Free-Market News: The market has rejected the euro and the EU. Now Draghi proposes to reject the market. In a groundbreaking reversal, he has indicated he will print currency to buy eurozone sovereign debt.
Mario Draghi, president of the European Central Bank (ECB), will do "whatever is necessary" to ensure a solvent euro. Draghi made the comments at an investor conference at the Olympics. Professional investors like John Fox, director of research at Fenimore Asset Management, believe it may mark a turning point in the four-year old crisis.
"When the head of the ECB comes out and says he's willing to do anything," Fox is quoted as saying. "That's code for 'We are going to agree to resolve this issue.'"
Of course, there may be another reason why Draghi is doing this now but it is nothing that Fox would ever allude to. We'll get to it toward the end of this article.
In any case, one wonders how much of Draghi's statement is merely an attempt to "talk up" the market and how much is grounded in reality. To be sure, he is obviously trying to sound tougher about using an array of monetary weapons at his disposal.
In an article about Draghi's announcement, the Wall Street Journal writes that Draghi "has had enough." Like a previously abashed partner in a bad business partnership, Draghi is going to the show the market who is "boss." He calls the euro "irreversible," and claims the "euro zone has the power to defeat market speculation."
Draghi can make a case for generating price inflation now because the expense of government borrowing is impeding the ECB's ability to conduct monetary policy and to support private sector transactions. He thus has a mandate to "lower ... premiums."
Of course, by that logic anything in the marketplace that affects government debt adversely is fair game for the ECB. Please note: The German people were sold the EU and the euro as something of benefit ... not as a "transfer union." Draghi may manage to do what he intends, but he is running close to the "red" line.
The ECB sees that interest rates on government bonds cripple private borrowing. It needs to stimulate demand for bonds by buying paper in crippled PIGS countries. Nonetheless, as the WSJ article points out, the ECB is "prohibited from monetizing debt, or buying bonds directly from issuing governments,"
For a while, Draghi tried stuffing European banks full of euros and then basically demanding that banks purchase domestic debt, which would tend to drive down rates. But even €1 trillion wasn't enough. Now, as the Journal article points out with considerable understatement, "it seems Mr. Draghi is willing to ignore restrictions on debt monetization."....