The talk all week had been that instead of doing its job properly and act as a Lender of Last Resort to solvent European countries or simply refusing to do its job properly and act as a Lender of Last Resort to European countries, that the European Central Bank was going to refuse to do its job properly and then suddenly change its mind if Europe’s leaders reached agreement on a new treaty package mandating fiscal discipline. That struck me as undemocratic and irresponsibe, but it at least did point the way toward a solution of the mess. Today, though, we seem to be moving backwards as Mario Draghi combined interest rate cuts and a new initiative to give banks discount loans with a statement that seemed designed to rule out LOLR operations.
“We have a treaty that says no monetary financing to governments,” he said. This is true but it’s easy enough to get around this by adopting a stated target and making the purchases in the secondary market. An ECB leader who wanted to get this done despite the treaty could make statements aimed at emphasizing that fact. Instead, Draghi seems to have brought up this treaty point in order to bat down the past week’s worth of rumors. The new lending facilities should help kick the can down the road a bit (a derogatory phrase that’s often a good idea) but we still have some very fundamental issues that are going unaddressed.