7 Sep 2012

Did the ECB fix the crisis yesterday?

Well, there is potential in the announcements made by Mario Draghi yesterday. The ECB has said that it has unlimited firepower to buy up government bonds. But, importantly, no government will be able to get that sort of help unless they sign up for massive austerity. Furthermore, it is clear that it is the ECB that will decide how much bond-buying is needed.

Let's make it clear. If any Eurozone government is paying interest rates to the markets that are higher than the rates that the banks pay the ECB, then there is something very wrong. The banks that lend the money to governments create the money out of thin air, and they lend to Eurozone governments with (virtually) zero risk, and then sit back and charge interest. There is no excuse for the excessive and unfair rates that are visible in the graphs for interest rates for the 17 Eurozone governments - graphs that reveal that while the rates had converged at around 4.5% at the end of 2008, the spread is now completely ridiculous - 1.24% for Germany, 25.82% for Greece.

But I fear that the ECB will only buy enough bonds to keep the interest rates at what is supposed to be a "sustainable" level of interest rates - namely 6%. If that is all they do, then all that will happen is that the banks will be guaranteed that they can continue to make huge profits for creating the money supply.

Nevertheless, the existence of a mechanism for transfering government debt from the financial markets and the banks to the central bank is a good thing. I can still hope that one day it will be possible to transfer all government debt to the ECB and allowing all governments in the Eurozone to pay the same low interest rates.

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