A Wall Street Journal blog says that markets should NOT “count on ECB riding to rescue”.
The article attempts to highlight on the differences in the expectations of institutional economists and what some of the European Central Bank officials have recently been saying.
“Clearly, it is not the task of the central bank to intervene… when there are fundamental doubts about the sustainability of some countries,” fellow board member Peter Praet said Thursday in comments posted on the blog Debating Europe.
Bank of Portugal head Carlos Costa, echoed that sentiment late Wednesday, saying the ECB “took its capacity to intervene to the limit.” Dutch Central Bank president Klaas Knot also said the ECB has about reached its limit.
But politicians usually say something but do another.
The BCA Research writes, (bold emphasis mine)
Political events in Italy are not progressing as fast as markets would like. The announcement that Prime Minister Silvio Berlusconi would resign provided only short-lived relief. It is unclear, however, whether any political evolution will be sufficient to satisfy the markets at this point. Thus, the ECB is once again being forced to intervene and is reportedly buying Italian bonds in the secondary market. Unfortunately, the impact on yields is muted since there are now few other buyers for the debt. Two major clearinghouses have announced increased margin requirements for Italian debt as the spread over bunds crossed the 450 basis point “line in the sand” that previously had prompted similar moves on Irish and Portuguese debt. This is important since the decision to raise margin requirements decreases the bonds’ liquidity, leading to a further spike in yields. The further danger is that Italian banks begin to come under pressure as markets discount the effect of sovereign debt markdowns on their balance sheets. Given that there is not enough firepower in the EFSF to support Italian banks, the ECB may soon find itself dealing with a bigger and bigger problem. A further deterioration in Italian sovereign debt prices might prompt the ECB to follow the Federal Reserve and Bank of England and expand its balance sheet through more aggressive purchases, possibly unsterilized, of government debt.
In short, continued political wrangling will likely force the hand of the ECB to resort to the printing press.
And in contrast to what the political bureaucrats cited above recently said, the ECB reportedly did intervene in the bond markets yesterday.
Of course political bickering has not been exclusive to political entities, such as in Italy and in Greece, but likewise apparent in the ECB—as evidenced by the infighting over policies, as well as, political appointments to its organizational hierarchy.
Earlier two ECB officials, Jürgen Stark and Axel Weber resigned over policy differences—in protest of ECB’s bond purchases.
Yesterday another ECB official, Bini Smaghi, resigned
Lorenzo Bini Smaghi resigned from the European Central Bank’s Executive Board, clearing the way for France to regain a seat after the retirement last month of President Jean-Claude Trichet.
Bini Smaghi, whose term officially ends in May 2013, will join Harvard University’s Center for International Affairs on Jan. 1, 2012, the Frankfurt-based ECB said in an e-mailed statement yesterday. ECB President Mario Draghi thanked Bini Smaghi for his “contributions in the field of European and international monetary and economic affairs over many years.”
Italy’s Prime Minister Silvio Berlusconi had stepped up pressure on Bini Smaghi to quit in recent weeks in a bid to defuse a row with French President Nicolas Sarkozy over the Italian’s seat on the central bank’s six-member Executive Board. Sarkozy had backed Mario Draghi’s candidacy to head the central bank on the condition that Berlusconi get Bini Smaghi to step aside to make way for a French candidate and avoid leaving the board with two Italians when Trichet, a Frenchman, finished his term at the end of October.
Berlusconi angered France last month when he failed to name Bini Smaghi to replace Draghi as head of the Bank of Italy, which would have resolved the impasse over the ECB board. After saying that Bini Smaghi was a candidate on Oct. 18, Berlusconi appointed Ignazio Visco, the bank’s deputy director general, to run the Italian central bank. Bini Smaghi had initially refused to resign before his term ended in 2013.
And that based on demonstrated preference, which as defined by Murray N. Rothbard signifies as the
actual choice reveals, or demonstrates, a man's preferences; that is, that his preferences are deducible from what he has chosen in action
…the cumulative actions by policymakers suggest that the interests of political authorities remain supreme.
This means that the ECB will continue to do what central banks have originally been designed to do—finance deficits and conduct bailouts of the banking cartel (with or without political tussles—as everything else will be used as an excuse)
And importantly, the popular notion that central bank acts independently from political influence has been exposed as a mirage.
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