Any day now, it seems that European Central Bank President Mario Draghi’s full head of hair will migrate to his chin and turn gray, as the central banker morphs into former Fed Chair Ben Bernanke.
Last week, the ECB began its purchase of €60 billion ($64.2 billion) a month in Eurozone government bonds, with total purchases expected to eventually exceed €1 trillion.
He’s called the purchase his “big bazooka,” but it could turn out to be a blunderbuss, an antiquated weapon that’s prone to misfiring.
Eminently Orthodox
After last week’s start of EU-QE, or maybe we should call it the Hail Mary QE, the Eurobanker is seeking to position his continent’s quantitative easing program as business as usual.
“Asset purchases are unconventional but they are not unorthodox,” Draghi said at a conference. “In fact, they are eminently orthodox.” We doubt anyone has referred to EU-QE as being unorthodox, but it’s certainly easier to defend a program by saying it’s not unorthodox than it is to defend a program by saying it’s not an act of desperation.
So buying bonds by the billions isn’t just orthodox … it’s “eminently orthodox.” Kind of sounds like a tag line: “EU-QE. Eminently Orthodox.” Makes you want to go out and buy your bonds today!
Even the Germans Did It!
While Draghi was breaking new ground with asset purchases on a Bernanke-like scale, he said that asset purchases are “nothing new” and that the level-headed folks at Germany’s Bundesbank did it in the 1970s. Even the Germans did it, so it must be OK.
Of course, Chairman Draghi wasn’t so much trying to provide a history lesson as he was trying to muzzle Germany, which has been wary of bond buying.
Bundesbank President Jens Weidmann said he was “skeptical” that more expansionary policies were needed. Germany is concerned that, among other things, EU-QE will cause asset bubbles.
Claudia Buch, deputy president of Bundesbank, also expressed concerns that it EU-QE succeeds in boosting inflation, policymakers may not concentrate on implementing fiscal reforms.
That strikes us as an odd concern for two reasons. First, EU-QE is not going to boost inflation. The Federal Reserve Board spent six years buying more than $3 trillion worth of bonds and prices have flatlined in the U.S. Why should the European economy react differently to bond purchases a little north of €1 trillion? Will there also be an EU-QE2 and EU-QE3?
Odder, though, is her worry about policymakers failing to implement fiscal reforms if QE succeeds. Europe is practically failing into the Atlantic Ocean and policymakers have failed to implement any significant fiscal reforms; they’re not likely to be affected by EU-QE one way or another.
At least maybe the ECB will manage to artificially pump up European stock prices.