ECONOMIC AGENDA – 1,250 WORDS
BY LIAM HALLIGAN
The summer holiday season is in full swing. Most investors have been at the beach in recent weeks – or fixated by the splendid London Olympics. Global markets have been treading water, but trending up on very low volumes. US stocks, in fact, have drifted 10pc higher than their low in early June.
What attention to financial matters there is has been riveted on the eurozone, and the possibility of a huge dose of quantitative easing by the European Central Bank. Over the last week, ECB President Mario Draghi has come as close as he possibly can to announcing a barrage of virtually-printed money, without actually announcing it. While wanting to soothe market nerves, so allowing Europe’s ruling classes to remain relaxed on their summer sun-beds, Draghi is also petrified of pushing Berlin too far and provoking an explicit “nein”.
Germany’s deeply-engrained reluctance to “monetizing” public and/or private sector debts is the main reason, of course, why the ECB has so far been relatively moderate in its use of QE. I say “relatively” because the 148pc increase in the ECB’s balance sheet since 2007 is still without historic precedent. It is dwarfed, though, by the incredible 225pc balance-sheet ballooning by America’s Federal Reserve over the same period and the truly jaw-dropping 362pc mega-expansion by the Bank of England. Yep, when it comes to medals for money-printing, Team Central Bank Anglo-America is Steve Redgrave, Chris Hoy, Carl Lewis and Michael Phelps combined.
Buoyed by the spirit of competition, perhaps, “Super Mario” now wants the ECB to clamber onto the QE podium and perhaps even challenge for gold. Most mainstream equity investors are cheering him on, despite the massive damage QE will do to the Western world in terms of inflation, savings debasement and crippling future borrowing costs.
In early August, administering some summer balm to the markets, while keeping the Germans just on-side, Draghi issued an elliptical statement: “The Governing Council may consider undertaking further non-standard monetary policy measures according to what is required to repair monetary policy transmission”.
In other words, the ECB will come to the view that more eurozone QE is appropriate at some future date if bank lending remains at rock bottom – which, of course, it will, given the massive smouldering losses lurking on (or mostly off) the balance sheets of many of the eurozone’s “leading” banks.
If busted European banks keep black-mailing insolvent eurozone governments by failing to extend credit to the broader economy, Draghi is effectively saying, so continuing to trap much of the region in a debilitating recession, then said eurozone governments will allow themselves to continue to be black-mailed. I paraphrase, but not a lot.
The ECB, then, has indicated it is now willing to resume purchasing the sovereign bonds of the eurozone “periphery” on a big scale, providing those countries sign up to further “conditionality” in the form of budgetary rigour and structural reform. While Berlin can’t yet endorse fully-blown eurozone QE, the ECB’s sotto voce message goes, Chancellor Merkel may just about be able to stomach a raft of sovereign bond purchases if the related announced conditions are strict. That would allow German ministers to jump up and down, castigating foreign profligates while pretending the Latin types, having taken the German geld, will now, finally, stick to the fiscal straight-and-narrow. Which, of course, they won’t.
Until recently, Spain – and by extension Italy – had hoped the ECB would step-in to support them on the basis of home-grown austerity measures without Madrid or Rome having to endure the political humiliation, and related market trauma, of applying for a condition-related bail-out. But now the question is whether the leaders of Spain and Italy will be able to bury their political pride sufficiently to agree to some tough “bail-out style” Berlin-imposed conditions on what they can and cannot do, even if it isn’t explicitly called a “bail-out” – and whether the feisty Spanish and Italian electorates will accept such demeaning anti-democratic subjugation.
The possibility of all that happening is apparently now high enough that Spanish and Italian bond yields have recently come back from the brink. An emboldened Draghi has even begun trying to intimidate traders by claiming that shorting the euro is “pointless” because “monetary union is irrevocable”.
The sleight of hand is just breath-taking – of Olympic proportions, in fact. If Spain and Italy do bite the political bullet, it appears the ECB will buy their sovereign bonds to an extent that goes beyond the existing resources of the European Financial Stability Facility and the upcoming European Stability Mechanism. The size of these bail-out vehicles is currently the source of bitter international squabbling, seeing as it was previously assumed they would be used to channel real money. If the bazookas are loaded via QE, though, then their size is potentially limitless. I mean, look at the Fed and the Bank of England.
This is Draghi’s implicit signal to the markets. Merkel – on vacation during the ECB’s recent spin-fest – for now is remaining tight-lipped. Did Draghi have her agreement to say what he (almost) said? Maybe, but maybe not. Is the wily Italian playing a high-stakes game of “chicken”, attempting to force the Iron Frau’s hand. That could also be true. For if Merkel now explicitly slapped-down Draghi’s “plan”, the markets would seriously rebel.
Not for the first time, I’ve ended up writing about the eurozone when my intention was to highlight something else. That something was the recent volte face by Sandy Weill, the swaggering Wall Street financier who, in the late-1990s, forged the then illegal merger of Travellers’ Insurance and Citibank. In doing so, Weill created the mighty Citigroup, so consigning to history the Glass-Steagall Act – the Depression-era separation of commercial and investment banking.
For a very long time, this column has argued that the 1999 repeal of Glass-Steagall was the single most important cause of the sub-prime crisis and its related economic fall-out. Sanford Weill, the man who did more than anyone to remove this crucial safeguard, is now admitting he was wrong.
“We should probably now split up investment banking from banking,” Weill said on US television, during an eve-of-Olympics confession. “Have banks be deposit takers, make commercial and real estate loans … do something that’s not going to risk the taxpayer dollars, that’s not too big to fail”.
For Weill to say this is like Colonel Sanders calling for chicken-free diets. Equally incredibly, Weill also called for “full disclosure”, criticizing investment banks’ use of off-balance-sheet subsidiaries – a black art in which Citigroup excelled.
Why this conversion from Weill, a conversion which has bolstered the case for bank reforms going well beyond America’s Dodd-Frank measures or the UK’s Vickers proposals? As shown by the Citigroup share price, now just a tenth of its 1999 level, most of the banking behemoths are now probably worth more broken up. And having made his massive fortune and now approaching his 80s, Weill is tidying up his memoirs.
But still, both Weill and John Reed, the two Citigroup founders, now both back a new Glass-Steagall. I wonder if Robert Rubin does too.
Having steered the Glass-Steagall repeal into law, the Former US Treasury Secretary then went to work with Weill and Reed at Citigroup. Rubin earned tens of millions of dollars, before the bank turned to American taxpayers for a multi-billion dollar bail-out. Rubin’s memoirs, written in 2003, barely mention Glass-Steagall. Perhaps they’re in need of an update …