Monday, March 12, 2012

Draghi And The Banks

Simon Thorpe notes that Mario Draghi is printing money and lending it to banks instead of directly lending it to Greece. This is supposed to stabilize Greece by having the banks buy their debt, and that seems to be happening. He asks, "So, can somebody explain to me why all of these central banks throw this freshly minted money at commercial banks, rather than lending the money to governments and allowing them to use the money to pay off national debt?"

The answer I'd offer is that this is the only politically feasible option, since direct loans to Greece are considered unacceptable in Germany and Northern Europe. If your cover story to the Germans is that you're just loaning money to banks, however, you can sneak some aid to Greece by them. I don't want to disagree too strongly with his suggestion that the ECB wants to line the pockets of commercial bankers by letting them be middlemen, but this is still a reasonable way to do things given the generally dysfunctional politics of the Eurozone. And this is why I'm quite happy with Mario Draghi -- even if he has to make tactical concessions to the pathological German obsession with inflation and to the prejudices dividing Northern and Southern Europe, he doesn't allow them to utterly dominate European central banking.

1 comment:

Anonymous said...

It's not just the only politically feasible option, it's the only legally available option, given that the Treaty on the Functioning of the European Union (which predates the financial crisis) prohibits the direct lending of money to ailing governments. Maybe this prohibiton is stupid, but try changing a treaty in the middle of a financial crisis when any change would require unanimity among the member states. (It's funny how economists always seem to think that economic considerations should be allowed to overrule existing political frameworks and decisions...) Regarding 'the pathological German obsession with inflation', this article might be of interest: