Consolidation War of 2012, a multi-level game where the ECB attempts to force spendthrift sovereigns to undertake structural reforms while ostensibly going about their business of maintaining their single mandate of price stability. It’s a neat trick if you can pull it off, as Draghi kinda sorta did with the PIIGS two summers ago, but … geez, do we really have to go through this all over again?

Multi-level games live at the intersection of politics and economics. I wrote about them earlier this year in the Epsilon Theory note “The Play’s the Thing”, and the basic idea is that public communication policy has a recursive, strategic nature. That is, while there’s an ostensible meaning and an ostensible audience for any performance, there are almost always one or more deeper levels of real meaning and real audience for any political performance. And Mario Draghi is one heck of a political performer.

The press conference delivered two ostensible messages yesterday.

First, Draghi called out Italy and France. Why is Italian GDP back in the red? Why is France threatened by deflation, the Great Satan of modern monetary policy dogma? “It’s mostly the lack of structural reforms”, something “that has nothing to do with monetary policy”.

Second, Draghi put the kibosh on monetary easing beyond what was announced months ago. Why not do more to force credit into the European economy? “If one can’t open a new business [because of structural impediments], there’s no point in giving more credit. You won’t know what to do with this.”

The linkage of the messages is the real communication here. Memo to France and Italy: you want more easy money? Then stop spending so much and pass meaningful labor and tax reform legislation. It’s a giant game of Chicken, just like in 2012, and the big question now is who will blink first, ECB/Germany or Italy/France.

What do I think is going on? Why do I think that Draghi felt compelled to pull this stunt now?

I think that the looming conflict with Russia is a big problem for the German economy, which means that Germany’s degrees of freedom to accommodate bad actors in the EU club are dramatically reduced, which means that Germany’s overwhelming macroeconomic focus – a weaker euro and fiscal consolidation in the periphery (and France) – is now Draghi’s overwhelming macroeconomic focus.

I think that the ECB’s asset quality review and stress test of major EU banks has revealed just what a bitter pill it’s going to be to assume regulatory control (see “The Red King” for more). Does anyone else find it odd that Espirito Santo, which has been under troika supervision for years, is only now revealed as a basket case, right before the ECB becomes its primary regulator? Sorry, but it seems like a kitchen-sink quarterly earnings announcement to me, where new management comes in and blames everything on the prior gang of incompetents. The last thing in the world these undercapitalized, overlevered, and stuffed-to-the-gills-with-sovereign-debt banks need is more pressure to finance their sovereigns, but that’s exactly what they will face without structural reform and fiscal consolidation.

I also think that Draghi believes he’s mastered the Common Knowledge Game, that he is confident he can always save the day if markets get too squirrelly by invoking the magic spell of the OMT or some other phantom policy. The difference between 2014 and 2012 is that Draghi believes he has established a safety net of sorts, at least to prevent a sovereign-level liquidity crisis as in 2012, with his command and control of the Narrative.

And trust me, the Narrative of Central Bank Omnipotence is alive and well. Want to read a really terrifying article? Take a look at this August 6th Op-Ed piece in the FT by Draghi’s former colleague, Lorenzo Bini Smaghi: “The ECB Must Move to Counteract Market Turbulence”. Are you kidding me? This is what we have come to … that the proper role of a central bank is to counteract “market turbulence” before it happens? I’d laugh, but then I remember that Yellen means exactly the same thing when she refers to “macroprudential policy”, and I want to cry.

Draghi is playing a variation on this theme. He’s intentionally injecting “market turbulence” in order to achieve larger political goals, but only because he is of one mind with Bini Smaghi and Yellen and the rest of the Central Banking nomenklatura – central banks can control market outcomes. Period, end of story. And so far he’s been absolutely right. Will the winning streak continue? I have no idea.

What I am certain of, however, is that this is a very dangerous game. It’s obviously a disaster if the game spirals out of Draghi’s control, if he’s unable to put the inevitable market freak-out genie back in the bottle as he was in the summer of 2012. But it’s a different kind of disaster, at least to my way of thinking, if Draghi succeeds, because then the Narrative of Central Bank Omnipotence will just be stronger than ever. If you like the notion of capital markets transformed into public utilities, then this is great news. For everyone else, not so much.

Your rating: None

- advertisements -

Comment viewing options

Select your preferred way to display the comments and click "Save settings" to activate your changes.
Fri, 08/08/2014 - 14:06 | 5066425 Bloppy
Bloppy's picture

Central bankers truly see themselves as gods

Fri, 08/08/2014 - 14:09 | 5066447 813kml
813kml's picture

And they are about as effective as beano.

Fri, 08/08/2014 - 14:14 | 5066483 Dr. Engali
Dr. Engali's picture

Beano? Why try to suppress a fart? Farts are for sharing. Nothing says I love you honey like a Dutch oven.

Fri, 08/08/2014 - 14:14 | 5066495 Killer the Buzzard
Killer the Buzzard's picture

The mental desolation of Smaghi.

Fri, 08/08/2014 - 14:31 | 5066607 SafelyGraze
SafelyGraze's picture

see Minority Report II

in which the pre-cogs can tell when a person is going to make an account withdrawal *before* it happens

and the authorities can intervene to prevent it and then sequester/re-educate/quarantine/torture the folks pre-emptively 

Fri, 08/08/2014 - 14:16 | 5066508 813kml
813kml's picture

There is nothing more turbulent than a woman stormed.

Fri, 08/08/2014 - 15:21 | 5066900 Stuck on Zero
Stuck on Zero's picture

The proper place for a free market is eliminating central bankers before turmoil takes place.


Fri, 08/08/2014 - 14:06 | 5066426 Bastiat
Bastiat's picture

Sign of the times? I saw a woman in her 30's yesterday, jogging down the sidewalk in a black t-shirt with a great big white guillotine printed on it. 


Fri, 08/08/2014 - 14:07 | 5066439 NOTaREALmerican
NOTaREALmerican's picture

That was meant for her ex-husband's dick.   

Fri, 08/08/2014 - 14:09 | 5066444 Row Well Number 41
Row Well Number 41's picture

Sexy, I like it.


Fri, 08/08/2014 - 14:11 | 5066467 Bastiat
Bastiat's picture

I looked for a Zero Hedge emblem but didn't see it.

Fri, 08/08/2014 - 14:12 | 5066484 813kml
813kml's picture

Was she wearing yoga pants?  Could be the perfect woman...

Fri, 08/08/2014 - 14:39 | 5066677 Bastiat
Bastiat's picture

Nope; running shorts. I was curious about the shirt but somehow it didn't say:  chase me down and tap me on the shoulder.  I'd have a hard time explaining the knife wounds to my wife.

Fri, 08/08/2014 - 14:06 | 5066427 LawsofPhysics
LawsofPhysics's picture

Bankers;  You need to pay us the protection money.

Citizen;  Why?

Bankers;  You need protection.

Citizen;  From what?

Bankers; Us.


Get long guillotine manufacturing, beat the rush.

Fri, 08/08/2014 - 14:06 | 5066433 NOTaREALmerican
NOTaREALmerican's picture

When bullshits all ya got,  bullshits all yer gonna get.     (The lost Gospel of Jesus)

Fri, 08/08/2014 - 14:08 | 5066437 Bastiat
Bastiat's picture

+ 1 for the cite

Fri, 08/08/2014 - 14:28 | 5066523 813kml
813kml's picture

The lost Gospel of Jesus Blankfein

Fri, 08/08/2014 - 14:08 | 5066442 Jumbotron
Jumbotron's picture

Oz, The Great and Powerful.

"We're not in Kansas anymore ! "

Fri, 08/08/2014 - 14:13 | 5066448 JustObserving
JustObserving's picture

Why do we not get to the heart of the matter?  The role of the Central Banksters is to manipulate the market higher and spread sweetness and light and wealth - even if it means starting a few wars here and there.

All wars are bankers' wars.

Fri, 08/08/2014 - 14:09 | 5066458 1000yrdstare
1000yrdstare's picture

The only "Market turbulance" I deal with is trying to find a parking spot at my local farmers market....

Fri, 08/08/2014 - 14:10 | 5066466 SheepDog-One
SheepDog-One's picture

Don't cry, that's for pussies....DO something about it like pulling your funds from the central banksters, then throw a toga!

Fri, 08/08/2014 - 14:12 | 5066477 Raoul_Luke
Raoul_Luke's picture

Hahahahaha!  "Market turbulence" is their euphamism for market declines.  They know they are building a house of cards and now their number 1 goal is to prevent even the slightest breeze from blowing the thing all to hell.  It's like we've gone through the economic looking glass and everywhere you look you see something confusing or bizarre.  It reminds me of the acid trips of my youth - if you take this shit too seriously you will get a bad case of "the fear."  Just keep laughing and hopefully we'll all come down soon...

Fri, 08/08/2014 - 14:12 | 5066485 pods
pods's picture

This is just another installment of baffle them with bullshit to keep us from realizing the simple fact of what their role is.

To maintain the FUCKING skim so that the government and their banker friends can steal all our productivity increases plus a small bit (2%) per year.

If society really did progress, we would all be working 4 hours a day 2 days a week to fulfill our needs.  

But no, the banker scum has a giant anal vacuum sucking the life out of society.

Reading this Central Bank gobblitygook makes my skin crawl.

Makes me want to rethink my reflexive answer when someone asks me whether I could kill someone in cold blood.

SOOOO much of our lifeblood has been stolen by the bankers and their pals in government.

Reminds me of a quote by H.L. Mencken

"Every normal man must be tempted, at times, to spit on his hands, hoist the black flag, and begin slitting throats."


Fri, 08/08/2014 - 14:39 | 5066673 r00t61
r00t61's picture

"Bankers - the only assholes in the universe who could push Jesus into violence."

Fri, 08/08/2014 - 17:59 | 5067707 Bioscale
Bioscale's picture

Perfect summary.

Central bankers with governments are the biggest parasites on the planet.

Fri, 08/08/2014 - 14:15 | 5066500 ebworthen
ebworthen's picture

"Macroprudential Policy" = "Macrogenerational Sodomy"

Fri, 08/08/2014 - 14:15 | 5066503 NoWayJose
NoWayJose's picture

The proper role for a Central Bank is to exist only in the history books, so that people have the opportunity to never repeat the same mistake twice...

Fri, 08/08/2014 - 14:16 | 5066509 Professorlocknload
Professorlocknload's picture

"Capital" itself ( money) is now wholly owned by it's creator. "Capital Markets" are presently nothing more than "Fiat" Distribution/Re-distribution mechanisms.

Political Economic systems, as it were.

Fri, 08/08/2014 - 14:17 | 5066522 Quinvarius
Quinvarius's picture

Because mispriced assets are great for the real economy.

Fri, 08/08/2014 - 14:18 | 5066528 JamesH
JamesH's picture

Bullshit baffles brains


Fri, 08/08/2014 - 14:28 | 5066580 Downtoolong
Downtoolong's picture

I know I commented this before, but, it seems applicable every time I read one of these posts about some jackass central bankster spouting his latest iteration of financial homicide. 

“One vast and ecumenical holding company,
For whom all men will work to serve a common profit,
In which all men will hold a share of stock,
All necessities provided,
All anxieties tranquilized,
All boredom amused”

Network, 1976

Unfortunately, we all know how this ends for Howard Beale, the voice and spirit of the truly free and independent. He gets sacrificed on live TV taking five slugs to the chest in a blaze of gunfire.


Fri, 08/08/2014 - 14:36 | 5066597 nope-1004
nope-1004's picture

FUCK YOU, banker scum.  You invented your own job description as a means to preserving your job and perpetuation control over the economy.  One BIG problem with that premise:  You don't produce a fucking thing!!!!  You leech off of those that create jobs, produce goods, or provide a legitimate service.  You cubicle dwellers are archaic and a throw-back to when people actually believed the financing gig.


Fri, 08/08/2014 - 14:52 | 5066750 markar
markar's picture

Draghi & Smaghi. The financial world's answer to Cheech&Chong

Fri, 08/08/2014 - 15:06 | 5066831 ObamaDepression
ObamaDepression's picture

Spell check is your friend

Fri, 08/08/2014 - 15:16 | 5066863 czarangelus
czarangelus's picture

Somebody needs to tell them what happened to Yellowstone after decades of putting out every single little fire and letting the undergrowth grow to unmanagable proportins.

Fri, 08/08/2014 - 15:16 | 5066865 markar
markar's picture

Draghi & Smaghi. The financial world's answer to Cheech&Chong

Fri, 08/08/2014 - 15:27 | 5066935 Joebloinvestor
Joebloinvestor's picture

Someone needs to remove some of these un-elected assholes who try (looks like they are!) to run the world.

Get off the fiat system and watch their super powers go POOF.

Fri, 08/08/2014 - 17:44 | 5067664 Captain Willard
Captain Willard's picture

I think Smaghi's comments reflect the likelihood that the ECB will gradually be drawn into the maw of the Eurozone political project. They tried to stay independent, but this effort was never going to outlast the Crisis. And since the ECB was not as guilty as the US Fed, they had some credibility with which to resist the imprecations of politicians.

Now, they're at a crossroads. Can you imagine Smaghi writing such an article 10 years ago? The intellectual center of gravity is moving away from the old Bundesbank mentaility. But moving toward Smaghi is not progress.

How precisely are they going to forge a consensus on ECB policy when it's now clear that the major players have vastly different visions for the role of the ECB?

Just like in the case of foreign relations/Ukraine/etc., the older generation of leaders is now out of ideas. They put the Eurozone project together, but they cannot keep it going. We're going to see a lot of new faces and hopefully new ideas too.


Fri, 08/08/2014 - 18:02 | 5067714 MollyHacker
MollyHacker's picture

The genie is going to be Draghi keeping the gas flowing through Ukraine and at some point before the winters freeze this genie will be at the centre of concern.

Do NOT follow this link or you will be banned from the site!