The ECB’s 731 Trillion Dollar Bailout

Sometimes, life gives you perfect examples to correct previous misunderstandings.   In today’s case, we have this:

“The European Central Bank will lend euro-area banks a record amount for three years in its latest attempt to keep credit flowing to the economy during the sovereign debt crisis. The Frankfurt-based ECB awarded 489 billion euros ($645 billion) in 1,134-day loans today, the most ever in a single operation..”

Does anyone remember just two weeks ago when I wrote this post about how anyone who tried to tell you that the Federal Reserve’s Bailouts totaled $29 Trillion dollars was 1) misleading you and 2) seriously missing the main problem?  Let’s go into the way-back machine an pull a quote:

“More importantly, the length of the intervention is the problem (not the cumulative notional!).   Overnight liquidity constantly rolled can’t be summed in terms of notional dollars – that’s the theme I’ve been trying to get at here.   HOWEVER, the question should be:  “Why the f*ck should The Fed need to be lending these banks money every day for months and YEARS?”   If the problem lasts for extended periods of time, it means that the bank’s business model/balance sheet management is inadequate.   The Federal Reserve should act as an emergency stopgap – not a constant ongoing liquidity provider.”

Yet, we have today’s ECB announcement.  Ludicrous.   Kick the can for three more years?    What’s funny is that American citizens are under the false impression that the Fed is lending to banks at zero percent interest right now on a regular basis.   That’s not true, but the ECB did exactly that last night – $645 billion in 3 year loans at 1%.  Let me make it quite clear, just in case there is any doubt about where I stand:  the Central Bank should not not be making 3 year loans at its benchmark interest rate, unless it’s also going to be dismantling the banks who take those loans.   Oh – by the way – how many banks are we talking about here?    You might want to sit down for this one:

“The ECB said 523 banks asked for the funds, which will be lent at the average of its benchmark interest rate — currently 1 percent — over the period of the loans. “

Just 523 banks.  No big deal. (/sarcasm)

This ECB program also serves to illustrate just how asinine the “Fed bailouts totaled $29 trillion” logic is.  See, alternatively, the ECB could have loaned the money one day at a time, rolling it each day, in which case they would have much less risk, but then someone would write a post saying that the ECB’s support totaled $645 billion x 1134 days = 731 trillion dollars !!!   The three year loans that the ECB actually made,  totaling $645 billion, are both

a) riskier and

b) a more egregious bastardization of the central bank’s role than are rolling overnight loans

yet the total is still clearly only $645 billion.   This example should serve to illustrate beyond the shadow of a doubt exactly how asinine the $29 trillion number I debunked 2 weeks ago is.




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