Cat's Out of the Bag on EZ Solution

LvMIC:

When push comes to shove, never doubt the central banker’s decisiveness to fall back on what he/she knows best.  Business Insider has finally cracked the code on the implications of last week’s decision by the ECB to both cut interest rates and extend a time frame of low cost borrowing for three years:

Yields on short-term peripheral sovereign bonds are plunging,despite the fact that EU leaders appeared to make little progress at their highly-anticipated summit last week.Pundits continue to expound on the flaws of the eurozone but markets are telling a different tale.

That’s because the European Central Bank may have already introduced roundabout measures that will solve some of Europe’s big problems—it’s making investing in peripheral sovereign debt a huge profit opportunity for banks.

Theoretically, financial institutions will be able coin money by borrowing ultra-cheap from the ECB and buying higher yielding sovereign debt.

Essentially, it appears the ECB might allow European banks to pledge everything but the kitchen sink in return for funds. First, the new policy allows European banks to hold far fewer assets as collateral in exchange for funding from the ECB—freeing up liquidity to the tune of €103 billion ($134 billion). More importantly, relaxing collateral restrictions could also allow European banks to use even somewhat risky sovereign assets as collateral for bond purchases.

Finally, the extension of loan maturities to a full three years means that banks would be able to borrow money for the long-term, presumably long enough for EU leaders to make more progress towards solving the flaws of the euro monetary union.

Some call it “back door” money printing, I call it one large punt of the financial can further down the road to an inevitable crash.  Explicit monetary easing has become taboo as a strategy in the eyes of German citizens.  This policy looks to use the banks as quiet middlemen to facilitate a monetization of government debt as to not spook inflationary expectations.  This will allow more resources to be squandered by the clearly unsustainable public sectors in countries such as Italy and Spain.  The whole maneuver is incredibly risky as cheap debt will be used to facilitate the accumulation of more debt.

For the real solution to the EZ crisis, one needs to only look to Rothbard:

What is needed is the courage to bust out of this entire fallacious and debilitating Keynesian paradigm.  Massive tax cuts, especially in the income tax are needed (a) to reduce that parasitic and unproductive burden of government on the taxpayer, and (b) to encourage the public to spend and especially to save more, because only through increased private savings will there come greater productive investment.

I would also add a large relaxing of labor regulations and occupational licensing that throw barriers in front of entrepreneurs looking to fulfill consumer demand to the list.

Austrian thinkers can never stress enough the fact that further papering over of government and bank debt is no panacea.  The bitter medicine of massive cuts in government expenditure, bond haircuts, and a clamping down on cheap credit must be swallowed if the EZ ever wants to see a return to sustainable economic growth.  Here is Rothbard again:

Once an inflationary boom is launched, a recession is not only inevitable but is also the only way of correcting the distortions of the boom and returning the economy to health.  The quicker a recession comes the better, and the more it is allowed to perform its corrective work, the sooner the recovery will arrive.