In June, the ECB lowered the interest rate on bank deposits, including reserve holdings in excess of the minimum reserve requirements, from zero to -0.10%. This week, surprising just about everyone not named Mario Draghi, the ECB lowered the rate by another 10 basis points to -0.20%.
As we wrote when the less-than-zero rate was announced, “banks will pay a fee on money they fail to lend out. Whether or not that stimulates the economy, it could encourage banks to take more risk, approving loans that otherwise may not have been approved. Isn’t that what caused the financial crisis?”
Zerohedge explained that while rates were already negative, “Now they’re even more negative. Because in the world of Central Banking if something doesn’t work at first the best thing to do is do more of it. Whatever you do, DO NOT question your thinking or your economic models at all.”
Et Tu, Europe? ECB Gives QE a Hug.
Negative interest rates and the resulting weakening of the euro may not be the only thing the ECB has in store for Europe.
Like the U.S., Europe seems prepared to try everything but austerity and policies that would create jobs in order to revive its economy. It may even turn to quantitative easing (QE).
As we’ve written before, while the Fed was literally betting the bank on QE, ECB Chair Mario Draghi has resisted bond buying – but that may be because there are no Eurozone bonds to buy.
Now, though, most analysts are predicting that QE is coming in 2015. Economists from Citigroup Inc. predicted that the central bank will unveil a QE program in December valued at 1 trillion euros.
While a prediction attributed to “most analysts” is bound to be wrong, in this case they didn’t have to do much analyzing to make their prediction, since the ECB has hired Blackrock to help design a “private QE” program, in which the ECB buys asset-backed securities (ABS) instead of sovereign bonds.
If the ECB buys into private QE and QE goes global, Appaloosa Management’s David Tepper predicts the bond market will tank, “as the global capital markets simply cannot exist in a world in which every single central bank stops cold turkey.”
QE: An American Success Story?
Some analysts take for granted that QE has saved the U.S. financial system and is restoring the country to economic prosperity. But ask yourself this:
What is the best way to stimulate economic growth and create jobs?
- Reform the tax code, since America has the highest corporate tax rate in the world.
- Deregulate, since regulations are time consuming, reduce productivity and interfere with free markets.
- Raise the minimum wage and provide subsidies to key contributors to your political party.
- Buy bonds.
If you answered A. or B., you are a rational human being and have probably worked a real job or even managed a business. If you answered C., you’re a member of Congress or a journalist. If you answered D., you’re probably a member of the Federal Reserve Board’s Open Market Committee.
During more than five years of QE 1, QE 2, Operation Twist and QE 3, U.S. gross domestic product (GDP) has grown by an average of under 2%, which, as we’ve repeatedly pointed out, is well under the post-World War II average of 3.3% growth. And, as Zerohedge noted, “By the Fed’s own admission, its QE programs have only lowered unemployment by 0.13% (mind you, the Fed found this by using the overinflated unemployment data from the BLS, the reality is likely even worse).”
The BLS is the Bureau of Labor Statistics, which, as we’ve previously reported, tends to see the workplace as half full, when it’s half empty.
In other words, buying bonds does not create jobs (unless your job is with the Fed). It does not create economic growth.
Bond buying can be used to manipulate the stock market, but the average investor is unlikely to benefit much from it, since investing based on bond buying is risky. The well-connected Wall Street types have benefited greatly from QE’s market rigging, though. A new study – from the Fed, of course – shows that income equality in the U.S. has increased in recent years. Wasn’t addressing income inequality supposed to be one of President Obama’s main objectives?
Bond buying has been so ineffective, even Fed Chair Janet Yellen has endorsed continued “tapering” of bond purchases. When she was nominated as Fed Chair, we dubbed her the QE Queen, because of her ongoing support of bond buying. Now, though, it appears that bond buying will officially end next month.
So why would the ECB pick up the QE baton now?