Today is Wednesday and I have a lot to do today. I’m scanning some transcripts from the European Parliament today as part of a project I’m working on to update my 2015 books – Eurozone dystopia: Massive groupthink and denial (Published May 2015). I have received many requests (including from publishers) for revisions to take into account events since 2015, including Brexit and the pandemic. So my head went back to transcripts, agenda reports, and other official documents to create the evidentiary trail I need to proceed with the case against the Monetary Union and the European Union. I report today on a particularly interesting exchange that took place at the European Parliament in November 2020. Then we had some great harmonica playing.
Solemn statement – Central banks cannot go bankrupt
There seems to be a regular Feffi cycle — you know, the back-and-forth rehearsals of fiction inspired by the lies that mainstream economists allow rampant in the wider community.
It’s a familiar pattern – lies are made up, financial media reports, news explodes for a week, a Modern Monetary Theory (MMT) economist points out the fiction, and then some mainstream economists, who suffer from attention deficits, issue The tweet said they knew it had been part of the mainstream theory all along.
Then someone points them to what the mainstream teaches every day in college courses, or what these economists have written (regularly) in the past or said to the media, and some further tweets about MMT being a cult, etc.
We’ve been observing this pattern for years.
Recently, we’ve seen a re-use of the “central bank will lose” myth as part of a mainstream attack on large bond-buying programs that keep government bond yields very low, if not negative.
On Monday (16 February 2022) the European Parliament considered – European Central Bank Annual Report – This is a regular event, apparently as accountability.
On November 19, 2020, Madame Lagarde, President of the European Central Bank, met with the European Parliament Committee on Economic and Monetary Affairs.
This – Transcript – The hearing includes this exchange.
Italian right-wing MP Marco Zanni is from Lega Nord and worked for an Italian investment bank. From 2019, Zani represents the right-wing “Identity and Democracy” group in the European Parliament.
He asked the ECB president this question:
…In the past few days, someone including the president of the European Parliament has started discussing the possibility of cancelling some of the debt that the ECB bought under its PEPP program…I just want to know, technically, what debt cancellation would be for Europe Will the central bank’s impact, and especially the associated losses, impair the ECB’s ability to achieve its monetary policy objectives – will it risk bankruptcy, or if the central bank operates under different rules than private banks or other private companies? Can you explain how and why the ECB can also deal with negative equity, as the ECB has stated many times? Is the ECB a special institution in some way?
The question, then, is whether the ECB (or any central bank) can continue to be negatively capitalized if they lose money on any of their holdings, including the vast amount of government bonds that many central banks now own.
I wrote a detailed analysis of the problem in these blog posts (years ago):
1. The ECB can’t go bankrupt – get over it (May 11, 2012).
2. The Fed is on the brink of bankruptcy (not!) (November 18, 2010).
3. Coalition Government – Treasury and Central Bank (20 August 2010).
Recently, I proved that an “expert” reporter from the Australian Broadcasting Commission was misleading readers by concocting a story of a possible RBA bankruptcy.
For that blog post – When ABC reporters misled the public and spread fiction (January 13, 2022).
In any case, Mrs. Lagarde answered the question, claiming that under Article 123 of the treaty, the ECB cannot write off debts.
Zenny insists:
As I said, I know there are limitations in the treaty, but what could happen in the future is that the ECB could lose money from its holdings under the Asset Purchase Program (APP) if the debt is not officially cancelled. So I wonder, technically, what happens if these losses erode the ECB’s equity, and how the ECB could possibly operate in negative equity.
Lagarde was then forced to ask questions:
As the sole issuer of euro-denominated central bank money, the Eurosystem will always be able to generate additional liquidity as needed. So, by definition, it will neither go bankrupt nor run out of money. In addition to this, in the event of any financial loss, it will not impair our ability to seek and maintain price stability. I’m afraid that’s another fairly simple, straight-forward answer, but that’s the reality we’re dealing with, and I’m not speculating on alternatives because we have a treaty. We are the only issuer, so we have no risk.
Apart from institutional references to treaties, the statement applies to all central banks that issue sovereign currencies.
They never go bankrupt and can operate without permanent negative equity issues.
They are not shareholder-owned for-profit companies.
They are part of the currency-issuing government (or, in the special case of the ECB, the currency issuer in the system where the elected government uses the ECB currency).
So whenever you read a commentator’s statement that central banks could take huge losses from their bond-buying programs, roll your eyes and realize that commentators don’t know anything about this topic.
Our edX MOOC Week 2 – Modern Monetary Theory: 21st Century Economics Begins Today
Materials for the second week of this free 4-week course are now available. During the course, new material is available every Wednesday.
Each student needs about 2 hours of engagement per week, so you can still catch up and registration is still open.
There is a large class doing the course, so why not join them and get a proper understanding of MMT through lots of videos, discussions, etc.
In the coming week, there will be the first live interactive event of the year, which adds to the previously presented material.
So even if you completed the course last year, these live events may be a reason for you to study again.
More details:
https://edx.org/course/modern-monetary-theory-economics-for-the-21st-century
If you want to take a class, do so early to avoid catching up.
welcome everybody.
Music – Slim Harpo
Here’s what I’ve been listening to this morning at work.
It comes from the incomparable— slim harp – sing his class – rain in my heartreleased in 1961, peaked at number 34 on the U.S. hit charts.
He wrote this song – Jerry West.
I first heard this song when I was in high school when my brother brought home a record – beautiful things – They were released in 1965.
My memory tells me I heard this song on an EP, but it was also released on their second studio album of the year – Get three pictures?.
I like their sound.
I found Slim Harpo in the early 1970s and have been listening to him ever since. Research was more difficult back then (without Google), so I had to track down records in two stores in Melbourne (Keith Glass’s import store on Bourke Street and Batman Records).
Slim Harper lived an ordinary life – early tragedy, hard manual labor, and then his talent was recognized.
He died young (heart attack) and the world lost an important talent.
Covers of his songs by 1960s British R&B bands including Rolling Stones (I’m a King Bee), Yardbirds, Kinks, Dave Edmunds, Them and more
Great musician and songwriter.
Enough for today!
(c) Copyright 2022 William Mitchell. all rights reserved.
