"The concept of an independent central bank clearly focused on price stability is neither old-fashioned nor outdated," exclaimed Bundesbank head Jens Weidmann. As The WSJ reports [16], he criticized the European Central Bank’s decision to buy private-sector bonds and signaled his fierce opposition to purchasing government bonds, underscoring his reluctance to back additional stimulus measures to combat weakness in the eurozone economy. "There is a risk of monetary policy, especially in the euro area, being held hostage by politics," Mr. Weidmann said
As The Wall Street Journal reports, [16]
In an interview with The Wall Street Journal, Mr. Weidmann rejected calls from the International Monetary Fund and within the ECB for Germany to cut taxes or ramp up public spending despite mounting signs that its economy is succumbing to Europe’s downturn. The European Commission should consider rejecting France’s 2015 budget, which exceeds deficit targets mandated by the European Union, he added.
Mr. Weidmann said he stands by the conservative principles that have characterized the Bundesbank throughout its nearly 60-year history: keeping inflation low; protecting the central bank’s balance sheet from risks and strict separation from the financial needs of governments.
His cautious stance stands in contrast with the ECB’s latest attempts to convince investors that it will act forcefully to boost the flow of money to the economy, and may raise doubts about the bank’s ability to gain the consensus needed to do still more expansive steps if needed. It also exposes the deep rifts that still mar the Eurozone, with countries including France and Italy calling for more flexibility while Germany insists on fiscal rigor.
“There is a risk of monetary policy, especially in the euro area, being held hostage by politics,” Mr. Weidmann said in an interview Monday at the Bundesbank’s headquarters in Frankfurt, just a few kilometers away from the ECB.
...
Although buying bonds in financial markets isn’t forbidden, “the ECB’s mandate is more narrowly limited than that of central banks in other currency areas,” Mr. Weidmann said, referring to rules preventing the ECB from financing governments.
"These concerns are particularly acute whenever the central bank buys specifically the most risky sovereign bonds,” he said. Besides, with government and corporate borrowing costs already super low, such a policy would have limited effect. Tying fiscal policies together through ECB bond purchases “is a dangerous path,” he said.
But it's not just the Germans...
On Tuesday the Dutch central bank delivered its own critique of ECB policies, warning in its semi-annual report that that easy-money policies could cause financial instability and fuel asset bubbles. “The medicine should not become worse than the disease,” it said.
Finally, Weidmann notes,
“Against the background of the announced target for the balance sheet, I see a risk that we will overpay for these assets,”
Indeed, as Mises Patrick Barron concludes, [17]
Of course the ECB will get stuck with low-quality loans purchased at inflated prices! Economic logic makes this a certainty. If the institutions selling such loans could get as high a price in the open market as the ECB will offer, they would sell them now. This program is nothing more than a back door bailout to politically connected, privileged, special interest groups. It is corruption on a grand scale. Of course the ECB has a good role model–the US Federal Reserve Bank.
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