24 Jul 2012

Force the ECB to start buying government debt

The ECB started a scheme in May 2010 called the "Securities Market Programme" (SMP) in which it buys up governement bonds. As reported by Reuters, the system allows the ECB and the other Eurozone central banks to buy government bonds second hand on the secondary market from banks and other bond holders, a tactic that helps avoid claims that it is directly financing governments - something that is strongly opposed by the banking sector. Not surprising really, when you realize that having a monopoly on money creation has allowed commercial banks to "earn" 4.5 trillion euros in interest charges from the 17 eurozone countries in interest charges since 1995 - and 286 billion in 2011 alone. They obviously can't have the ECB stealing their guaranteed source of revenue. 

The SMP program has so far been used  to buy a total of €211.5 billion euros worth of bonds. The ECB does not give a country by country breakdown, but the Economic Times article says that "it has spent about 40 billion euros on Greek debt and concentrated on Italian and Spanish debt with the 140 billion euros spent since August."

I was intrigued by the statement in the article that "As usual it will take 211.5 billion euros worth of deposits from banks on Tuesday to counterbalance the buys and neutralize any threat of them fuelling inflation."

However, we have also learned that the ECB has failed to make any bond purchases for 19 successive weeks  - essentially since Mario Draghi pumped over €1 trillion into the banking system via the two rounds of funding in last december and february. 

So, what's the problem? Why is Mario Draghi refusing to use this mechanism? I think that we can assume that it is because he realises that the SMP mechanim is the thin edge of a wedge that, if pushed hard enough, could completely destroy the commercial banking system's monopoly on money creation. And, as the ex-European Director of Goldman Sachs, he is doing his job in protecting the interests of Goldman Sachs and the other big banks.

Since the ECB and the Central banks can generate as much money as they like, they could in fact buy all the government debt for all 17 countries - it would "cost" €8.2 trillion euros - only 8 times as much as Draghi has already printed for his banking friends. But since the money was just created out of thin air, there would be no real need to pay back the money in the near future - and no real reason to charge interest either. It would be tragic for the commercial banks who would have to start earning their money by provided services to the public, rather that printing money for themselves.

We would therefore have moved from the current insane system in which commercial banks create the money supply out of thin air, lend the "money" to governments and then charge interest, to one where the money supply can be created directly and potentially interest free by central banks.  There are more and more people who are realizing that there is no reason not to do this.

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