A Question is Bothering Me…
A few weeks ago, speaking before the European Parliament, Mario Draghi stressed once again the ECB committal to provide the financial sector with all the liquidity it needs.
The ECB has taken several measures in 2010 and 2011 to ensure that banks continue to have access to funding sources. This has enabled them to continue lending to firms and households. Most importantly, the ECB has extended its policy of fully allotting liquidity demanded by banks at fixed rates against collateral. The maximum maturity of these liquidity-providing operations was first extended to six months and later to 12 and 13 months. A new Covered Bond Purchase Programme has recently been initiated, with a size of 40 billion euros. In addition, liquidity in US dollars has been offered to banks for three-month periods. [...] We have furthermore agreed, as a contingency measure, to establish temporary bilateral liquidity swap arrangements so that liquidity can be provided in each jurisdiction in any of the currencies, should market conditions so warrant.
In a sentence, and in non technical terms, the ECB will do everything it takes to save the banks, whatever the source of their problems. And this seems to work, as commercial banks rushed as late as last week to obtain hundreds of billions low-cost liquidity.
This is fine, I am very happy about it. This is what a central bank should do, even if Walter Bagehot had warned against lending at low rates, because, well, this could trigger moral hazard (that he called “unreasonable timidity”)
Somewhat surprisingly, though, moral hazard is nowhere to be found in speeches by Mario Draghi and other ECB officials when discussing the role of the ECB as a lender of last resort for commercial banks. Moral hazard is instead “the” problem, when it comes to guaranteeing sovereign debt. Otmar Issing, former ECB board member, recently stated that
the prohibition of monetary financing is an indispensable element for a stable currency. Pressing the ECB into the role of ultimate buyer of public debt of individual member states would create the biggest conceivable moral hazard.
This is fascinating. It is nowadays almost common knowledge that financial institution behaved recklessly, with the sense of impunity that comes from the perception of being too big (or too interconnected) to fail, with the loosening of regulation that began in the 1980s and climaxed with the repeal of the Glass-Steagall Act. It is also common knowledge that this reckless behaviour is one of the main reasons for the exorbitant growth of debt, and ultimately for the crisis. And yet for them there is no apparent moral hazard risk, that instead is so large for EMU countries, that the ECB is ready to let them go almost without blinking.
So, to sum up: it is fine to lend, and at low rates, to the guys who contributed to create the current big mess. But it is not fine to lend to governments who had to clean it, and who avoided a second big depression, because, you know, they may be irresponsible. I can think of only one name for this: ideological preconceptions…
What is puzzling is that these guys waste their time trying to cast their arguments in economic analysis. Wouldn’t it be easier to just say Government = Bad and Markets = Good?