tag:blogger.com,1999:blog-36227136.post5276285326039597846..comments2024-01-16T08:40:53.682+00:00Comments on <a href="http://www.openeurope.org.uk">Open Europe</a>: ECB sterilisation failOEhttp://www.blogger.com/profile/00556463374230498875noreply@blogger.comBlogger4125tag:blogger.com,1999:blog-36227136.post-88821071066690448492011-11-30T15:14:25.353+00:002011-11-30T15:14:25.353+00:00Well, under UK law money deposited with a bank is ...Well, under UK law money deposited with a bank is a loan to the bank, so if the same rule applies the ECB is in fact borrowing from a bank when it accepts a deposit.Denis Coopernoreply@blogger.comtag:blogger.com,1999:blog-36227136.post-91518930723988368312011-11-30T14:50:05.713+00:002011-11-30T14:50:05.713+00:00Thanks for the comment Denis.
The ECB isn’t quite...Thanks for the comment Denis. <br />The ECB isn’t quite borrowing from banks to fund its purchases. It purchases the government bonds using the capacity of its balance sheet. This money goes to the holders of bonds (usually banks in this case) and is therefore an injection of new money into the system. If it stopped here then it would be creating new money essentially. However, to stop this being the case the ECB ‘sterilises’ these purchases by taking the same amount of money out of the system (by taking on deposits from banks). When this fails then, it can be seen to have added new money to the system. This goes against the principles and desires of the ECB and Germany so can be seen as controversial.<br /><br />In any case, this argument is somewhat semantic since the ECB is providing unlimited liquidity or loans to banks in its usual monetary policy operations. Clearly, taking a bit of money out of the system when you are meeting other demands for money fully doesn’t make too much sense. But it is the veil of proper practice which Germany and the ECB have used to suggest they are not simply creating new money. If it fails they will have to answer some difficult questions over the role of the ECB.Open Europe blog teamhttps://www.blogger.com/profile/14476470353790515912noreply@blogger.comtag:blogger.com,1999:blog-36227136.post-73229216189369653082011-11-30T14:11:15.561+00:002011-11-30T14:11:15.561+00:00If I understand correctly, the ECB has been borrow...If I understand correctly, the ECB has been borrowing money from banks so that it can buy dodgy government bonds which the banks themselves wouldn't want to buy.<br /><br />Is that correct?<br /><br />So how does that square with the commitment to "the principle of an open market economy with free competition" laid down in the EU treaties, eg in Article 120 TFEU:<br /><br />"... The Member States and the Union shall act in accordance with the principle of an open market economy with free competition, favouring an efficient allocation of resources ...".<br /><br />Is it because the ECB knows better than private investors that helping wastrel governments to borrow more cheaply in order to fund their over-spending is "favouring an efficient allocation of resources"?<br /><br />But now, as I understand, the ECB can no longer borrow as much from banks as it needs for its interventions in the bond markets, so it has started to create new money for that purpose.<br /><br />Is that correct?Denis Coopernoreply@blogger.comtag:blogger.com,1999:blog-36227136.post-65793373345596113412011-11-30T12:48:59.231+00:002011-11-30T12:48:59.231+00:00It would be strange idf banks did think that it wo...It would be strange idf banks did think that it would be a good thing to lend money to the ECB. The ECB is a bad bank, buying up lots of dodgy assets. I woould put my money anywhere but in the Eurozone.Rollohttps://www.blogger.com/profile/18255460090580758354noreply@blogger.com