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Wednesday, October 24, 2012 10:52 AM

Draghi Defends Bond Purchases With Warning of Deflation; Lies From Draghi on ECB Mandate and Mopping Up Liquidity

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If you are going to tell a lie, make it as big and credible as you can by wrapping the lies with a platitude of half-truths. ECB president Mario Draghi did just that today with a spirited defense of bond purchases, coupled with a warning about deflation.

Paragraphs in italics below are from the above Bloomberg link. My comments follow immediately.

The ECB’s so-called Outright Monetary Transactions “will not lead to inflation,” Draghi told lawmakers in Berlin in a closed-door session, according to a text provided by the ECB. “In our assessment, the greater risk to price stability is currently falling prices in some euro-area countries,” he said. “In this sense, OMTs are not in contradiction to our mandate: in fact, they are essential for ensuring we can continue to achieve it.”

The problem with such nonsense is you cannot break the law while screaming you are upholding it. Draghi now sounds and acts like hypocrite US presidents of both political parties.

Both president Bush and president Obama (as well as the treasury departments under each administration) have shown little concern for the law. Increasingly presidents are of the mind "we have to destroy capitalism to save it" or as President Bush stated (and Obama practices)“I’ve abandoned free-market principles to save the free-market system.”

For further elaboration, please see The Most Redeeming Feature of Capitalism is Failure.

“OMTs will not lead to disguised financing of governments,” Draghi said. “All this is fully consistent with the Treaty’s prohibition on monetary financing. Moreover, they will focus on shorter maturities and leave room for market discipline.”

Translation: The OMT is disguised financing of governments. Moreover, should "market discipline" get out of line with what the ECB wants, rest assured maturities will be extended on the "whatever it takes" mandate.

Draghi explained that the ECB’s intervention is necessary “because confidence in the euro has been disturbed,” said Priska Hinz, the Green party’s budget spokeswoman.

Confidence is disturbed because the euro is fundamentally flawed and it's too late to fix it. Certainly one huge nanny-state led by Brussels is not going to fix anything. The nanny-state will only make things worse.

Draghi said the program won’t compromise the ECB’s independence because it requires governments to agree to conditions. The program doesn’t create “excessive risks” for euro-area taxpayers, he added, according to the ECB text.

“Such risks would only materialize if a country were to run unsound policies,” Draghi said.

Unsound policies, like the ones they are running now?

Bond purchases won’t fuel inflation because the ECB will absorb the liquidity created by those interventions, Draghi said.

That is a direct lie as is his opening gambit of claiming that breaking the treaty is within mandate. Yes, the ECB sterilizes the bonds it buys. However, the ECB will also accept those bonds right back as collateral for cash, thereby pumping up base money supply. The ECB has no intention of absorbing liquidity in actual practice.

Real Problem is Not Deflation

By the way, I would be remiss if I failed to point out the problem is not "deflation". Rather, deflation only seems bad because of the excess leverage that the Fed and the ECB allowed to build up.

The real problem is unsound money and fractional reserve lending coupled with misguided policies of central banks and out of control budgets everywhere one looks.

Mike "Mish" Shedlock

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