CT Blue

Floyd Norris, who usually, so far as I can see, makes sense, notes with approval that the European Central Bank has found a way to delay the day of reckoning in Europe:

In recent weeks, the new president publicly insisted the central bank would never do any of the things that Germany opposed. The bank would not drastically step up its purchases of Spanish and Italian government bonds. It would not directly finance European governments. It would not backstop European rescue funds or print money that the International Monetary Fund could use to bail out governments. 
 
It would do only what central banks normally do. It would lend to banks. 
 
It turns out that may be enough to stem the European crisis for at least a few years, and go a long way to recapitalizing banks in the process. 
 
That fact only became clear on Wednesday, although Mr. Draghi announced his intentions on Dec. 8, when the central bank said it would offer to lend money to banks for three-year terms, in unlimited amounts, at a very low rate. 
 
In reality, it was an offer banks could not refuse. They will initially pay the central bank’s official rate of 1 percent. But if the bank lowers the rate in coming months — as it is widely expected to do — the rate on these loans will drop as well. 
 
There is no limit on what the banks can do with the money. But there is an obvious, virtually risk-free, option. A bank can buy short-term securities of its own government and pocket the difference — up to four or five percentage points — for the life of the securities.

If there is an obvious way to use the money, then it is, we can assume, the ECB’s intent that the money should be used in precisely that way. This is, then, a backdoor way to do what it refuses to do directly: “step up its purchases of Spanish and Italian government bonds” or “backstop European rescue funds or print money that the International Monetary Fund could use to bail out governments”.
 
I’m no expert, but this inquiring mind wants to know why it makes any sense at all to do indirectly and inefficiently what could and should be done directly. The European banks are getting a deal pretty much like the banks here got: the government is lending them money at almost no interest, and borrowing it back at a higher rate. One might argue that in this case the banks are taking on risk the American banks never did; after all, when the American banks lent the money back to the government there was no risk of an American default.
 
But in reality, it is the ECB that is really taking on the risk here, and its doing it for a measly one percent return. As here, everyone knows that if push comes to shove, the ECB will step in to bail out the banks, since this “plan” is itself part of just such a bailout. So, as here, the banks are lending out money with no real risk, and pocketing the spread between their own costs and those they are passing on to the taxpayers of Europe. In essence, those taxpayers are paying a tax to the banks, and a hefty one at that. Along with getting the bill, those very taxpayers will be expected to make “sacrifices”, in the form of counterproductive austerity measures. The banks and bankers, of course, will make no sacrifices. They will get only what they’ve grown used to getting: free money. It’s a Wonderful Life if you’re a banker.
 
As a postscript, as even Norris acknowledges, all this maneuvering only postpones the inevitable, since it does not address the fundamental problems with the Euro. Dean Baker explains the situation succinctly:

It seems the problem here is that Robert Samuelson has not heard about the euro. The countries he has identified as reaching a situation where they “lose control over their economy” are all on the euro. These are countries that do not issue their own currency. In this sense they are like Ohio and Texas. These states cannot freely run deficits because the Federal Reserve Board has no explicit or implicit commitment to back up their debt. Greece, Italy and Spain are in the same situation, as the European Central Bank (ECB) has repeatedly insisted that it will not back up the government debt they issue.

The countries of Europe have tried to have it both ways: a unified currency without a truly unified economy. It hasn’t worked. The ECB’s response doesn’t address the underlying issue, but it does make an awful lot of rich bankers a lot richer.
 
UPDATE: Paul Krugman confirms my basic reaction that this was a back door way to lend money to Italy, Spain etc.
 

Regular readers may recall that I and others were adamant that it was essential for the ECB to step in and buy the debt of troubled governments, to head off what looked very much like self-fulfilling panic. The ECB refused to do that, and many of us took that refusal at face value — but the argument is that in reality it did the functional equivalent, lending very large sums to banks with sovereign debt as collateral, so that it was in effect doing the purchases we wanted, but laundering those purchases through banks.