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  1. #1
    He3 He3 is offline

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    The tragedy of the commons and the money pool in the eurozone - Tornell & Westermann

    Ever dodgier collateral is being accepted by the ECB from borrowing banks. The Bundesbank sees what is coming, and is unhappy.

    Bundesbank Swipes at Draghi as European Fault Lines Deepen - Bloomberg

    Tornell and Westermann, Professors at UCLA and Osnabrück respectively, give a really good explanation of why current policy is self defeating, drawing on the well known concept, the tragedy of the commons. Their full article is well worth reading - it's at The tragedy-of-the-commons at the European Central Bank | vox - Research-based policy analysis and commentary from leading economists

    The late, great scholar of crises, Rudi Dornbusch, put it aptly: “In a very rich country you can afford to do very bad things for very, very long.” (Dornbusch and Fischer 2003). The Eurozone is in the process of finding out just how long “very, very long” means.

    ...
    Far from waiting too long to act as a lender of last resort, the ECB has presided over a continuous and ongoing expansion of central bank credit to private banks in the periphery. Since 2007, it has increased more than 1000% in Greece, Italy, Ireland, Portugal and Spain (GIIPS for short), as shown in Figure 1. This is massive and unprecedented in the post-war history of Europe.

    Without institutional reform to eliminate the tragedy-of-the-commons from the Eurozone architecture, the next rescue package will simply be another link in a chain of difficult decisions forced upon the ECB and European authorities by the urgency to avoid a crisis. Unfortunately, such a rescue package will exacerbate the tragedy-of-the-commons and further delay reforms.

    The tragedy-of-the-commons concept has been used to explain the overgrazing of the Commons in the middle ages, the overfishing of the oceans, capital flight, etc. Anywhere property rights are not strictly enforced, agents tend to overuse the common-pool resources, paying attention to the average, rather than the marginal cost that their actions place on society (Tornell and Velasco 1992).
    The central bankers and governments seem unwilling or incapable of fixing the mess they have created.

    The ECB is beyond democratic control. The attenuated form of democratic control at EU level is ineffectual. The spiral deepens.
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  2. #2
    He3 He3 is offline

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    The ECB statement. They are resisting pressure to accept used Pokemon cards.

    "22 June 2012 - ECB takes further measures to increase collateral availability for counterparties

    On 20 June 2012 the Governing Council of the European Central Bank (ECB) decided on additional measures to improve the access of the banking sector to Eurosystem operations in order to further support the provision of credit to households and non-financial corporations.

    The Governing Council has reduced the rating threshold and amended the eligibility requirements for certain asset-backed securities (ABSs). It has thus broadened the scope of the measures to increase collateral availability which were introduced on 8 December 2011 and which remain applicable.

    In addition to the ABSs that are already eligible for use as collateral in Eurosystem operations, the Eurosystem will consider the following ABSs as eligible:

    Auto loan, leasing and consumer finance ABSs and ABSs backed by commercial mortgages (CMBSs) which have a second-best rating of at least “single A” [1] in the Eurosystem’s harmonised credit scale, at issuance and at all times subsequently. These ABSs will be subject to a valuation haircut of 16%.

    Residential mortgage-backed securities (RMBSs), securities backed by loans to small and medium-sized enterprises (SMEs), auto loan, leasing and consumer finance ABSs and CMBSs which have a second-best rating of at least “triple B” [2] in the Eurosystem’s harmonised credit scale, at issuance and at all times subsequently. RMBSs, securities backed by loans to SMEs, and auto loan, leasing and consumer finance ABSs would be subject to a valuation haircut of 26%, while CMBSs would be subject to a valuation haircut of 32%.

    The risk control framework with higher haircuts applicable to the newly eligible ABS aims at ensuring risk equalisation across asset classes and maintaining the risk profile of the Eurosystem.

    The newly eligible ABSs must also satisfy additional requirements which will be specified in the legal act to be adopted Thursday, 28 June 2012. The measures will take effect as soon as the relevant legal act enters into force."

    ECB: ECB takes further measures to increase collateral availability for counterparties
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  3. #3
    Howya Howya is offline
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    It has that whiff of sub-prime mortgages about it - the authorities continue to close their ears to the clamour for action.
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  4. #4
    He3 He3 is offline

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    Quote Originally Posted by Howya View Post
    It has that whiff of sub-prime mortgages about it - the authorities continue to close their ears to the clamour for action.
    Brian Carey has an analogy for finite bailout funds in his ST column today. He says they remind him of ordinary guys walking through Harrods passing luxury items - if they have to ask the price they probably cannot afford to buy. In other words only the Central Bank with its power to create money without limit can match the market players in the shoot out.

    We may throw a whole lot more money into the black hole before we learn from Carey and others that present policy is a mug's game, and who the mugs are.
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    He3 He3 is offline

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    Frank Galton Frank Galton is offline
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    Quote Originally Posted by He3 View Post
    Note the clowning in that speech -- he says it's all the fault of non-Eurozone-based pundits.

    ECB board member: Euro-bashing is Anglophone overload | A Fistful Of Euros
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  7. #7
    MrFunkyBoogaloo MrFunkyBoogaloo is offline

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    Quote Originally Posted by He3 View Post
    "The ECB has gained stature during this crisis. The people and the markets look to the ECB for solutions. But there should be no illusion that the ECB can single-handedly ensure a plain sailing for our economies and the markets. There are limits of what we can do, and what we know. “Central banks do not have divine wisdom. They try to do the best analysis they can and must be prepared to stand or fall by the quality of that analysis [9] .”Rest assured that we will continue to do this, and to fulfil our mandate. Not least to make sure that central banking remains up there in the list of the three greatest inventions"
    Can central banking be considered one of the top 3 greatest inventions?
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  8. #8
    Frank Galton Frank Galton is offline
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    Getting back to the OP, note that the ECB is only now slowly getting round to obtaining information on the actual loans in the asset backed shyte that they are buying:

    ECB: ECB announces implementation of loan-level data reporting requirements for asset-backed securities?
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  9. #9
    He3 He3 is offline

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    Quote Originally Posted by Frank Galton View Post
    Getting back to the OP, note that the ECB is only now slowly getting round to obtaining information on the actual loans in the asset backed shyte that they are buying:

    ECB: ECB announces implementation of loan-level data reporting requirements for asset-backed securities?
    Carloans.

    http://www.ecb.int/ecb/legal/pdf/l_2...en00200023.pdf
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