European "Corporate" Bank

I will keep this post short - I welcome today’s decision by Mario Draghi, the chief of the European Central Bank (ECB), to pump some of the new quantitative easing (QE) money into high quality corporate bonds. In general, I wouldn’t have favored this because this has a potential to set a wrong precedent and exacerbate complaints of crony-capitalism, but given the fact that there aren’t much new debt to buy from euro area governments, and the fact that no amount of bond-buying makes some of these governments to utilize that money to stimulate demand by efficient fiscal policies, and given another fact that many of these governments are waiting for private demand to catch up without any public investments or increase in public debt (in other words, they just don’t believe in Keynesian economic model), it makes sense for the ECB to pump money directly into the private sector by buying some of their non-bank corporate debt.

Now, how and who decides which company’s bonds to buy, how much to buy, when to buy etc..are still not very clear. And questions like if there will be a preference for one sector over another still exist (atleast in my mind, as I am yet to see all the details).  But as a general theme, and given the precarious situation they are in, I welcome the ECB’s decision to start pumping QE money directly into the region’s corporate bond market.

Europe! I am exasperated!

From the onset of the Great Recession in 2008, one continent exasperates me more than any other in their effort to come out of the slump. And that is Europe. (And I am mainly referring to the EU countries). In the last 7 years, they have made a series of policy blunders and have handled things in a terrible way. First, many of their major banks were so badly regulated that worsened the crisis that began with the US and European banks. Then there was the sovereign debt crisis of some of the countries – Portugal, Ireland, Greece and Spain – that rocked the world and worsened the global recession with a lot of uncertainty. Then there was the mishandling of the debt crisis and the bailout of Greece – which led to riots in the streets of Athens and extreme economic hardship. Then there was the austerity program introduced by many major countries during the depth of the recession (meaning, at the wrong time). In essence, rather than working to generate internal demand, they were trying to free ride on the demand generated from the stimulus programs of China, the US and the rest of the world (U.K. was the only country to have realized the mistake of introducing austerity programs at the wrong time and reversed it after it being a failure).

Then the European Central Bank (ECB) increased interest rates prematurely, only to reverse them later and in fact take them in the opposite direction – and they have been going in the opposite direction ever since – to the level that they are in the negative interest rate territory right now. And like many mistakes in the past which they realized them well after the fact, I am afraid that they will realize the mistake of taking benchmark interest rates into negative territory after the negative effects start to show. Let’s hope that doesn’t happen, but let’s wait and see how it goes.

Oh and then the repeat of the Greek debt crisis last year – with almost Greece coming to the brink of getting out or being pushed out of the Euro currency. And there is still no light at the end of the tunnel for this crisis. 

And now, there is the Brexit dilemma – the question of if Britain should leave the European Union - coming at a time when there is so much uncertainty already in the European economies.

I am a great admirer of Europe and their strenuous efforts to form an “ever closer union”. I love their social climate, many of their economic policies and love them for being a strong defender of individual freedoms and common sense in today’s complex global geopolitical systems. But I also have to say that their policy mismanagement during the past 7 years, in both on the monetary and fiscal fronts, have caused the global economic growth dearly by constantly being a source of uncertainty in the global economic sphere, rather than being a guiding light for global growth and prosperity.

I hope that many of the European countries will make better fiscal policies that will give more weightage to internal demand rather than looking outside to stimulate their growth. In the process, if they could also address some of their debt burdens, that will be a huge contribution to the global economic growth by eliminating the constant economic uncertainty that arises from that region.