The ECB must rise above itself to rescue the eurozone

Great post by Bill Black on how the ECB must break and remake it’s own rules .

Tuesday, August 09, 2011

The European Central Bank Rises above the Law and its Principles

By William K. Black

Here is snippet…

…The ECB inherently must perform effectively four missions if the euro is to avoid causing repeated crises and, eventually, collapse. In addition to fighting severe inflation, the ECB must (1) minimize unemployment, (2) serve as a lender of last resort to member nations and banks, and (3) serve as a “regulatory cop on the beat” to prevent the epidemics of accounting control fraud in EU banks that hyper-inflated financial bubbles, rendered most of the EU’s largest banks insolvent, and caused the financial crises that shut down hundreds of financial markets and drove the Great Recession. The ECB, however, is not permitted to serve these other three missions under is mono-mission statute. It remains true however, that the prospect of being hung in a fortnight (or less) focuses central bankers’ minds most wondrously. The ECB has repeatedly risen above its theoclassical principles and the law governing its mission. Necessity has forced the ECB to adopt the lender of last resort function and (in economic substance regardless of the nominal structure) bail out banks and member nations.

The ECB remains indifferent, however, to the periphery’s unemployment. Indeed, the ECB’s demand for what our CIA refers to as “draconian” austerity programs (in Ireland), is the principal cause of increasing unemployment in much of the periphery. The ECB’s pro-cyclical policies are economically illiterate and will generate recurrent economic and political crises in the periphery that will soon bring to political power some of the most odious extremists in the EU. If the ECB continues its pro-cyclical policies it will produce a lost decade in the periphery and cause some nations to withdraw from the euro.

The ECB remains blind to the fact that it must ensure effective financial regulation, particularly of the systemically dangerous institutions (SDIs), if the euro and the ECB are to be effective. Accounting control frauds drove the crises in several European nations. Those crises imperiled the EU, the ECB, and the euro. The regulators must stop the “Gresham’s” dynamic that causes bad ethics to drive good ethics out of the financial markets. EU financial regulation suffered from what the authors of the book Guaranteed to Fail (Princeton 2011) call the “race to the bottom.” This perverse race towards anti-regulatory policies, another form of a Gresham’s dynamic, was decisive throughout the EU. Anti-regulators cannot break the Gresham’s dynamics that accounting control frauds create that lead to hyper-inflated financial bubbles and endemic fraud. Individual nation states cannot break the Gresham’s dynamic. They can divert the frauds to other nations by serving as the “regulatory cops on the beat,” but they cannot safeguard the EU. Only the ECB is in a position to provide that effective regulation and break the Gresham’s dynamic throughout the EU.

The ECB has, as predicted, risen above its principles and the mono-mission that the ECB championed. Its mono-mission imperiled the ECB’s ability to respond to the (not-so) sovereign debt crisis of the periphery and the European banks’ private and public debt crises. The ECB needs to rise above its principles and law to reduce the severe unemployment and economic suffering caused by the current crisis and become an effective regulatory “cop on the beat” to prevent or at least sharply limit future crises….

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