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Strategies & Market Trends : The coming US dollar crisis
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To: Box-By-The-Riviera™ who wrote (745)8/12/2007 10:09:56 AM
From: RockyBalboa  Read Replies (3) of 71456
 
Governments and their central banks shouldn do it and in most cases also can't do it. The monetary base of the ECB is in the $1T range but they can not and will not extend unlimited credit.

Consider that even a relatively modest injection of, say, 10B needs to be returned to the central bank by the commercial banks who have bid for such short term advances.
The ECB did place more than 100B or the equivalent of 10% of the money in circulation within days, with the hope to gradually drain this amount (by reducing daily advances over the next weeks or month) as liquidations take place. Basically banks are instructed to liquidate and don't let happen a 100B crunch again.
(and Europeans already pay part of this bill as the exterior value of the EUR immediately tanked by 1% instead of going up).

As I noted earlier, it is not the business of the central bank to bail out bad money with good on a permanent basis. Their policy forbids it and the public picture of permanently increasing the monetary basis is fatal. It is like betraying - do it once, do it twice, and by adding funds in this size prices will react over time, fuelling inflation and further prompting delays in debt repayments (they will become cheaper as inflation rises).

Also if the ECB would start buying or permanently funding (bad, illiquid) debt then this would just create moral hazard in all borrowers "they will bail us out regardless of our behaviour".

Only thing they ought to do is that there are no disruptions in operations - for example if a large bank is overextended on a daily basis. This is what the ecb and other CBs tried in recent days.

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