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The ECB is considering capping peripheral bond yields by stepping in to buy the debt when its...
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Sunday, August 19, 2012, 6:52 PM ETThe ECB is considering capping peripheral bond yields by stepping in to buy the debt when its spread to German paper rises above a certain threshold, reports Der Spiegel. Draghi has complained that monetary policy transmission is broken, i.e., the ECB eases yet financial conditions tighten further in the periphery - this gives him his opening to buy government debt. A decision could come at the bank's September policy meeting.
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Could not agree more. Draghi is really pushing his luck these days, and may someday find himself in charge of an ECB that is the central bank to only the weaker southern EU countries. As John Hussman has suggested, the logical alternative may well be for Germany, Holland, Finland, and the stronger north to just create a separate northern EU with their own currency block. And then let Draghi print as many euros as he wants and buy as many bonds as the wants. The south can then devalue themselves into competitiveness again. Albeit at substantially reduced standards of living.
As Hussman has pointed out, leaving the euro with the weaker south could help with lots of technical and potentially expensive issues such as contracts, denomination, legal issues, etc.
Perhaps the big question is what happens to France and which way would they choose to go. Maybe France chooses to be the big dog in the weaker southern block, and attempt to reassert themselves in such a manner.
Or is that whiny!!!! as in compared to overpaid and incompetent EU bureaucrats & politicians continually attempting to hand out favors to crony capitalists always working to stack the game in their favor. Maybe the markets ought to try banning long sales (instead of banning short sales) for a few months and see how that works out for markets.
Or maybe that just whiny!!! as in we don't believe in real free markets, real capitalism, or real price discovery. We are the entitled class and have every right to be major crooks, major fraudsters, and to make up all the rules as we go along.
Wall Street would continue to feed from the muppets and there isn't anything you can do to stop it.
If it works then it could buy more time for Spain and others.
This could be a game changer if the ECB and Germans both are behind it.
Keeping the interest rates low by creating an artificial demand for bonds might work for a while, but two factors form the reality that cannot be avoided. First, the wave of bond issuances will continue as bonds auctioned at reasonable rates a few years ago reach maturity and have to be replaced. Second, governments or banks willing to create the artificial demand will soon discover that they can only get their money back by buying more and more debt. They will be repaying their own investment.
Maybe we should call this the Draghi Scheme.