QUANTITATIVE EASING (2)

In my post a year ago, I highlighted how European central banks were printing money in order to buy Government bonds in their domestic market place, bonds which had been previously issued to finance said Governments' fiscal deficits. This was supposedly a "good thing", and qualitatively different from merely printing money to finance the deficit in the first place, a supposedly "bad thing".

Now comes a variant in this story. The European Central Bank is prohibited by its statutes from financing Member States' fiscal deficits (though it can buy bonds in the market place, which have already been issued). However, in the past three months, it has lent roughly Euros 1 trillion (there's that trillion word again) for three years at an interést rate of around 1% to  hundreds of European banks. The official word is that those banks will in turn lend the money to hard-pressed European businesses. However, everybody knows that the banks will invest at least some of the money in European Government bonds that yield much more than 1%. The two-stage domestic QE ruse now has an equivalent two-stage European QE ruse.

Don't get me wrong, I am not saying that this is a bad idea. I am merely pointing out that supposedly sacrosanct ideas (namely that central banks should not print money to finance Government deficits) are falling like ninepins during this financial crisis. And people will remember that, if and when the crisis eventually comes to an end.

Walter Blotscher