FOMC Freeze Frame

As was widely expected, the FOMC decided not to do anything in addition to the latest crazy plans to undermine the economy with even more money printing that were announced in September.

In fact, the October FOMC statement reads almost like a carbon copy of the September statement. The two statements can be compared side by side with the help of the WSJ's 'Fed statement tracker'.

As can be seen there, only a handful of sentences have been amended ever so slightly. The only differences worth mentioning concern the assertion that consumer spending has improved a bit, while investment spending by corporations has weakened. Moreover, Richmond Fed president Jeffrey Lacker now no longer merely 'prefers to disagree' with keeping the current loose monetary policy in place until 2015, he plainly and simply 'disagrees' as of October. Maybe they should have said 'he's disgusted by now'.


In fact, Lacker's latest dissent marks a milestone of sorts: he is now close to breaking the track record of Thomas Hoenig, the previous serial dissenter who attempted in vain to stop the helicopter pilot (as certain left-leaning bloggers will tell you, this means they are 'anti growth'. Ha!).

The WSJ notes regarding Lacker's lone dissent:


“Jeffrey Lacker is going down in the record books yet again. The Federal Reserve Bank of Richmond president dissented in today’s decision by the Federal Open Market Committee, which as expected kept its bond-buying plan and rate guidance in place. It’s his seventh dissent of the year — out of seven meetings so far.

With his latest vote, Mr. Lacker marks a new milestone: He has now dissented in votes as a Fed policymaker more often than he has joined the majority. After his 23rd vote as a FOMC member on Wednesday, Mr. Lacker now has 12 dissents to his name, according to a tally by Wrightson ICAP.”


(emphasis added)

So there is at least one among the FOMC's voting members in 2012 who will one day be able to say “I tried to stop the madness”. Not that it really matters.



Serial FOMC dissenter Jeffrey Lacker: Dude! If you say 'easing' one more time…

(Photo credit: Bloomberg)



Draghi Visits the 'Lion's Den'

Mario Draghi has decided he needs to convince German lawmakers he is not the bad all around money printer they fear he is. And so he has entered what the financial press refers to as the 'lion's den'- the German parliament in Berlin, to make, as Bloomberg reports, 'his sales pitch'.

“By appearing before a joint session of three committees of the German parliament in Berlin today, the European Central Bank president is seeking popular support in Europe’s largest economy for his plan to purchase government bonds to stem the debt crisis. While Draghi says his so-called Outright Monetary Transactions are required for price stability, some German policy makers say they are an affront to the monetary orthodoxy upon which the ECB was founded.


Draghi’s crisis response is being criticized on both sides of the political fence in Germany, said Christian Schulz, an economist at Berenberg Bank in London.

“On the conservative side there is the belief that countries should be responsible for themselves and the ECB certainly shouldn’t be taking over the risk,” he said. “On the left they want a democratically legitimated instrument to end the crisis, not the ECB.”

The Bundesbank — a bastion of stability for Germans after its iron grip on prices after World War II banished memories of 1920s hyperinflation — has led opposition to Draghi’s bond- purchase plan. Its president, Jens Weidmann, says the program is tantamount to financing governments by printing money, which is prohibited by the ECB’s founding treaty.

German discontent with ECB measures intended to stem the spread of the debt crisis has festered since the bank’s first foray into bond markets in 2010. That program, which has since been terminated, prompted then-Bundesbank President Axel Weber and ECB chief economist Juergen Stark, a former Bundesbank vice president, to resign in protest.


(emphasis added)

It appears that Draghi considered his foray into the lion's den a success, as  he emerged 'smiling from the two hour long grilling' according to a Reuters report. Apparently the dreaded cats of prey turned actually out to be tame old circus lions well past their prime. However, he apparently hasn't convinced everyone  just yet. So let us take a look at what he asserted:

“Rebutting the main objections point by point, Draghi said in an opening statement released by the ECB:

"First, OMTs will not lead to disguised financing of governments.

"Second, OMTs will not compromise the independence of the ECB … Third, OMTs will not create excessive risks for euro area taxpayers … Fourth, OMTs will not lead to inflation."

Indeed, falling prices in some countries posed a greater risk than inflation, he said, while the ECB's counter-measures lay above all in the interest of Germany as the euro zone's biggest creditor, two lawmakers in the room reported.

The rare appearance in a national legislature underscored how important it is for Draghi to keep politicians in Europe's biggest economy on-side amid a broader German backlash.

Asked afterwards if he felt he had accomplished his mission and no longer needed to lose sleep over German public opinion, the Italian ECB chief said: "Oh, that would be too ambitious … The proof is in the eyes of the beholder."

Several lawmakers in Chancellor Angela Merkel's centre-right coalition praised his attendance and his answers. "This should put an end to any doubts about the seriousness of the ECB's policy," said Volker Wissing, a senior lawmaker from the Free Democrats, Merkel's junior coalition partners.

Conservative Norbert Barthle, a senior member of Merkel's CDU party on the budget committee, said he had questioned Draghi on his strategy for exiting the bond-buying programme and how he would ensure price stability in the long term. "His answers were very convincing, and we can therefore give the message to German citizens that fears of inflation that have been expressed here and there are unfounded," said Barthle.

Outside parliament, the reception was less warm. A handful of Eurosceptic protesters demonstrated in red T-shirts bearing the slogan: "Hands off the printing presses, Mr Draghi!" One banner read: "ECB = Bad Bank."

Frank Schaeffler, a Eurosceptic rebel in Merkel's coalition, called the ECB chief "a dove in hawk's clothing" and insisted that "inflation will be the bitter consequence" of his plan.”


(emphasis added)

'A dove in hawk's clothing' is the best and most succinct description of Draghi we have come across yet. However, with only euroskeptic tinfoil hat wearers and the pesky public left to oppose the man, it seems he can now proceed to print away at his heart's content. We have highlighted Draghi's assertion that falling prices allegedly represent a 'danger' above. Since when is that so? Consumers in the crisis countries are 'threatened' by falling prices? Really? This is an utterly absurd assertion – in fact, if it were not so infuriating that our vaunted central planners believe such abject nonsense, it would be lough-out-loud funny to hear him say something like that.

Never mind that prices aren't falling anywhere in the euro area, least of all the periphery! For example, Spain's year-on-year CPI growth rate just accelerated to 3.5%, which is way above the ECB's official 'target' of 2%. The peripheral countries actually need falling prices, so as to improve their competitiveness (we are leaving aside for the moment that CPI and similar index numbers are deeply flawed statistics and cannot actually 'measure' the mythical 'general price level' anyway).



Euro area money supply growth is recently re-accelerating after a huge injection of ECB credit (data via Michael Pollaro)



Anyway, the argument that 'falling prices are a threat' provides an exremely convenient excuse for pursuing as loose a monetary policy as possible. However, falling prices are of course the natural order of things in a progressing market economy. By attempting to forestall a fall in consumer prices, central banks have been furthering massive credit bubbles, which is precisely why there is now a crisis in the first place!

That buying government debt in the secondary market is not going to provide financing to the governments concerned is a rather dubious assertion as well. Of course the ECB won't finance them directly, but what difference does it really make in practice when it is done using the commercial banks as intermediaries? OMT's and other central bank interventions will naturally create all sorts of risks – to all holders and users of the euro.

How German lawmakers could come away 'convinced' from this meeting that 'inflation is not a threat' is slightly mysterious to us, except to say that economic ignorance is of course widespread and Mario Draghi is a very slick customer who knows how to wax eloquently.



Listen up, you dense Germans…there shall be stability!

(Photo credit: Ralph Orlowsky / Getty Images)




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One Response to “Central Banks Update – The FOMC Decision, Draghi Visits the ‘Lion’s Den’”

  • Crysangle:

    Irony of Spain’s rising CPI is that a large part is due to tax rises. These tax rises are aimed at balancing the budget . The budget is out of sync. due to excess past and programmed spending, which in turn reached that ‘acceptable’ level due to boom revenues . Those boom revenues were a product of ECB policy , of FRL , and they now remain present in the form of debt , both private mortgage debt taken on at exorbitant (due to financial policy) realty values , and in the form of sovereign debt . The public not only have to cover their own debt or be evicted , they now have to finance the excess government debt via taxation , and they also have to finance high sovereign interest and any financial bailout failure. They are therefore paying across the board to maintain the financial system and its inflated values … all the way back to the ECB , so that the ECB and EU might ‘advise’ their governments how to run their country . So when someone goes to buy slightly less food because CPI has risen much faster than the wage which they (often do not) have , they will know who to thank .

    Spain is headed to 25% unemployment now .

    Worthwhile covering French realty maybe . The French property market is now in trouble, loan volumes are down around 30% (twice as fast as 2008-2009) . This started early this year and seems entrenched . gives an aggregate of French property news .

    This news is known for a while , but it is only a main topic in the press now e.g. :

    give some local headlines.

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