This is one of the questions Marshall Auerback tackles in a piece at Counterpunch.  His answer, as you might expect, is “no.”  He also addresses the concern that the ECB risks an impaired balance sheet if it steps up and plays a larger role in buying member-state debt:

… if the ECB bought the bonds then, by definition, the “profligates” do not default. In fact, as the monopoly provider of the euro, the ECB could easily set the rate at which it buys the bonds (say, 4% for Italy) and eventually it would replenish its capital via the profits it would receive from buying the distressed debt (not that the ECB requires capital in an operational sense; as usual with the euro zone, this is a political issue). At some point, Professor Paul de Grauwe is right :  convinced that the ECB was serious about resolving the solvency issue, the markets would begin to buy the bonds again and effectively do the ECB’s heavy lifting for them. The bonds would not be trading at these distressed levels if not for the solvency issue, which the ECB can easily address if it chooses to do so.  But this is a question of political will, not operational “sustainability.”

So the grand irony of the day remains this: while there is nothing the ECB can do to cause monetary inflation, even if it wanted to, the ECB, fearing inflation, holds back on the bond buying that would eliminate the national [government] solvency risk but not halt the deflationary monetary forces currently in place.

While the latest figures show the unemployment rate dipping below 9 percent, a lot of this decrease has to do with individuals giving up and leaving the labor force.  As for additional stimulus, Congress is currently negotiating an extension, and possible expansion, of the payroll tax cut.  But Republicans are insisting that it be “paid for,” so it’s not yet clear what effect this would have if passed.  That leaves the Federal Reserve as the only US institution to turn to.  Zero Hedge tries to provide some (small) reason for optimism on this front, suggesting that the composition of the FOMC may become more “dovish” in 2012 when the next group of voting members is rotated in (Fisher, Kocherlakota, Evans, and Prosser out; Pianalto, Lacker, Lockhart, and Williams in).

In its continuing series on the Fed’s bail-out of Wall Street, Bloomberg estimates that the banks got a $13 billion hand-out from the Fed’s easy lending terms.

Using the excuse of the crisis, the Fed lent funds at near-zero interest to the banks. This was supposed to encourage them to begin lending to firms and households, to spark economic growth and recovery. Of course, the problem with that scheme is that households were already underwater with debt (hence, the recession), firms had no sales hence no reason to borrow to increase production, and banks were loathe to lend to households and firms that face a bleak future on account of Wall Street’s crashing of the economy. So instead, banks mostly bought Treasuries and played the yield curve—earning more on Treasuries than they had to pay the Fed. The $13 billion subsidy directly created by the ZIRP (Fed’s zero interest rate policy) directly created $13 billion of extra profits that Wall Street could then use to reward the same genius CEOs that created the crisis. Nice synergy.

The same Bloomberg article reports that the bail-out itself cost $7.77 trillion—a lucky string of sevens if you happen to be in the top 1% and work on Wall Street. This is based on the secret Fed documents that Senator Sanders managed to force Bernanke to release—25,000 pages worth. I do not know how Bloomberg came up with that number. The true number is almost four times bigger–$29 trillion based on careful analysis done at UMKC. In any event, 7 trillion is a big enough number to raise eyebrows. It is more than 10 times the Treasury department’s $700 billion TARP program that Paulson managed to get out of Congress (after holding a loaded gun to his head and threatening to blow his brains out if Congress didn’t give him the money with no strings attached; Congress wouldn’t blink so he had to come back on hands and knees). But it is not just the size that is shocking—it is that the measly little $700 billion was subject to Congressional approval and oversight, while the Fed’s bail-out (whether $7.77 trillion or the more likely figure of $29 trillion) not only was never approved, nor overseen by Congress, but it actually took an act of Congress to get the Fed to fess up to its largess.

(Read the rest here)

At Citizen Vox Micah Hauptman uses the recent Bloomberg revelations (regarding the details of the Federal Reserve’s extraordinary efforts to stabilize the financial system) to frame a discussion of Fed transparency and accountability:

The Fed has vigorously defended its secrecy, claiming that working behind closed doors is necessary to prevent panic in financial markets. According to the central bank, disclosing information about the Fed’s actions would create a stigma for the banks that took advantage of the measures, and cause investors and counterparties to shy away from doing business with them.

But these excuses just don’t hold water. When the Fed spends money, it creates a government liability, for which the public is ultimately on the hook. And when the public is on the hook, it must be done in the light of day.

Hauptman notes the recent formation by Senator Bernie Sanders of a panel of experts, featuring a number of Levy Institute scholars (including James Galbraith, Randall Wray, and Stephanie Kelton), that will make reform recommendations regarding these very issues.

In a recent interview Dimitri Papadimitriou talked about the EU leadership’s failure to prevent the euro crisis from entering its terminal phase and ran through the likely repercussions for the US financial system.  Papadimitriou cites $3 trillion in exposure for US finance, half of which is mutual fund investments in European banks and sovereign debt—and he notes that this doesn’t even include the fallout from any unraveling of credit default swaps.

Unless the European Central Bank steps up as lender of last resort (an announcement that it is willing to engage in unlimited purchases of sovereign debt should be sufficient), we will see the end of the euro project, says Papadimitriou.  He contrasts the Federal Reserve’s $29 trillion worth of pledges to save the banking system with the anemic actions of the ECB (less than half a trillion euros so far).  This is, says Papadimitriou, a truly historic moment we are witnessing, as the European project falls apart before our eyes.

Listen to the interview with Ian Masters here.

Randall Wray kicks off a discussion of the movement to reform or eliminate the Federal Reserve with a look at Andrew Jackson’s 1832 refusal to extend the charter of the Second Bank of the United States (effectively forestalling the creation of a central bank in the US):

The basis of his objection to the US Bank was its “exclusive privilege of banking under the authority of the General Government, a monopoly of its favor and support” which accorded to its owners some $17 million as the “present value of the monopoly”. Those owners consisted of an elite aristocracy of Americans and foreigners. Jackson argued that it would be far more just if Congress were to “create and sell twenty-eight millions of stock, incorporating the purchasers with all the powers and privileges secured in this act”—that is, sell the stock to the American people. “If our Government must sell monopolies, it would seem to be its duty to take nothing less than their full value”.

He also recognized that the set-up ensured a net transfer of wealth from the West to the Eastern aristocrats. Further, “Of the twenty-five directors of this bank five are chosen by the Government and twenty by the citizen stockholders” (of whom a third were foreigners). Thus, “The entire control of the institution would necessarily fall into the hands of a few citizen stockholders, and the ease with which the object would be accomplished would be a temptation to designing men to secure that control in their own hands…There is danger that a president and directors would then be able to elect themselves from year to year…It is easy to conceive that great evils to our country and its institutions might flow from such a concentration of power in the hands of a few men irresponsible to the people.” (I do love the phrase “designing men”—worthy of a Veblen or a Galbraith.)

Read the whole thing here at EconoMonitor.

In a new policy note Marshall Auerback argues that discussions of how to solve the euro crisis often conflate two distinct issues:  solvency and insufficient demand.  “Policymakers want the ECB to do both,” he writes, “but in fact, the ECB is only required to deal with the solvency issue. When you do that in a credible way, then you get the capital markets reopened and you give countries a better chance to fund themselves again via the capital markets.”

Auerback considers a proposal that would, by addressing national solvency, give member-states the space necessary address the growth problem.  The proposal (developed also by Warren Mosler) calls for the ECB to make annual distributions of euros to national governments on a per capita basis.  By contrast with targeted bailouts, these per capita distributions would avoid problems of moral hazard, says Auerback.  They would also provide the ECB with a more effective policy lever (withholding of payments) to ensure compliance with the Stability and Growth Pact.  Concerns about inflation with respect to this plan are misplaced, he argues:

To anticipate the screams of the hyperinflation hyperventillistas, the revenue sharing proposal would be noninflationary. What is inflationary with regard to monetary and fiscal policy is actual spending. These distributions would not alter the actual annual government spending and taxation levels demanded by the austerity measures and SGP constraints. They would simply address the solvency issue, which has effectively cut the PIIGS off from market funding (because the markets believe they are insolvent).

Read the whole thing here.

The European Central Bank has finally responded to overwhelming public demand and created an online game, €conomia, in which you get to direct monetary policy for the eurozone.  The game appears to reward achievement in a distressingly instructive manner.  According to Matt Yglesias:

…they grade you on the basis of a pure inflation targeting regime asymmetrically centered at 2 percent. I played a round in which inflation averaged -0.25% and we had a continent-wide depression in which output fell for twelve straight quarters. They gave me 2 stars out of four. I also ran a game in which inflation average[d] 4.16% and we had zero quarters of recession. They gave me zero stars even though in the higher inflation scenario I was closer to the 2% target!

So now you can wreck the European economy over the weekend.

(Update added below)

In our last post on this topic, we found the head of the Bundesbank citing legal obstacles (Article 123 of the EU treaty) as the reason why the European Central Bank cannot step up as lender of last resort.  Can the ECB work around that Article 123 restriction?

In the last couple of days we’ve seen reports of a new, convoluted approach in which the ECB would lend to the IMF, which would in turn directly buy member-state debt.  Marshall Auerback noted another possible workaround, via a mechanism the ECB has already used (though not to the extent that would be necessary):  the ECB can get around the prohibition on buying member-country debt in the primary market by doing so through the secondary market.  (On the ECB buying bonds in the secondary market, Brad Plumer of the Washington Post has a nice quote from Richard Portes of the London Business School:  “If that’s illegal, then officials should already be in jail.  Because they’ve been doing it sporadically since May of 2010.”)

At Modeled Behavior, Karl Smith questions whether this would really work.  He points out that while the ECB has conducted limited buying of this sort in the secondary market, what would be required for the ECB to act as lender of last resort would be unlimited buying.  Smith then runs down the legal obstacles to unlimited ECB operations, citing two provisions that could stand in the way of this secondary market solution:

The first provision says that the ECB cannot target a price for Italian Debt on the secondary market.

The second provision says that ECB cannot guarantee that newly issued Italian debt will stand as collateral under repurchase agreements.

If the ECB were able to do either of the above things then it could provide guaranteed liquidity to the holders of Italian debt and cause the yield to collapse towards the overnight rate.

Smith ends by offering a couple of alternative routes, but in many ways, this may all be beside the point.  If you read between the lines in interviews given by people like Jens Weidmann, what comes through is not simply an expression of regret regarding the obstacles to a lender of last resort function, but something more like an endorsement of the value of these Article 123-type restrictions.  The barriers, in other words, seem to be more a matter of ideology and politics.

Update:  Ramanan adds some serious value to this discussion in comments (go take a look), including a link to a 2006 paper by Wynne Godley and Marc Lavoie in which they consider this very issue of working around the rules prohibiting the ECB from directly financing member-state Treasuries.  From the paper (emphasis mine): continue reading…

Relevant to the question of the legal limits of relying on the European Central Bank as lender of last resort, Tyler Durden observes Jens Weidmann, head of the Bundesbank, defending the narrow view of the ECB’s role in a recent Financial Times interview:

FT: Can you explain why the ECB cannot be lender of last resort?

JW: The eurosystem is a lender of last resort – for solvent but illiquid banks. It must not be a lender of last resort for sovereigns because this would violate Article 123 of the EU treaty [prohibiting monetary financing – or central bank funding of governments]. I cannot see how you can ensure the stability of a monetary union by violating its legal provisions.

I think the prohibition of monetary financing is very important in ensuring the credibility and independence of the central bank, which allow us to deliver on our primary objective of price stability. This is a very fundamental issue. If we now overstep that mandate, we call into question our own independence.

This looks like two separate arguments:  (1) lender of last resort activities would violate Article 123; (2) this prohibition of LLR activities (“for sovereigns”) is a good idea anyway, because it preserves ECB independence.

The second argument, if this is what Weidmann intends, would imply that a great many central banks that do have LLR roles, including the Fed, lack sufficient independence.  As Brad DeLong argues, this narrow, LLR-less mandate for the ECB represents a radical break with central banking tradition (which, in and of itself, needn’t count as a decisive objection, but it is important to keep all of this in context—in DeLong’s story, Weidmann’s vision for the ECB does not represent some staid, tested, conservative approach).  DeLong:

Our current political and economic institutions rest upon the wager that a decentralized market provides a better social-planning, coordination, and capital-allocation mechanism than any other that we have yet been able to devise. But, since the dawn of the Industrial Revolution, part of that system has been a central financial authority that preserves trust that contracts will be fulfilled and promises kept. Time and again, the lender-of-last-resort role has been an indispensable part of that function.