The announcement last week that the ECB might decide to further expand its QE program to encourage employment and growth in Europe was predicted. It does not make it right.
The dogmatism of Mario Draghi looks increasingly like a desperate attempt to prove a point of economic theory rather than an effective policy. It would not be a problem if it were not having damaging consequences on investors.
The LTRO failed to increase loans
The open-ended offer in the end of 2011 and the beginning of 2012 to banks interested to borrow any amount at 1 percent for three years was doomed to fail. It was stemming from a belief that the banks were suffering from a liquidity squeeze and were not lending to the economy for that reason.
The trillion euro of the LTRO coincided with a slight decrease in bank loans, an increase in government bonds and an Asset and Liability Management opportunity that allowed banks to repay their most expensive debt and boost their profits. It was predictable, but the chorus of the European Commission and the ECB was unstoppable.
What the ECB did was to subsidize through its balance sheet the over-indebted Southern European countries,mostly Italy and Spain, who took the lion share. It reduced the spread between the "good" and the "bad."
It was not, contrary to the statements of the ECB, a liquidity operation. It was a credit operation, involving the ECB as a lender -- in that case not a lender of last resort, with weaker collateral.
To correct this, the ECB came with a Targeted LTRO (TLTRO) that was a failure.
The Euro QE I had no effect on the economy
Once again presented as a support to European growth, the QE was pouring water on an inundated garden. There was no need for such measure which had the immediate effect to weaken the Euro and keep interest rates in negative territory, to the great benefit of the over indebted governments: this includes now France who is showing neglect in the management of its debt, whatever its government pretends otherwise, and soon reaching 100 percent of GDP.
No growth and no reduction of unemployment followed. Copying the US QE was a classical mistake of singing the song of the Stieglitz and the Krugman who, despite their Nobel Price, does not make this aberration legitimate. US solutions do not always work for Europe.
The Euro QE II is unnecessary because interest rates are inefficient to propel growth
There is therefore no reason to launch a second tranche of the same mistake because the first one has not created growth and employment. The statement of Mario Draghi proves that he is dogmatic in his believe that he will push inflation, stimulate growth and create jobs.
There is no theoretical or practical evidence that such effect could come from interest rates. The problems of Europe are not financial. However, it will continue to inflate the ECB balance sheet reducing substantially the ammunition that the ECB will need to sustain future crises.
Interest rates do not create Jobs
Federal Reserve President Janet Yellen who continues to be the cantor of jobs through QE and attributes the employment improvement to her interest rate policy. The arguments pushing her were so weak that they start raising doubts about the presence of a captain at the Fed.
It is untrue that jobs are created by lowering interest rates. I have yet to meet a CEO who is telling me that 25 basis points (0.25 percent) change in interest rates will change his decision to invest and will do it at home so that it creates jobs!
The beneficiaries are primarily the governments, who borrow at interest rates that do not cover the risk, and the banks who do not reduce their lending rates, but enjoy cheaper funding.
Low interest rates are an expropriation of savings
The truth is that central banks do not care about the economic actors who depend on return on capital. Neither does the International Monetary Fund who encouraged the Fed to wait.
By doing so they cut the yields below the risk level, and pensioners do not know how to be able to live on the miserable yield that they can get. While the situation is troubling in the United States, the European Central Bank is responsible for negative interest rates and even France, who runs to its collapse, borrows for 10 years at 1 percent. It denies it in a recent study.
It is counterproductive to deprive savings of an adequate returns to stimulate banks and government borrowing. It is dangerous to weaken insurance companies and pension funds by not giving them a fair return on the risk of their portfolios. All this leads to a search for yield that can only obtained by taking additional risks and making the system vulnerable.