Notes From Underground: Now Starring in the Music Man … Mario Draghi as Professor Harold Hill

Oh yes, we got trouble right here in Frankfurt City! It rhymes with T and starts with G and is spelled Germany. Today (and of no genuine market surprise), the ECB made no adjustments to its current QE and negative rate policy. The press conference was where all the potential market moving “tweets” would take place, but Professor Mario Draghi danced around the very fine questions from the European financial cognoscenti. Draghi was sharp as he insisted that “we need lower interest rates to get higher rates.” Also, when one inquisitor asked if the ECB was ready to DO LESS if inflation reached close to the MAGIC 2% level, President Draghi admitted that we only considered doing more QE (never LESS). Thus, the ECB allowed us a look at the asymmetric BIAS of all central banks. The ECB is far more worried about low growth, low inflation that the main concern is always more. And Draghi’s ultimate fallback position for the construction of counterfactual policy formation is the ongoing deleveraging process in Europe.

Unfortunately, Draghi fails to explain the nature of the deleveraging. Is it private sector, or public sector? There is a difference as to the policy action. President Draghi deflected the questions of Italian bank stress as deftly as the best flim-flam man. BUT THIS PRESS CONFERENCE WAS DIFFERENT FROM ALL PRECEDING ECB press conferences for ONE KEY REASON: The amount of questions from the press concerning Germany and its potential inflation problem. There must have been at least five direct questions and Draghi’s canned response to the growing critical voices from Germany. Germans are benefiting immensely from the ECB negative rate policies because of ultra-low borrowing rates, and, of course the low unemployment rate due to surging exports. Draghi basically said to the Germans, “Shut up and let the rest of Europe get on its feet.” One reporter had the temerity to ask Draghi if his was concerned about the DISCREPANCY between European and high German inflation. Draghi: “We are all one Europe.”

He also noted that any divergence between Germany and the others would not likely be unmanageable. I bring this up because it represents the enormity of the ECB problem with German dissonance as we progress into 2017’s political season. Also, I note how Draghi’s terse response to German savers is directly from the Bernanke/Yellen hymnal. (To all those savers complaining of financial repression by the central authorities, STEP BACK AND COUNT YOUR BLESSINGS.) But what President Draghi and Chair Yellen fail to acknowledge is this: If your policies are so beneficial to the majority why are the political outcomes not supporting the counterfactual constructions that the central bankers put forward? Maybe the answer will arrive on the Wells Fargo Wagon.

***Memo to the Davos Crowd from Steve Mnuchin: The Treasury Secretary nominee underwent an intense day of questioning before the Senate Finance Committee. One inquisitor raised the issue of the Volcker rule and his views on it. Mr. Mnuchin raised the issue I raised in a letter to the Financial Times on August 30, 2002 as to my concern about the repeal of Glass-Steagall. A bank with FDIC-insured deposits shouldn’t be involved in proprietary trading. My letter to the FT is below, but I applaud Mr. Mnuchin for having the fortitude to take that stand.

If banks want to trade their assets then drop FDIC insurance or publish your risk positions in a real-time manner so that depositors and investors can make a genuine assessment of how much risk the institution is carrying on their books. If banks want to risk let them pay a market rate for money rather than a subsidized rate. The impact would be a beneficial outcome for regional and community banks because the cost of their FDIC insurance would drop dramatically. Hey Mr. Mnuchin, you deserve to have a marching band for your forthrightness.

LETTERS TO THE EDITOR – Profit centres too big to fail.
30 August 2002
Financial Times
(c) 2002 The Financial Times Limited. All rights reserved

Sir, John Plender (“How banks got in a mix”, August 21) correctly identifies the systemic dangers that accompanied the passage of the Graham-Leach-Bliley act. The repeal of Glass-Steagall has pushed the US banking system to the brink of “moral hazard”. The conglomeration of all financial services under one roof has entangled banks in numerous ethical conflicts. Additionally, Graham-Leach-Bliley has made several institutions so large that the Fed cannot allow them to fail.

A single institution’s deep involvement in every facet of financial dealings does not create greater synergy but greater risk. These large, private profit centres know they are too big to collapse. This realisation adds great uncertainty to the entire financial landscape. Rewarding private profits while socialising the risk is a pathway to disaster. Glass-Steagall should never have been repealed without a bank forfeiting its right to Federal Deposit Insurance Corp insurance.

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11 Responses to “Notes From Underground: Now Starring in the Music Man … Mario Draghi as Professor Harold Hill”

  1. Stu f Says:



  2. Chicken Says:

    Mnuchin – Didn’t expect to hear any of them mention this, ever.

  3. the bigman Says:

    Yra you are truly a seer foreseeing the crash 5 years before it happened and having provided the cure before the disease went systemic- we are not worthy. without the FDIC put these large banks would have to pay depositors interest rates that reflected the risk that they were taking with their money. I suspect somewhat north of the pittance received now. A simple solution for a complex problem. Again we are not worthy

    • Yra G Harris Says:

      Bigman–thanks for the wonderful compliment and as i try to inform my readers for the sake of profitable trades I would respond with a quote attributed to Disraeli when William Gladstone wished him ill: You ,sir,will certainly die upon the gallows or of a social disease.To which Disraeli responded:That depends,sir,upon whether I embrace your principals or your mistress.Here’s to embracing the continued dialectic and the search for profitable trades and investments and to no one’s demise.

  4. frank c Says:

    Draghi is now humming a different tune to his fellow Italians.

    • Yra G Harris Says:

      Frank c.–good catch but it is more flim flam from Draghi and he is stone lying about Target 2—this is more b.s. from the master and yet the investment world continues to pray that germany is in so deep it has to capitulate.In today’s Barron’s Gundlach cites selling short Bund futures.He is right and wrong at the same time—why sell the best when you can get short the far worse credit for very little cost.

  5. Arthur Says:

    German Inflation Anxiety Could Bring an Election Shock in 2017

    • Yra G Harris Says:

      Arthur –very good post and you as a long time reader and contributor know my views about Merkel–not favorable but then again this is Notes from underground where 2+2=5 and we search for making sense of things in an unbalanced world.

    • the bigman Says:

      Arthur thanks for the great post- With Bundesbank rate at -0.88 and inflation currently at least 2.5% means the real interest rate for German savers is -3.38% or worse than some slot machines in Vegas. This can only lead to more investment in real assets(real estate, gold, etc) which will lead to more inflation and worsening real interest rates- the proverbial viscous cycle. Then when the Bundesbank finally raises rates they will attract more capital- this is not going to end well

      • Yra G Harris Says:

        Bigman–the bundesbank can’t raise rates for they are not in contol of their monetary policy–but your point is well made.The point you made is why I suggested that EWG as much as I don’t like ETF’s is something to watch and trade because German high quality stocks will be a source of investment for German investors searching for yield in all the right places–it presently has a yield of 2.4% compared to 0.43% on the bund—real estate values will be determined by quality of the property and how much it has already appreciated

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