The bazooka has supposedly saved the Eurozone, but what flexibility going forward does the ECB actually have? According to the article below, the ECB’s space to manoeuvre inflation has become narrow. From Voxeu.
In December, the ECB successfully forestalled a financial crisis by stepping in with a big bazooka and inundating the market with liquidity. Unfortunately, the big bazooka has come at a cost; the composition of the ECB’s balance sheet has changed dramatically.
Under standard monetary policy, when there is a sudden increase in money growth, the central bank can increase its short-term interest rate and thereby reduce its short-term loans to banks. This policy causes a reduction of bank lending to households and firms, which absorbs excess liquidity and prevents an acceleration of inflation. The ECB has lost its ability to implement this type of anti-inflationary policy.
As we suggested yesterday, “Seriously, just let the FED do the job. The ECB is just the junior on the desk. Get the guy with the bazooka to pull the trigger and show the world how it is done. The Europeans can’t hardly agree on the size of the cucumber, how will they agree on what the ECB should be doing. Let central planning go Global”.
They lisyened, latest press release on the Bazooooka.
The Bank of Canada, the Bank of England, the Bank of Japan, the European Central Bank, the Federal Reserve, and the Swiss National Bank are today announcing coordinated actions to enhance their capacity to provide liquidity support to the global financial system. The purpose of these actions is to ease strains in financial markets and thereby mitigate the effects of such strains on the supply of credit to households and businesses and so help foster economic activity.
These central banks have agreed to lower the pricing on the existing temporary U.S. dollar liquidity swap arrangements by 50 basis points so that the new rate will be the U.S. dollar overnight index swap (OIS) rate plus 50 basis points. This pricing will be applied to all operations conducted from December 5, 2011. The authorization of these swap arrangements has been extended to February 1, 2013. In addition, the Bank of England, the Bank of Japan, the European Central Bank, and the Swiss National Bank will continue to offer three-month tenders until further notice.
Seriously, just let the FED do the job. The ECB is just the junior on the desk. Get the guy with the bazooka to pull the trigger and show the world how it is done. The Europeans can’t hardly agree on the size of the cucumber, how will they agree on what the ECB should be doing. Let central planning go Global. From Al Jazeera;
The European Central Bank (ECB) has been working hard to convince the world that it is not competent to act as a central bank. One of the main responsibilities of a central bank is to act as the lender of last resort in a crisis. The ECB is insisting that it will not fill this role. It is arguing instead that it would sooner see the eurozone collapse than risk inflation exceeding its 2.0 per cent target.
It would be bad enough if the ECB’s incompetence just put Europe’s economy at risk. After all, there are tens of millions of people who stand to see their lives ruined because the bureaucrats at the ECB don’t understand introductory economics. But the consequences of a euro meltdown go well beyond the eurozone.