ECB Resorts to ‘Nuclear Option,’ Intervenes in Bond Market to Fight Euro Crisis

The ECB does not want to call it quantitative easing (= printing money = creating money out of thin air = increasing the money supply = inflation = tax on monetary assets = looting of the people) yet.

Interesting how the Federal Reserve, the Bank of England and the ECB (with the corresponding governments creating record deficits) are all using policies that rob the middle class and the poor:

“When a country embarks on deficit financing and inflationism (quantitative easing) you wipe out the middle class and wealth is transferred from the middle class and the poor to the rich.”
– Ron Paul

“The Federal Reserve System is nothing more than legalized counterfeit.”
– Ron Paul

The market is not ‘dysfunctional’, but all those stimulus packages, bailouts and quantitative easing make it totally dysfunctional.

The goal of the elite criminals is the New World Order:

ECB President Jean-Claude Trichet calls for ‘Global Governance’ at the Council on Foreign Relations (Forbes)

The European Central Bank (ECB) headquarters in Frankfurt. (Bloomberg)

May 10 (Bloomberg) — The European Central Bank said it will buy government and private bonds as part of an historic bid to stave off a sovereign-debt crisis that threatens to destroy the euro.

The ECB wants “to address severe tensions in certain market segments which are hampering the monetary policy transmission mechanism and thereby the effective conduct of monetary policy,” the central bank said in a statement at 3:15 a.m. in Frankfurt. The announcement came less than an hour after European finance ministers unveiled a loan package worth almost $1 trillion to staunch the market turmoil.

Resorting to what some economists have called the “nuclear option,” the ECB may open itself to the charge it’s undermining its independence by helping governments plug budget holes. Four days ago, ECB President Jean-Claude Trichet said bond purchases hadn’t been discussed when members of the bank’s 22-member Governing Council met to set interest rates in Lisbon.

By deciding to “go in and buy sovereign and corporate debt, they crossed a line,” said David Kotok, chairman and chief investment officer at Cumberland Advisors Inc., which manages about $1.4 billion in Vineland, New Jersey. “The line between fiscal and monetary policy gets blurred.”

The euro jumped to $1.2982 at 8:30 a.m. in Frankfurt from $1.2755 at the end of last week.

‘Dysfunctional’ Markets

The ECB said it will intervene in “those market segments which are dysfunctional,” suggesting it views the surge in some of the region’s bond yields as unjustified and that it’s acting to stabilize markets and protect the 16-nation economy.

Investors cited the ECB’s initial refusal to consider asset purchases as one reason for the May 7 rout in global markets, which included U.S. stocks falling the most in 14 months amid concern Greece’s woes were spreading.

After a week in which markets showed growing concern about access to funding, the Frankfurt-based ECB also reversed its withdrawal of emergency steps taken to tackle the global credit crisis, saying it will again offer banks as much cash as they want for terms of three and six months. It will also reactivate a swap line with the Federal Reserve and sell unlimited amounts of U.S. currency for seven and 84 days. The first operations will take place this week.

The central bank acted in concert with governments after markets targeted European economies with the weakest public finances. The extra yield that investors demand to hold Greek, Portuguese and Spanish debt instead of benchmark German bonds surged to the highest level since the euro’s 1999 introduction.

Bunds Drop

The ECB’s strategy will hurt German bunds, lift the bonds of Portugal, Greece and Spain and eventually hamper the euro following an initial rally, said David Zervos, a managing director at Jeffries & Co. in New York.

German 10-year bonds fell when European markets opened this morning, sending the yield up 12 basis points to 2.93 percent.

While the euro’s founding treaty bans the ECB from buying bonds directly from governments, it can do so in the secondary market. The ECB said its moves won’t affect monetary policy as the resulting liquidity will be reabsorbed. The bank’s council will decide on the scope of the intervention.

“They are not cranking up the printing presses,” said James Nixon, co-chief European economist at Societe Generale SA in London. “This is a much more targeted, surgical approach. They buy the duff stuff that no one in the market will touch.”

‘Using Every Means’

Bundesbank President Axel Weber said on May 5 that the threat of contagion from Greece’s fiscal crisis didn’t merit “using every means.” Without referring specifically to bond buying, he said “measures that damage the fundamental principles of the currency union and the trust of the people would be mistaken and more expensive for the economy in the longer term.”

The concern is that the purchasing of government debt opens the ECB to the accusation it’s coming to the rescue of fiscal authorities and may need a bailout of its own if the assets turn sour, raising questions about its independence.

An unchecked increase in the amount of money in circulation could also fan inflation, the containment of which is the ECB’s main aim.

The ECB noted that some governments had vowed to accelerate their fiscal consolidation. Spain’s budget deficit reached 11.2 percent of gross domestic product last year and Portugal’s was 9.4 percent. Greece’s was 13.6 percent.

‘Monetizing’ Deficits

“Much will depend on whether or not euro-zone governments quickly follow through on their pledge,” said Marco Annunziata, chief economist at UniCredit Group in London. “If they do not, it will be hard for the ECB to fight off the charge of monetizing excessive fiscal deficits.”

There are signs banks have started to hoard money again.

Overnight deposits with the ECB surged to a 10-month high of 290 billion euros on May 6, signaling banks are wary of lending to each other on concern about counterparties’ exposure to high-deficit countries. The rate banks say they pay for three-month loans in dollars rose the most in almost 16 months on May 7.

While European banks had claims on Greece totaling $193.1 billion at the end of 2009, that number is dwarfed by their $832.3 billion exposure to Spain and the $240.5 billion with Portugal, according to data from the Basel, Switzerland-based Bank for International Settlements.

‘Decisive’ Action

Until today, Trichet had tried to convince investors that volatility in euro-region markets would subside once the Greek government drew on its 110 billion-euro aid package and implemented its agreed austerity plan. After the May 6 meeting of the ECB’s council, he urged other European governments to take “decisive” action on deficits and said Portugal and Spain were “not Greece.”

With the roots of the current crisis lying in fiscal policy, Trichet has had less of a say in fighting the turmoil. Politicians ignored his pleas for a fast aid package and his advice that the International Monetary Fund not be included in any rescue of Greece.

His role began to shift last week when the ECB broke a commitment not to assist individual countries, saying it would indefinitely accept Greek government debt as collateral regardless of its credit rating. Trichet is today set to talk to reporters after chairing a meeting of central bankers in Basel.

To contact the reporters on this story: Gabi Thesing in Brussels at [email protected]; Jana Randow in Basel, Switzerland at [email protected]. Simon Kennedy in Paris at [email protected]

Last Updated: May 10, 2010 03:07 EDT
By Gabi Thesing, Jana Randow and Simon Kennedy

Source: Bloomberg

“I believe that banking institutions are more dangerous to our liberties than standing armies. If the American people ever allow private banks to control the issue of their currency, first by inflation, then by deflation, the banks and corporations that will grow up around [the banks] will deprive the people of all property until their children wake-up homeless on the continent their fathers conquered. The issuing power should be taken from the banks and restored to the people, to whom it properly belongs.”
– Thomas Jefferson

“By a continuing process of inflation, governments can confiscate, secretly and unobserved, an important part of the wealth of their citizens. There is no subtler, no surer means of overturning the existing basis of society than to debauch the currency. The process engages all the hidden forces of economic law on the side of destruction, and does it in a manner which not one man in a million is able to diagnose.”
– John Maynard Keynes

“In the absence of the gold standard, there is no way to protect savings from confiscation through inflation. … This is the shabby secret of the welfare statists’ tirades against gold. Deficit spending is simply a scheme for the confiscation of wealth. Gold stands in the way of this insidious process. It stands as a protector of property rights. If one grasps this, one has no difficulty in understanding the statists’ antagonism toward the gold standard.”
– Alan Greenspan

“There are two ways to conquer and enslave a nation. One is by the sword. The other is by debt.”
– John Adams

“Capital must protect itself in every way… Debts must be collected and loans and mortgages foreclosed as soon as possible. When through a process of law the common people have lost their homes, they will be more tractable and more easily governed by the strong arm of the law applied by the central power of leading financiers. People without homes will not quarrel with their leaders. This is well known among our principle men now engaged in forming an imperialism of capitalism to govern the world. By dividing the people we can get them to expend their energies in fighting over questions of no importance to us except as teachers of the common herd. “
– J. P. Morgan

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