On Friday, outgoing ECB president Jean-Claude Trichet said the "ECB will not act as a lender of last resort". It took one day for Trichet to prove he is a blatant liar.
Please consider ECB to end bond-buying when markets stabilize: TrichetThe European Central Bank signaled on Saturday it would not abruptly end its bond-buying program now that the euro zone bailout fund EFSF has powers of secondary market intervention and would wait until financial markets stabilize.In plain English Trichet effectively said "ECB will be the buyer of last resort until financial markets stabilize."
"It is because we have the absence of financial stability in the euro area that we have to intervene to help restore a better transmission of monetary policy," Trichet said.
Thus, it only took only one day for Trichet to contradict himself. I would love to be a press conference and call him a liar to his face. Why the press lets him get away with these blatant lies is beyond me.
IMF Proves it is Clueless
This one is more subtle. See if you can catch it. Reuters reports IMF calls for pan-European deposit insuranceThe International Monetary Fund called on Saturday for an EU-wide deposit insurance scheme and more coordinated regulation of the continent's banks to prevent contradictory national regulation from exacerbating its debt crisis.The headline itself discloses the stupidity of it all. Insurance is not stabilizing, it is destabilizing.
A common bank crisis management system, a supra-national resolution regime and common deposit insurance rules would help significantly stabilize the banking system, said Ajai Chopra, the deputy director of the IMF's European Department.
The IMF believes a deposit insurance scheme should be introduced in parallel to an increased harmonization of deposit insurance schemes in the member states to ensure sovereign problems don't trigger destabilizing bank runs, he said.
In the United States, FDIC "insurance" protects deposits no matter what stupid things banks do. Scores of banks offered high interest rates attracting deposits simply because they were government insured. Banks took those deposits and made risky loans to condo development in Florida and Las Vegas, then blew up. Corus bank is a prime example. Larger banks were bailed out.
If there was not deposit insurance, these banks never would have gotten funding or if they did they would have failed early. Instead, they were able to attract deposits because deposits were insured, and only because they were insured.
Here is another example: Would money have flowed to Icelandic banks if governments did not guarantee the deposits? I assure you the answer is no. Ironically, Icelandic banks blew up in spite of the alleged insurance, when Iceland rightfully said "screw you".
Bank runs are only destabilizing when they are concentrated. It is far better to have a few isolated bank failures sporadically than none for a decade followed by 700 in two years.
Insurance coupled with AAA ratings on garbage entices people and lenders to take obscene risks in the belief nothing can go wrong. Insurance concentrates systemic risk until the whole mess blows up at once.
This has been proven is spades, multiple times, in multiple countries, and the IMF consists of a collective group of complete fools to not see the simple truth.
Mike "Mish" Shedlock
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Mike "Mish" Shedlock is a registered investment advisor representative for SitkaPacific Capital Management. Sitka Pacific is an asset management firm whose goal is strong performance and low volatility, regardless of market direction. Visit http://www.sitkapacific.com/account_management.html to learn more about wealth management and capital preservation strategies of Sitka Pacific.