Draghi's plan can't cure what ails Europe
Just how powerful and intimidating will the European Central Bank prove to be?
Euro-phoria hit financial markets Thursday after Mario Draghi, president of the European Central Bank, said that the ECB's purchases of bonds from debt-laden and struggling countries like Spain and Italy could be unlimited. That unexpectedly strong measure effectively removes a hefty chunk of the risk that would confront investors in those bonds -- potentially leaving them with the lofty returns.
In the weeks that have elapsed since Draghi pledged to do whatever it takes to restore calm to Europe's financial markets, investors have demonstrated that they are once more willing to take on risk -- to some extent. Stock prices have climbed, along with valuations, although they have done so amidst light trading -- a sign of a lack of conviction on the part of investors, even during the typically quieter summer months.
Similarly, while the Standard & Poor's 500 Index ($INX) has rallied, the gains in smaller, less liquid stocks have not been as impressive, while retail investors have demonstrated a clear preference for exchange-traded funds -- which can be rapidly sold -- over actively managed mutual funds.
Draghi's bold initiative could be a game-changer, at least for the time being. The Spanish and Italian stock markets’ bellwether indexes soared 4%; the S&P 500 ended the day more than 2% higher. Bond markets also felt the love, with yields falling to their lowest levels since early this year -- or, in the case of Ireland, lower than the country has seen in almost two years. The plan is intended to be a "fully effective backstop," to use Draghi's words, that will help prevent future bond market runs on Spanish or Italian sovereign debt -- but it comes with conditions attached that require recipients of that aid to ask for help from one of the eurozone bailout funds and to submit their budgets to the International Monetary Fund.
For weeks, financial markets have speculated about what Draghi meant by the phrase "whatever it takes." Now that they know, the nature and scope of his plan has gone a long way toward addressing part of the problem -- a lack of confidence. Speculators who want to bet against Spanish or Italian sovereign debt now understand that they will have to confront the ECB as a buyer of last resort.
And that's the big long-term question mark hovering over the whole deal: Just how powerful and intimidating will the ECB prove to be? Germany's Bundesbank remains opposed to the nature of the plan, with Jens Weidmann, the German central bank's head, arguing that it comes too close to being fiscal policy.
Then there’s the question of the ECB’s ability to keep printing money. Will there come a point at which the bank reaches a limit in its ability to keep buying, despite the tough talk of its spending power as being "unlimited"? The answer is almost certainly yes, and if Europe's policy makers don't seize this opportunity to address the roots of the crisis, the temptation will grow among financial market participants to figure out just what that limit is.
That in turn means that there's a time limit on the celebrations. Draghi, by acting so decisively, has tossed the ball firmly and permanently into the camp of the eurozone member states. The ECB has done all that it is within its power to do -- some would argue that it has probably done more than it should. It has bought time for the politicians -- but not an indefinite or "unlimited" amount of it.
This goes beyond the "band aids" that Europe's leaders have often been accused of trying to apply to the debt crisis -- but it isn't a cure. Think of it as a cast applied to a broken leg, enabling it to heal. But casts come off eventually, and the patient needs to be able to walk on his own. And ensuring that happens is up to the politicians.
The Europhoria won't evaporate overnight, but the Europhobia that has been so much a characteristic of financial markets over the last two years hasn't fled the scene for good. By all means, relish the good news, but do so while understanding that this isn't the end; more likely, as Winston Churchill memorably phrased it, just the end of the beginning.
Suzanne McGee is a columnist at The Fiscal Times. Subscribe to The Fiscal Times' FREE newsletter.
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Several years ago now, financiers and hired-in white collar types conspired to wipe millions of jobs off the face of the Earth. It caused two things to happen: instant poverty and instant wealth. Intelligent or professional people don't do that. You can write articles forever. You can ask every expert. There can be only one solution... repair what you did. If I were the President, I would be preparing two massive teams of Armed Forces. One targeting Wall Street and the other- Central Banks worldwide. It is the function of Central Banks to maintain economy. That's it. It isn't to make wealthy people or withhold a stake in life from others. ALL Central Banks have failed us. Either they call massive debt instruments null and void and condemn the wealth invested in them as fraud or they be accused of terrorism and crushed as we would any other terror threat. Wealth is a handicap in any society, as long as it it used to suppress, oppress, compress and cause recession and depression. It's money. It isn't omnipotence or power, it just affords these ugly attributes.
We had reached the point where many world economies had exceeded Maturity and were headed for decline-- in 1998! That was the year we stopped participating in free enterprise and capitalism, only to be stolen by paper pushing administrative bookkeeping terrorists. You want to make money in America? Open a store and work your ethic off through high quality service innovation invention and ingenuity, not sleazy overwhelming marketing bait & switch and ploys masked by legalese. It's not the fault of consumers when a business is irresponsible negligent and dangerous. There is no anonymity attribute to protect them. There are no tolerable Law Firm tactics to prevent justice. All these evils have prospered through the corrupt collusion caused by a Gramm Leach Bliley Act here in America, a fake movement to Globalization and a failure by government to not PROTECT citizens over accepting reward not to.
So where does that leave us? All nations worldwide must condemn it's financial sectors, abolish all Central Banks and rebuild local currencies that do precisely what currencies are supposed to do--- balance effort with reward and found commerce as exchanges for it, not exchanges that fund what they do today- financial platforms without workforces. Second- define and segregate financial law and political relations. You can do ONE, you bear no right to know intimately another in any of the other or a peer in your chosen field. Separate money touchers as far as possible. A Glass Steagall Act did that very well after the last Great Depression. Abolish the garbage Gramm Leach Bliley Act of Terrorism and Collusion that afflicts America now and restore Glass Steagall TODAY. Remove all NO votes in Congress who oppose it because they would be supporting terrorism in doing so. We must also recognize the obvious... Inheritors do bad things once endowed with obscene wealth. It is ANTI-American to inherit great wealth and power and business and use the windfall corruptly. The business sector is full of platforms, not thriving businesses full of workforces employing legitimate talents and paying all fair family-sustaining wages with commonsense benefits. To have it and NOT have earned it and condemn or cause condemnation to others is an atrocity worth crushing without mercy and dashing forever.
Hear me. You can be wealthy and use it wisely. It returns pleasure satisfaction and worth zillions of times more than using it unwisely. Draghi is a fool. Europe has NO economy. It has financial and economic suppression. Invest in it and you invest in terrorism. Cause it and you are a terrorist. Be the one who divests "big" and fractures it to open doors for job (skill set) recovery and you are the benefactor of progress and prosperity. Millionaires Billionaires and Trillionaires cause Anarchy. A well-off person who lives down the street without fences or security who is approachable and well known for generosity is a member of a community and an inspiration to Capitalism Free Enterprise Life Liberty and the Pursuit of Happiness FOUND!
Close the banks- they are corruption and worthless. End the Federal Reserve and Central Banks- they always have been worthless. Get rid of Wall Street. Exchange currency to build economy not to create wealth that is removed from economies. Invest 100% in job recovery. The world is poised to start World War III over money. READ IT-- stupid litter money. It belongs feeding families funding small businesses and carving the way of progress through a forest of digress and corruption. YOU have a choice... obviously you know where I stand.
Keep the good old Keynesian moving failure. Looking forward to a good old fashioned von Mises golden clubbing of his followers.
1. BORROW UP TO YOUR EYEBALLS WITH MAXIMUM DURATION
2. TAKE PROCEEDS AND BUY GOLD WITH CASH
3. SERVICE IT FOR AS LONG AS YOU CAN
4. PAY IT BACK WITH DEVALUED CURRENCY OR GO BANKRUPT*
* Fear not bankruptcy, no one will care in the longer run.
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