Posts about monetary policy

The ECB cannot go broke – get over it

CNBC’s Head of News, one Patrick Allen produced this article (May 10, 2012) – European Central Bank Leveraged Like Lehman – which several readers E-mailed to me suggesting that there was a problem that had to be addressed and would prevent the ECB funding member state deficit increases in pursuit of growth. The only problem I am afraid to say is the “author” doesn’t know much about the subject that he is writing about. This, sadly, in a general problem out there in commentary land. The article was in fact reporting the views of one Satyajit Das who gets a lot of airtime on national radio in Australia and elsewhere but perpetuates many of the mainstream myths about the way the monetary system operates and its limits and propensities. Das mixes factual statements (which I agree with) with causalities and reasoning (which I do not agree with). The journalists then build their stories based on an uncritical precising of so-called experts like Das and the myths then spread. Let us be absolutely clear. There is no meaningful comparison between the ECB and Lehman or any central bank and any private bank. Further, the ECB cannot go broke.

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New central bank initiative shows governments are not financially constrained

On November 16, 2011 by the Australian Prudential Regulation Authority (APRA) published a – Discussion Paper – Implementing Basel III liquidity reforms in Australia – which details how the prudential regulator plans to implement the new Basel III reforms which aim “to strengthen the liquidity framework for authorised deposit-taking institutions (ADIs)”. in that paper, APRA indicated that there were not enough assets in the Australian financial system to satisfy the new liquidity requirements. In other words, there are not enough government bonds on the issue that the banks can use for this purpose. This is a consequence of the excessive pursuit of government surpluses over the last 16 odd years. APRA indicated that a country-specific solution to this asset would be required. in this context, the Reserve Bank of Australia (RBA) a new facility – the Committed Liquidity Facility (CLF), which will provide high-quality liquidity to the commercial banks to allow them to meet the Basel III liquidity requirements. What the CLF demonstrates once again is that a currency issuing government is not financially constrained and can maintain integrity of the of the financial system and purchase any goods and services that are available for sale in its own currency any time that it chooses.

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