2 Jan 2012

My exchange with the ECB

Wow! I wrote a letter to the ECB on saturday about their decision to print unlimited amounts of money to give to banks, while refusing to allow any of it to go the governments. To my great delight, I've just got a reply back. Here's the exchange, together with my latest reply. The transcriptions that are mentioned in the ECB's mail are interesting, but don't seem to consider alternatives.

Will someone reply to my suggestion? Perhaps Mario Draghi himself? Stay tuned for more....

First my mail
From: Simon Thorpe
Sent: Saturday 31 December 2011 15:11
To: Press Office (Email)
Subject: The ECB must explain its actions

Article 123 of the Lisbon Treaty prevents the ECB from lending to
governments. My understanding is that Article 123 is there to prevent
elected governments from abusing Central Banks by ordering them to print
money to finance excessive spending. That, we are told, is why the ECB has
to be independent from governments. OK.

But now that the ECB has the ex-European Director of Goldman Sachs as its
director, we learn that it is ok to print an unlimited amount of money and
then hand it to banks to do precisely what they want with it -  with
absolutely no strings attached.

On the 21st December in the space of a 1 hour feeding frenzy, 526 banks
gobbled up 489 billion euros of money that the ECB does not have to lend.

I frankly cannot see any reason why this massive injection of printed
money should not be illegal for precisely the same reasons that Article
123 prevents payments to governments.

Why on earth is article 123 still in place? It is a total disaster.

Unless the ECB can explain these decisions, I and many millions of other
European Citizens will be justified in assuming that Goldman Sachs has
effectively taken over the printing press of the European Community and is
using that power to promote the interests of the banking sector, in direct
opposition to the interests of citizens.

Yours sincerely

Simon Thorpe
CNRS Research Director
Now the ECB's reply
On 2 Jan 2012, at 14:41, <info@ecb.int> wrote:

Dear Simon,

Thank you for your message. Its polemic nature does not make it easier to address the questions, but we would like to draw your attention to the motivation behind the decisions made by the ECB's Governing Council on 7 December 2011, including the launch of liquidity-providing operations with a duration of approximately three years, to which you are referring.

The main motivation can be found in the press release announcing the decisions:

In a more elaborate form you will find the reasoning behind the decisions in the transcript of the press conference on that same day:

Finally, the ECB's President Mario Draghi accounted for the ECB's actions before the European Parliament's Committee on Economic  and Monetary Affairs on 19 December 2011:

Please note that Mr. Draghi has several times emphasised the fact that the ECB is acting strictly within the Treaty on the functioning of the European Union.

With kind regards,

Directorate Communications
Press and Information Division
Kaiserstraße 29
D-60311 Frankfurt am Main
Tel: +49 69 13 44 74 55
Fax: +49 69 13 44 74 04
E-mail: info@ecb.europa.eu
And finally, my reply to their reply

Dear ECB

Thanks so much for responding.

Yes, I agree that the mail was polemical - sorry. But the stakes are very high, as I think everyone is aware. Personally, I am terrified by the situation that is facing the Eurozone.

I had found the press release for the 8th December, but not the transcript of the press conference or the report to the Committee, so thanks very much for the pointers

I've had a quick look through, but failed to see any discussion of possible alternatives.

Actually, I think that there is an option that the ECB may possibly have missed, and which could, in my humble opinion, provide a real alternative. I would be so grateful if someone at the ECB could have a look and maybe give me some feedback.

I've published it as a comment to the Financial Times this morning, as well as on my blog here.

Just to make the point very clear - I thought that the independence of the ECB from governmental control was to ensure that it was not used by governments to print money for excessive spending, which would have  dangerous repercussions for inflation. Of course, printing money to give directly to banks with no ability to control how the money gets used is no better. It might even be considerably worse.

However, if the money goes to 'publicly owned credit institutions' (permitted by the article), those institutions could be constrained by the governments to use the money to pay off government debt. Don't we agree that the real problem at the moment is less to do with the fact that the Greeks (and others) are spending too much on salaries, pensions and so forth, and much more to do with the fact that when they have to pay 18% interest to get money from the bond markets, that the situation is totally impossible for them.

Surely, priority number one should be for the ECB to find a way to provide loans to countries like Greece with the same 1% rate offered to banks. You suggest that the Lisbon treaty prevents them doing this, and I admit that the decision of David Cameron to veto any modification to the treaty has not made things easier. But, surely, that second paragraph of article 123  leaves open a real option?

The first operation ECB operation on the 21st December was a huge success from the point of view of the banks (489 billion euros of cheap money), but given that 412 billion has been replaced with the ECB, it seems to me pointless to try and do the same thing again on the 29th February. It doesn't matter how cheap the money is, banks are simply not interested in lending money at reasonable rates to countries like Greece and Portugal. I just don't see how such a strategy could work.

Please, please, consider the possibility of making the second wave of QE only usable for paying off sovereign debt. I seriously think that this could do the trick.

Yours sincerely

Simon Thorpe
CNRS Research Director, and amateur economist.

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