Thursday, March 21, 2013

ECB: Independent or political leverage? No-one can tell for sure!

After the ultimatum issued by the ECB one might wonder about the independence of the ECB and its subsequent credibility. Is the orchestrator of the Eurosystem really independent, conditionally independent or totally dependent to the political agenda of any given moment? Its dependence or independence extends to which degree?

First of all, the direct funding of public sector, i.e. public debt, is prohibited in the name of the credibility and independence of a central bank (here, the ECB). I must admit that I do not rigorously disagree with the necessity of independence, at least under certain circumstances. What about when a central bank is used as a leverage to political negotiation? What about when the central bank (any given one) turn a blind eye to imminent systemic risks of extended destabilization? What are the motives of this attitude? Why all of the ECB controversial measures have been proven to be cripple so far?

When the monetary authority does not seem annoyed at all by the risks of a bank run or a systemic collapse something is going really wrong. If we wish to allege the independence of ECB, the latter should be allowed to take all the necessary for its purpose actions away from political concerns and influence. Either ECB is incompetent, either it is and will always be an government branch- even if it does not finance public debt- or they are just bluffing; once more for political reasons. Incompetence is not a question at all- end of story! So, two possible conclusions are left to be examined and that is not an easy task at all. 

What are the differences between being a government branch and bluffing for the sake of politics? The latter can happen when certain conditions are met, e.g. time is not pressing for immediate systemic intervention, ECB has locked n' loaded and now is waiting. Any elaboration on the former is unnecessary. What do you think? For the current situation that we are experiencing, I vote for the bluff. In addition, one should not neglect the lack of active involvement in system stabilization that has been shown by the ECB. 

This passiveness of ECB is the main reason why Frankfurt is limping. And this persistence in the pattern of inadequate (not-drastic, if you prefer) measures really raises concerns about the ability of the primary monetary authority to respond and isolate any possible systemic threat. On the other hand, it is maybe the ECB that thinks that drastic involvement has been needless so far. At this point, please, allow me to mock in the following paragraph.

ECB will forcefully act only when the following two scenarios come true. Firstly, in the verge of a nuclear holocaust. Secondly, when 1€ will buy only 0.50$, people will be running panicked to their local bank offices to withdraw all of their deposits and Bernanke will have ordered the take offof all US Army C-130s that will bombard the US with 100$ bank notes.

The point that I am attempting to make here is that if a five-year long meltdown is not a probable cause then what is?

What anyone can tell for sure is that pax politica is prominent nowadays within the Eurosystem. Unless the ECB protects itself form the luring songs of neoliberal Serins from both inside and outside the Eurotower and ignores the political implications (if such implications really exist in an alarming way) it will take exhaustingly long time for the clouds of collapse and dissolution to go away. Mr. Draghi and his board should reconsider their role, their instruments and detach themselves from politics; let the politicians react to monetary authority actions and not the vice versa.