While not quite as full of fire and brimstone as his June report in which Deutsche Bank’s chief economist, David Folkerts-Landau said that “The ECB must change”, and in which he accused Mario Draghi of putting not only the ECB’s future at risk, but the future of the entire Eurozone, with its destructive policies, overnight the German bank’s top economist released yet another subversive if quite accurate analysis which could have come from your typical, fringe (blog which has accused the central banks of all of this for many years), in which Folkerts-Landau once again exposes that “dark sides of QE”, listing “Backdoor socialisation, expropriated savers and asset bubbles.”
And, in an amusing twist, none other than Deutsche Bank’s twitter account subtweeted the ECB earlier this morning pointing out that “ECB intervention: negative repercussions are becoming overwhelming “
#ECB intervention: negative repercussions are becoming overwhelming https://t.co/XAX0q6Dw8N #dbresearch
— Deutsche Bank (@DeutscheBank) November 2, 2016
While the 6-page paper does not contain anything particularly groundbreaking, the fact that DB continues to push the openly confrontational narrative, demanding the ECB unwind its extraordinary measures, suggests that the German bank continues to suffer, and most importantly, this outright bashing of Draghi’s policies received the explicit green light of John Cryan.
The summary of the note, as crystalized by Bloomberg, is the following: “While European central bankers commend themselves for the scale and originality of monetary policy since 2012, this self-praise appears increasingly unwarranted,†because, as he concludes, “ECB is stuck … between an unfavorable equilibrium of low growth, high unemployment and zero reform momentum on the one hand and growing risks to core country balance sheets on the other.â€
Here are the main points of the report. Stop us if you have heard these countless times in the past:
The dark sides of QE
Backdoor socialisation, expropriated savers and asset bubbles
While European central bankers commend themselves for the scale and originality of monetary policy since 2012, this self-praise appears increasingly unwarranted. The reality is that since Mr Draghi’s infamous “whatever it takes†speech in 2012, the eurozone has delivered barely any growth, the worst labour market performance among industrial countries, unsustainable debt levels, and inflation far below the central bank’s own target.
While the positive case for European Central Bank intervention is weak at best, it seems that the negative repercussions are becoming overwhelming. This paper outlines the five darker sides to current monetary policy.
The first is a paradox of ECB intervention: that monetary policy stifled the very reform momentum it sought to create. Up until July 2012, high interest rates and refinancing threats forced governments to be serious about reforms. Indeed, pre-2012, more than half the growth initiatives recommended by the OECD were being implemented across the eurozone. But last year just twenty per cent were. ECB intervention has curtailed the prospect of significant reforms in labour markets, legal systems, welfare systems, and tax systems across the continent.
Second, bond prices have lost their market-derived signalling function. Since investors began to anticipate sovereign purchases by the central bank in late 2014, intra-eurozone government bond spreads have been locked together. In turn, misrepresentative sovereign yields distort the whole fixed income universe that is priced off government debt.
Perhaps the darkest side of ECB monetary policy is the increasing concentration of risk on the eurosystem balance sheet – expected to be EUR 2tn by March 2018. In the event of a debt restructuring of a eurozone member, the liabilities of the national central bank are likely to be borne by the taxpayers of the other eurozone member states, even if losses are spread over a long period. Fundamentally, however, the debt will have been socialised.
Fourth, ECB intervention has not been a net positive for eurozone savers. While high and stable revaluation gains have buttressed total returns over recent years, this is clearly a one-time gain. Today, rising energy prices, the shortage of high coupons and ultimately mean-reversion are likely to take their toll.
Finally, the misallocation of capital caused by ECB policy is preventing creative destruction and causing asset bubbles. Increased lending has gone mostly to low quality existing borrowers while obviating troubled banks from the need to write down loans. Without creative destruction in ailing industries, investors in high-saving countries have simply bid-up the price of healthy assets.
