Fed and ECB in deficit, as bankers have worsened the crises
The credit crunch implemented by the Fed and the ECB was supposed to stop inflation. So far it’s only gotten to crash a few banks and panic global markets as well as soaring bond yields. Consumer prices, on the other hand, go about their business going down with exasperating slowness. One decimal at a time. In the meantime, GDP is falling everywhere (including Italy) and in Germany it is estimated negative for the whole of 2023. Three US banks have jumped and Credit Suisse is floundering. The collapse of the markets only yesterday cost 365 billion.
In the midst of this bombardment of bad news, the ECB executive meeting called to decide on a new credit crunch will take place this morning. Christine Lagardeand announced a month ago that it will be 0.5%. The speed of the increase is unprecedented in the history of the ECB considering that the race, which began in July, has already brought rates to 2.5%. Instead, what has a tragic precedent is the error.
Lagarde as Trichet?
How can we forget the catastrophe caused in 2009 by Jean-Claude Trichet who raised rates just as global finance was collapsing under the weight of subprime mortgages and the Lehman bankruptcy? The ECB tightened credit while Bern Bernankethe Fed chairman turned on all the taps to fuel a dry system.
What happened after Trichet’s wicked choice is well engraved in memory: the euro that threatens to split, the Pigs (Portugal, Italy, Greece and Spain) one step away from bankruptcy, the social butcher’s shop in Athens. It took Draghi’s “whatever it takes” in 2012 to stop the wave. Christine Lagarde is French like Jean Clud Trichet: will she repeat the mistake? Certainly so far he has not shown great ability to dominate events.
The beginning of the gaffes
Let’s face it: since it arrived in Frankfurt it hasn’t been exactly flawless. Already at the first press conference she had managed to bring down the markets. You had declared that the task of the ECB was not to close the spreads. Immediate reaction: avalanche sales of BTPs and race for Bunds. He had remedied announced an anti-spread shield that has never seen the light.
Then Covid and the opening of the liquidity dams. For the first time in world history, rates have gone negative. A reverse fee: the creditor paying the debtor. An exceptional situation that needed exceptional men and women. Instead, no bridles. Despite the whirlwind recovery of 2021 after the Covid tragedy, the cost of money remained at zero or below zero while it should have been necessary to start moving it.
The disaster of inflation
Still at the beginning of 2022, Lagarde announced that monetary policy would remain accommodative until the end of 2023. Regardless of the fact that Jerome Powell, certainly not an innovative governor, already at the Jackson Hole summit in September 2021 had given the end of recess whistle. From the following autumn the cost of money in the US would rise because inflation was biting.
Madame Lagarde, displaying her splendid brooches, announced that there was nothing to worry about because the flare-up in prices in Europe was a flash in the pan. But then the fire really broke out with the Russian bombs on Ukraine. Certainly unpredictable event. The fact remains that from February to July the ECB did not move. Then he began to tighten with unprecedented violence. Powell was doing the same in the US.
The result can be seen. Instead of inflation, the ax of rates fell on three US regional banks, a giant like Credit Suisse was crippled and the stock markets fell like stones. Record bond yields and widening spreads. And we are only at the beginning. A ring of fire is closing: rising rates, falling economy, troubled debtors, failing banks. The hell.