Thursday, 2 July 2009

Red Alert : The ECB Liquidity Deposit

"OVERNIGHT DEPOSITS with the European Central Bank (ECB) have surged to a five-month high, suggesting banks are hoarding much of last week’s massive injection of ECB 12-month funds.

Commercial banks deposited €236.2 billion with the ECB on June 26th, the highest level since since January 19th.

The Frankfurt-based ECB last Wednesday lent €442 billion to European banks at its benchmark rate of 1 per cent, doubling the liquidity in the banking system to €897 billion.

The ECB hopes commercial banks will lend the funds on to companies and consumers, which would stimulate spending.

However, after flooding the money market with a record amount of funds, the ECB is now grappling with the most difficult part of its operation: making sure the money fuels economic growth.

ECB executive board member Lorenzo Bini Smaghi and governing council member Axel Weber both told banks last week that they should toe the line after the fund injection.

“Now they have to pass it on to the real economy, make loans to firms,” Mr Bini Smaghi said.

“It will be up to the relevant authorities to ensure that they do.”

Mr Weber said that, if central banks’ efforts to kick-start the economy failed because commercial banks were too cautious in lending, central banks could bypass the commercial banks and take more direct measures.

“I assume that a credit crunch is avoidable, if banks co-operate,” he said. Mr Weber did not spell out what action the ECB might take if banks did not co-operate. But one option would be for the ECB to lend directly to companies, as the US Federal Reserve and the Bank of England are doing.

Mr Weber said he saw no need for fresh action “for the moment”.

On the one hand you have the media echoing that "the worse is behind us" and on the other the European Central Bank is working on the background to keep afloat a system , that will collapse under its ill designed regulatory and banking architecture, if more "blood" money was not injected.

So to summarize in a medical terms, the patient aka the economy had a heart attack in October, it got a electrical shock treatment (unseen low interest rates since the Cro-Magnon) to resuscitate him - remember the economy was on free fall in the first quarter.

Now the patient is artificially kept alive by periodical injection of blood (money) while no one is sure if the vital function are damaged or not - nobody at this stage want to know - it could adversely affect the confidence.

Have you seen Frankenstein? well that's what currently the ECB and the FED are engineering...some form of creature that no one knows how it look like and worse how it behaves...I have to watch again the movie to check the end...

Well I'm wondering why on earth I'm still putting or taking loan from my bank where I can get from the Ultimate Central Bank 1% rate and on top of that be sure that the bank will be around in 5 years time - after all technology allow that nowdays and they seem to be less greedy... so not sure about the rest of the banks, why do you need them anyway? they have just added noise and instability to the economy- they lent irrationally in 1985-89 to then collapse and being rescued by tax payers in 1992 - they fueled the tech boom by lending to shadow tech entities and public investment fund in 1999-2000 and now to fuel a once in life time world wide housing bubble in 2004-2008 where a correction was overdue at that time...

So maybe just in case we should call it WWHB I, you never know that lessons get forgotten and overwelmingly taken by greed once again...maybe in 20 years time we will have again WWHB II.

1 comment:

Andrew said...

Housing Finland, surely you cannot be talking about the fine people at the ECB who are there to preserve the value of money and will never ever compromise??

When did the revolution happen?