ECB Cuts Rates, Mulls Negative Deposit Rates

Central banks are reinforcing their assumed roles as superheroes for the global political economy.

Justifying a weak regional economy, the ECB has once again pared down interest rates…

From Bloomberg:

The European Central Bank cut its key interest rate to a record low as the 17-nation euro region struggles to emerge from recession.

Policy makers meeting in Bratislava today lowered the main refinancing rate to 0.5 percent from 0.75 percent, a move predicted by 45 of 70 economists in a Bloomberg News survey. The ECB kept the deposit rate at zero and reduced the marginal lending rate to 1 percent from 1.5 percent to preserve a symmetrical rate corridor. President Mario Draghi holds a press conference in the Slovakian capital at 2:30 p.m.

Since Draghi said last month that he stood ready to act if Europe’s economic outlook worsened, inflation plunged, economic confidence slumped and unemployment rose. Today’s cut, the first since July last year, takes the ECB closer to exhausting its conventional policy tools, raising the prospect of a negative deposit rate or new non-standard measures.

I have been expecting bolder and more aggressive experiments or tinkering with the financial system from central bankers. Central bankers will push using central banking (inflationism) tools to the limits.

The ECB has mulled on negative deposit rates since 2012, then I wrote:

Central banks have only one thing in mind: That is to expand to credit (inflationism) to supposedly boost aggregate demand which is reality serves as an academic cover for the true purpose—finance extravagant governments.

Unfortunately the world isn’t that simple. People refuse to take on more credit for several reasons: They have been drowning in debt, they have been tarnished by bad or blemished credit scores, they could be suffering from lower income or unemployment is high due to the recession, business environment has been hampered by politics banking institutions have been clogged and for many other reasons which reduces their incentives to do so.

What negative deposit rates will likely do is to destabilize allocation of resources and spawn more malinvestments and fuel frenetic speculation that leads to boom-bust cycles and worsen the situation

At the press conference following the announcement of the cutting of rates, the Financial Times’ Person of the year ECB’s Chief Mario Draghi has remarkable comments on the negative deposit rate and on the direction of ECB policies which deserves some comments. (bold mine)

On negative deposit rates:

We said in the past we are technically ready. There are several unintended consequences that may stem from this measure. We will address and cope with these consequences if we decide to act. And we will again look at this with an open mind and stand ready to act if needed.

Unintended consequences, which are likely to be systemic, will be suffered, not only by the taxpayers, but by the regional economy that may affect the world. This is because centralization of risk taking, which assumes simplicity and homogeneity, goes against the reality of a complex world.

Central bankers have been revealed as having no qualms using the economy as guinea pigs for their grand designs.

And for whose benefit?

Mr. Draghi on the direction of ECB policies:

I would use the word frustrated, yes. We view improvements in financial markets. We think financial markets are the only and the necessary channel for the transmission of monetary policy. You don’t go around with helicopter money, throwing money. In Europe, you go through banks. You don’t have capital markets as you have in the U.S. We have to go via the banking system. That is why in my press conference I try to give you a very detailed reading of different indicators because it shows how closely we are trying to examine and analyze reality to see whether these impulses that we’ve been transmitting to the economy get translated into better welfare, lower unemployment, better economic activity.

So there you have it folks, no helicopter money, ECB’s policies will mainly be directed at the rescues of the crony banking system.

Thus the consideration of negative deposit rates or of the charging financial institutions for the money they deposited with the central bank which once again will penalize savers.

Today’s derring-do rock star central bankers hardly understands why centralization will mostly fail to accomplish its goals.

As the great Nobel laureate Austrian economist Friedrich von Hayek warned of Fatal Conceit by political authorities 

The curious task of economics is to demonstrate to men how little they really know about what they imagine they can design. To the naive mind that can conceive of order only as the product of deliberate arrangement, it may seem absurd that in complex conditions order, and adaptation to the unknown, can be achieved more effectively by decentralizing decisions and that a division of authority will actually extend the possibility of overall order. Yet that decentralization actually leads to more information being taken into account