Evidence of real progress will be a statement like:
‘Draghi sees no evidence of any possible channel from ECB loans to the economy’

Bank liquidity is something like wheels on a car.
Without wheels the car won’t function, but neither are wheels alone enough to make it go.

Banks are public/private partnerships, with govt’s role being liquidity provider, as private capital in the first loss position prices risk. And with unlimited liquidity provision comes the necessity of full regulation and supervision of the asset/capital side.

In the US the unlimited liquidity provision comes mainly via FDIC insured deposits, supplemented by funding from the Fed. The Fed is the liquidity provider of last resort for its member banks, while at the same time it uses the banking system’s cost of funds as its instrument of monetary policy.

The euro zone hasn’t figured this out yet.
The liquidity provider of last resort is the ECB, as it’s the ‘issuer of the currency’, and as such not itself liquidity constrained. The member nations are like the US states, and are necessarily liquidity constrained, and therefore not ’empowered’ to be liquidity providers of last resort to their member banks.

So in that sense, as the bank funding by the ECB grows, it’s all gravitating towards what all other nations have in place. The problem is the euro zone leaders don’t understand that aspect of banking, as evidenced by the way they are resisting the shift to ECB funding, and, in fact, working towards moving banks away from ECB funding.

Draghi Sees No Evidence ECB Loans Are Financing Economy Yet

By Jana Randow and Simone Meier

Jan 28 (Bloomberg) — “Do we know that actually this money is going to finance the real economy? We don’t have evidence of this kind yet,” ECB President Mario Draghi told Davos. “There is a lag. We will have to see.” “We know for sure we have avoided a major, major credit crunch, a major funding crisis,” he said today. “You have parts of the euro area where credit is more or less normal, but you have other parts where credit is seriously contracting.” “If you take 0.5 trillion euros and then you take off the reimbursement of other short-term facilities by the banking system in December, you get a figure of roughly 220 billion euros, which is exactly the amount of bank bonds that were to come due in this period of time,” he said.

17 Responses

  1. “Banks are public/private partnerships, with govt’s role being liquidity provider, as private capital in the first loss position prices risk. And with unlimited liquidity provision comes the necessity of full regulation and supervision of the asset/capital side.”

    That’s a beautiful, elegantly worded statement, Warren. If you elaborate in words the avg 10 can understand, then maybe the ECB leaders might catch on.

    “The euro zone hasn’t figured this out yet.”

    Worse, we’re working hard to forget it here, as we churn out ever more clueless politicians and even bank/Fed/Treasury staff. Many in Europe get it, witnessed partly by the refusal of multiple countries to enter the EMU, and also by the fact that places like Italy knew it before they made their mistake of joining without permanent liquidity guarantees.

  2. “In the US the unlimited liquidity provision comes mainly via FDIC insured deposits,”


    Former Citigroup Chairman John Reed talks about how our system has failed, how corrupt crooks like Sandy Weil took over, and how the FDIC insured deposit system has been raped by these crooks in a way it was not intended for. He goes on to say nothing has really changed and the same old crooks are still making policy.

    So holding up our FDIC insured deposit system as an example for europe to follow doesn’t seem ideal Warren, being it isn’t working here, or do you disagree with Reed?

    1. @Save America, I think that’s where Warren’s comment about the “necessity of full regulation and supervision of the asset/capital side” comes in.

      If you allow the financial system to become fragile from too much speculation and leverage, and an unofficial, tacit guarantee to the biggest players of a bailout if things go sour, then eventually the government has to come in either to “validate” the piled up and multiply leveraged obligations, which amounts to an after-the-fact endorsement of an industrial scale embezzlement scheme, or else let the pyramid crash and accept the economy-wide devastation that will ensue from the massive disruption of flows of payments.

      Somehow we need to keep the Minski cycle of hedge to speculation to Ponzi from getting going in the first place.

      1. @Dan Kervick, I think that’s where Warren’s comment about the “necessity of full regulation and supervision of the asset/capital side” comes in.

        The devil is always in the details, it is easy enough to say it should be this and that way with proper regulation. Empirical proof shows the political and economic parts cannot be seperated and even after the DISASTER as Reed points out, nothing has changed, and this greatly surprises him. Our system is still broken, the regulation that Warren talks about and Reed talks about does not exist, our system is not the model to be holding up to the world until it is fixed. If we replicate certain parts of our system in Europe, and it allows the same corruption in others, we have given them nothing but problems. As the bible says, fix the plank sticking in your own eye brother, before you worry about the splinter in mine. Reed offered no practical solutions to fixing this problem other than saying he cannot believe society has not punished and discredited all of wall street culture and the political bodies have turned away from the big lobbying money. What practical solutions do you offer on that tiny little point (on which the whole system really depends) about regulation and enforcement?

      2. @Dan Kervick, http://www.ideasinactiontv.com/tcs_daily/2005/08/we-need-250-states.html

        Kling’s thesis is this regulation that you and warren say is required, is simply not possible under our current government, do you disagree? Reed is already in shock it hasn’t happened after the crisis, so perhaps Kling has a point. If Kling’s thesis is true, you and warren are not living in reality, you speak of “regulation” that is not possible in our current society with the way things are structured. From reading bill black to yves smith at naked capitalism and many others, the more I think Kling is correct, what you guys promote under our current politics is not reality and you are wasting your time.

    2. it’s the only way to do it
      it’s a work in progress
      the problem was failed regulation
      as well as allowing banking beyond my (narrow) banking proposals on this website

      1. @WARREN MOSLER, The problem still isn’t fixed, and with society putting in senator al frankens instead of senator warren moslers, I don’t see it changing. The whole government needs a reset, the way it is structured now it doesn’t matter who gets sent to washington, too much power is concentrated too heavily. Reed is in shock nothing has changed, and I see you saying it should be done this way or that way with proper regulation, but not how the masses can fight the billionaire bankers and thier lobbying groups and paid off crony corrupt politicians. Where was the good guys rallying the troops when glass-steagal got repealed? Where were they with backing byron dorgan in his singlehanded fight against it? When Bush reduced the financial crimes unit to nothing, where were the cries then? 🙂 Much more pain will have to be felt before the masses say this current structure of government does not serve them and we need it altered, but some here are saying the MASTERS OF THE UNIVERSE have too much power to be overthrown, Reed’s astonishment seems to add a little weight to that mindset.

      2. @Save America,

        Fine. Saying our current tactics aren’t adequate does no good at all. The only rational thing to do, EVER, is to make a suggestion – a suggestion for how to link/sequence/stage permutations of tactics into workable strategies.

        Populations never hire campaign managers to tell them what’s wrong. They only hire people to tell them the one permutation of things that actually is right.

        Warren’s set the stage for clarifying monetary operations. It’s up to others to link that with political operations. Just because they’re not yet perfectly linked does NOT, by any stretch of imagination, prove that Warren’s exposes of monetary operations are not spot on.

      3. @Save America, Warren is one of the best, I like him a lot even though his moderators constantly throw me out of his bowling alley, he even has spent great sums of his own money to try and be a senator –


        federal election commission.

        2/13/2009 Mosler for President 2012, Inc. $5,500.00
        12/2/2005 Klein for Congress $2,100.00
        9/27/2005 Friends of Joe Lieberman $2,100.00
        10/16/2003 Bush-Cheney ’04 (Primary) Inc $2,000.00

        But Roger you don’t address the points raised by Kling and William Black and Yves Smith and others, that http://www.ideasinactiontv.com/tcs_daily/2005/08/we-need-250-states.html

        It just is impossible to get real change under our current democracy, and the regulation you guys speak of is absolutely impossible under our current form of government, and the facts seem to bear that out to me. Warren and others say we have to fix regulation as a key underpinning for these other memes and ideas to work, however I don’t see how it is possible and is not realistic. Our lives and time are limited and we only have so much we can do. Do you disagree with Kling above that the current democracy has no HOPE at all of working for the benefit of the masses? Kling says the forces are too powerful to change our government in this way that is fundamental, other posters here have said the MASTERS of the universe can’t be overthrown, tom hickey was one of the few that I think has a good read on what is coming, the masters of the universe are going to blow themselves up and anger too many joe 6 packs and we are going to get a nasty government reset of some type with much gnashing of teeth. You should see the military grade hardware that the oakland police have to fight off the starving poor, sick, and old who just want to sleep in a vacant abandoned building!

        If the moslers of the world don’t find some way to massage this change in the least harmful way, I am sure there are dark forces working on the other side who are praying for and orchestrating maximum damage so they can feast on carcasses like the vultures they are. What do you think can be done to change our democracy in the ways that is required with the least amount of gnashing of teeth? Your current tactics aren’t adequate, and it aint just me saying it, but William Black, Reed of Citigroup, Barnhardt, Tavikoli, etc etc etc

    1. @chewitup, twitter feed? You better watch out chewitup! 😉


      Posting on Twitter can get you kicked out of the country now, The government listened at Warren’s jobs program and gave 3 million people a job working for homeland security, and now a little bit of power have went to some of these people’s heads and you can’t come to the country anymore if you tweet about a simpsons joke. Good lord this is damn silly and would be laughable if it wasmt so sad. My friends that have security clearances have removed all thier twitter,facebook other social media accounts on instructions from the boss, paranoia rules the day!

      1. @Save America,
        I am now supplying my hide out in the White Mountains with a years supply of beef jerky, bazooka bubble gum and water purifying tablets. That and my sling-shot and what I steal from unsuspecting campers should get me through the worst of it. Thanks for the warning.

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