ECB’s Record Breaking Lending

The President of the European Central Bank (ECB), Italian Mario Draghi (R) arrives for a conference in honour of the late economist Tommaso Padoa-Schioppa on December 16, 2011 at the Bank of Italy in Rome. Italy’s Prime Minister Mario Monti said Padoa-Schioppa, a former Italy’s finance minister and commonly considered a founding father of the euro, had understood ‘the need for Europe to strengthen policy apparatus around fiscal policy but to go beyond towards communitarian policies for growth.’ AFP PHOTO / FILIPPO MONTEFORTE (Photo credit should read FILIPPO MONTEFORTE/AFP/Getty Images)


In his piece for our sister publication Foreign Policy, Karl Smith projected that saving the Eurozone would essentially entail shoveling an unbelievable some of cheap money at banks. And today we see that operation shovel cheap monet at banks is well underway with the ECB doling out “489.2 billion euros, or $644 billion, to 523 institutions, through what are known as long-term repurchasing operations,” much more than the 300 billion euros that analysts had been projecting.

This money comes in the form of three-year loans that only charge a one percent interest rate and the ECB “also broadened the collateral it agreed to accept in return for the loans.” This seems to operate as something of a backdoor bailout of European sovereigns since banks can now profitably invest the money they’ve been lent in buying government debt. But whereas a direct government bailout might still have left some banks insolvent absent formal legislative action to bail the banks out, this way senior bank managers all get to keep their jobs. It seems to me that we’re continuing to see a breakdown of the basic evolutionary mechanism of capitalism, which ensures that “unfit” firms go out of business thus invisibly selecting the most functional business models as the most widespread. If dominant banks never go out of business, then they’ll never be replaced by better-run banks.