The ECB yesterday slightly increased its bond purchasing programme, but did not push the nuclear button and announce some huge new programme of QE or bank re-capitalizations, as some in the bond markets were screaming for.
The editor of Euroweek, one of the finance mags I write for, reckons the ECB played it well:
There has been no shortage of thundering demands from bankers and investors for a vast wave of quantitative easing from the European Central Bank. Speaking to people in the market this week has at times felt like hosting the sort of talk radio show that attracts prophet of doom taxi drivers and the more outspoken members of the National Rifle Association. Amid the talk of meltdown and default, immediate “shock and awe” spending by the ECB was prescribed as the only thing that could save the world from a terrible peril.
The response from the ECB was predictably less aggressive, more nuanced and, for now, more appropriate. Trichet is not a politician: he does not do shock and awe, he never has and nor should any central banker. Central banks are there to keep things stable and boring. Further, this would be the wrong time to let slip the dogs of QE war. Yields on peripheral sovereign debt have made back some or all of the ground lost earlier in the week. A lot of firms are about to shut their books for the year. Borrowers do not have a whole lot more borrowing to do, if any at all.
So why, pending any reckless statements from a European politician, with volumes about to lighten, would the ECB worry about doing anything before Christmas? Next year is sure to provide plenty of problems. Now is not the moment to go nuclear.
I agree. I’ve noticed this pattern over the last decade, whenever financial crises occur: the markets shriek ever louder that governments ABSOLUTELY MUST come to the rescue or ALL HELL will break loose. This generates such a general sense of panic and catastrophe that terrified politicians cave in and open the tax purses, and then bankers get bailed out, close their positions, and hail a cab to the gentlemen’s club for whiskies and cigars.
Private banks are, really, the perfect parasite: if you look at financial news, almost all the ‘expert opinions’ come from bankers, from bank economists, from bank analysts, from bank traders. There are hardly any alternate views given in the media. The taxpayer doesn’t really have a representative to put forward our views on CNBC. So the financial sector has captured information transmission, and it makes sure the only message that gets through is: it is imperative that the market gets supported and the banks and boldholders get bailed out. The perfect parasite.
So has the ECB stood firm against the histrionic Gillian McKeith-esque fainting of the bond markets? Well…sort of. It also emerged this week that the Irish government will protect all senior bank bondholders from any hair cut in the restructuring of Anglo Irish Bank, and probably of other bailed out banks too. This taxpayer largesse towards senior bank bondholders came at the insistence of the ECB, according to the Irish government. And that pattern is likely to be followed in other bank bail-out regimes across the periphery of Europe.
So don’t worry, oh hysterical bondholders. The gallant ECB will hold your hand after all. Quick, fetch the smelling salts!