Courtesy of Mish.
Draghi Has it Backwards
A director at a global financial company with offices worldwide pinged me in response to my post ECB’s €40bn Stimulus Gamble: ECB Pulls Out Bazooka, Cuts Rates, Buys Assets; Will this Stimulate Lending?.
Hello Mish,
Mario Draghi is an idiot. Banks create money when they lend. The loans create a requirement for reserves which ultimately reverts back as deposits at the ECB. The negative interest rate is therefore a tax on capital and a tax on lending. This not rocket science.
I’d start a charity whereby every newly appointed central bank board member is sent a free copy of Rothbard’s Mystery of Banking except I am beginning to doubt their ability to read.
Name Withheld by Request
Bond Bubble Grows
I responded to “NW” with “I agree 100%. All they have done is give banks the incentive to park money on sovereign bonds with diminishing yield. The bond bubble grows.“
It is ridiculous that Spanish and Italian 10-Year bonds trade at a lower yield than 10-year us treasuries, yet that is the current state of affairs.
Is there 0% risk of a Greece- or Cyprus-like disaster in Spain, Italy, or Portugal? That’s exactly what those yields suggest.
European banks, already leveraged to the hilt in their own nation’s bonds, will now buy more to avoid receiving -0.2% interest on funds parked at the ECB.
Moreover, European banks under pressure to help SMEs (small and medium businesses) will no doubt make poor lending decisions. Bank losses will grow,
€1 Trillion Bazooka…
