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The European Ass Backwards Stimulus Plan.

  • Written by Syndicated Publisher 283 Comments283 Comments Comments
    December 9, 2011

    Please consider the ass backwards Measures to Stimulate Bank Lending in the EMU.

    The European Central Bank may announce a range of measures tomorrow to stimulate bank lending, said three euro-area officials with knowledge of policy makers’ deliberations.

    Options on the table include loosening collateral criteria so that institutions have more access to cheap ECB cash and offering them longer-term loans to grease the flow of credit to the economy, said the officials, who spoke on condition of anonymity because the discussions are private. Two said an interest rate cut is likely, with only the size of the reduction to be determined for the monthly decision tomorrow.

    The ECB is focusing on getting banks lending again rather than increasing its government bond purchases to fight Europe’s debt crisis. The central bank’s insistence that governments take measures to restore investor confidence appears to have paid dividends, with Italian and Spanish yields plunging after Germany and France agreed to move the 17-nation euro area toward a fiscal union, a stance they reiterated today.

    Confidence? What Confidence?

    There is no confidence. Investors stepped in to buy Italian and Spanish debt hoping to unload to the ECB when it steps up bond purchases in the secondary market. Confidence is nothing more than investors front-running ECB president Mario Draghi’s hint that the ECB is about to purchase more sovereign debt.

    Ass Backwards Plan

    Banks cannot or will not lend in Europe for the same reason they don’t in the US.

    1. Banks are undercapitalized
    2. Few credit worthy businesses want to borrow

    Cutting rates will not fix either of those problems. Worse yet, and with thanks to French President Nicolas Sarkozy, taxpayers and businesses will bear 100% of the responsibility to recapitalize banks.

    Europe is in recession. Yet the fools at the EMU and EU want to increase the VAT, increase property taxes, increase fees, etc, to ensure that French and German banks do not shoulder any responsibility for making idiotic loans.

    This may (or may not) increase confidence that banks will not go under, but it sure will not inspire consumers to spend or businesses to borrow.

    Moreover, lowering interest rates further will put additional stress on those living on fixed income.

    Correct Approach

    1. Force banks, not taxpayers, to take losses for stupid lending decisions
    2. Force banks to raise capital so they are not capital restrained in lending
    3. Reduce public sector spending
    4. Reduce taxes on businesses
    5. Reduce taxes on private citizens

    In every instance, except perhaps number three in some countries, the ECB, EU, EMU, and various national leaders have taken the exact wrong approach.

    This is a balance sheet recession, not the garden variety in which the standard solution of central bank rate cutting might appear help. Few seems to have figured this out yet.

    Worse yet, most of the few who have figured this out are hell-bent on trying various QE strategies proven to be complete failures by Japan and the US.

    Mike “Mish” Shedlock
    http://globaleconomicanalysis.blogspot.com

    Images: Flickr (licence attribution)

    About The Author

    Mike Shedlock / Mish is a registered investment advisor representative for SitkaPacific Capital Management. Sitka Pacific is an asset management firm whose goal is strong performance and low volatility, regardless of market direction.  Visit Sitka Pacific’s Account Management Page to learn more about wealth management and capital preservation strategies of Sitka Pacific.

    You are currently viewing my global economics blog which typically has commentary every day of the week. I am also a contributing “professor” on Minyanville, a community site focused on economic and financial education.  Every Thursday I do a podcast on HoweStreet and on an ad hoc basis contribute to many other sites.

    When not writing about stocks or the economy I spend a great deal of time on photography and in the garden. I have over 80 magazine and book cover credits. Some of my Wisconsin and gardening images can be seen at MichaelShedlock.com.
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