On February 29, Bernanke gave a soothing presentation to a House committee. The stock market dropped a little. Gold and silver dropped like a stone.
The media focused on Bernanke’s hint that QE3 will not be necessary, that economic growth is slow. Conclusion: monetary stability.
At the same time, the European Central Bank injected $712 billion of fiat money into the eurozone. About 800 banks took this fiat money.
So, on this side of the Atlantic, all is calm. On Europe’s side, the ECB was in panic mode.
The West’s economy is schizophrenic.
The story about the ECB was given cursory coverage. Ho-hum.
It is not ho-hum. It is an indication that Europe’s economy is tottering at the edge of a crash. The ECB is in panic mode.
More crucially for eurozone governments, some banks in financially pressed countries such as Italy and Spain appear to have used the cheap money to buy government bonds. That has brought down borrowing costs, especially on shorter-term bonds, and taken some of the pressure off governments such as Spain and Italy. . . .
However, the first round had less effect on bank’s lending to the wider economy. Loans to businesses only stabilized in January after a steep fall in December.
ECB President Mario Draghi encouraged banks to take the credit, saying there was “no stigma” or sign of weakness associated with it and that participating was only a “business decision.”
The story added this: “Other ECB officials have indicated however that markets should not get used to such massive rescue operations from the central bank.” Nonsense. The ECB has capitulated twice. It will do so again. There is no stopping QE3 there. The ECB talks stability and then inflates massively.
It will never go back. The monetary base is up, and it will stay up.
Peter Praet, a member of the six-person executive board and the ECB official responsible for the bank’s economists, has said the bank will face a difficult balancing act in judging when to withdraw the additional credit. ECB governing council member Ewald Nowotny has said he sees no need for further action after the second installment of loans.
This is public relations flak. Of course the ECB will inflate. That is its job.
A German banker protested. German bankers have exactly zero influence.
Jens Weidmann, the head of the conservative Bundesbank, Germany’s central bank, has warned that overly generous liquidity could lead to banks investing in riskier assets.
“The crisis cannot be resolved solely by throwing money at it,” Weidmann warned in a speech last week. “While money can buy us time to tackle the crisis, it is imperative that we use that time in order to address its root causes. “
He is correct. He is also powerless.