Central Bankers Finding That “Old Tools” Not Working

Central Bankers Finding That “Old Tools” Not Working

Central Bankers Finding That “Old Tools” Not Working

Central bankers are learning that their “old tools” no longer help the economy and might even make it worse.

The Big Q: With the tool box empty, what is next?

US Fed Chairwoman Janet Yellen, speaking last week at the bank’s conference in Jackson Hole, WY, said that rate cuts and QE (quantitative easing) may not work in the next crisis. She wants (needs) to find new tools.

So, if the old tools are not helping and are really hurting, the 1st step is to stop using them, as they are ineffective and counterproductive. The FOMC is unwilling….

European Central Bank (ECB) Mario Draghi working to socialize the EU, is that what the US Fed is up to too?

The ECB is in the midst of a massive bond-buying stimulus program. And at the current rate, the central bank is 9 years or less away from owning all the sovereign debt of Spain, Germany, the Netherlands and Finland. Give them 2 more years and you can add France and Austria to that  list.

Socializing much of the continent’s government debt is not helping the European economy. Mr. Draghi knows this, and instead of changing course, he is swinging the same old tool harder.

Starting in June, the ECB added certain types of corporate bonds to its asset-purchase list. The Eurozone’s central bank is lending free cash to private businesses.

But, hang on, not just any private business gets this free cash. Only those that meet the ECB’s “standards” get it. And maybe not then, unless they have the right banker friends.

Last week it was reported that Morgan Stanley (NYSE:MS) had private placement bond sales for 2 Spanish companies totaling EUR 700-M. The terms the ECB loaned this money are not know. but assume the companies thought the terms more attractive than they would get from a private lender.

Here is the rub.

Central banks like the US Fed and ECB are supposed to be the “lender of last resort.” The ECB is instead becoming the “lender of 1st resort” for European businesses.

Companies that cannot convince the private sector to buy their debt should change their ways or go out of business. Keeping Zombie companies alive is not good for anyone. As it prevents better, more efficient companies from rising to take their place.

One savvy observers says, “Central bank interventions can reduce short-term pain but they never cure the disease. If anything, they spread it. No patient should want this kind of “cure.” Yet, that’s what the ECB is giving Europe.”

The US Fed is now right at that place too.

Some unnamed US Fed officials at Jackson Hole told Reuters they were considering whether the central bank should add corporate debt purchases to its toolbox.

Draghi is doing it, so why not Yellen?

Stay tuned…


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Paul Ebeling

Paul A. Ebeling, polymath, excels in diverse fields of knowledge. Pattern Recognition Analyst in Equities, Commodities and Foreign Exchange and author of “The Red Roadmaster’s Technical Report” on the US Major Market Indices™, a highly regarded, weekly financial market letter, he is also a philosopher, issuing insights on a wide range of subjects to a following of over 250,000 cohorts. An international audience of opinion makers, business leaders, and global organizations recognizes Ebeling as an expert.

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