So much for the LTRO “bazooka”:

EMU Growth Watch: Credit Growth Slows

Frankfurt, Germany (AP) — The European Central Bank says the flow of credit available to businesses slowed down in February — a sign that the bank’s massive series of cheap loans to the financial system has yet to kickstart a lagging eurozone economy. Figures Wednesday showed loans to nonfinancial corporations — a key credit indicator — grew by only 0.4 percent on an annual basis, down from 0.7 percent in January. The ECB made two massive rounds of cheap loans to banks Dec. 21 and Feb. 29, adding about €500 billion ($666 billion) in net new credit to the financial system. The loans were introduced in the hope that the money would eventually find its way to businesses and consumers as loans and, in turn, promote growth. The loans are credited with easing the eurozone debt crisis by removing fears that one or more of Europe’s shaky banks might fail, and by making it easier for heavily indebted governments such as Italy to borrow on bond markets.

Our Take: LTRO’s do not mean banks will be lending.

19 Responses

  1. We have a credit crunch caused by excessive and irresponsible borrowing. Fingers get burned. Everyone tries to deleverage. And then the ECB (along with other central banks) is surprised when the private sector does not run out to borrow more.

    I’ve lost the will to live.

  2. To me, it seems that if you try to sustain economic growth through borrow all you do is push the bubble further out. What’s needed is real cash injections, not this loan farce. If this should be apparent anywhere, I would think it is in Europe where whole countries are having solvency problems for the same reasons.

  3. There will come a time when the “animal spirits” will ignite and credit will expand, and corporations with trillions held in reserve will start to spend. Have no idea when that will happen, maybe after we start the drive to set up a moon base or something, and inadvertently drive up the deficit. But at that time the neo liberals will all say: “We told you so.” Yeah, right.

    1. @jonf, I would not want to bet on that for Europe. Demography is weighing down Europe and just waiting around this time may not do the trick.

  4. “The loans were introduced in the hope that the money would eventually find its way to businesses and consumers as loans and, in turn, promote growth.”

    Warren, isn’t this idea a bit misleading given that “loans create deposits”?

  5. Is MMT superfluous? 😉

    Madrid’s high-class escorts have found a way to regulate the Spanish banking sector. The ladies want to have their say in the economy by withholding sexual pleasures from bank employees.

    The largest trade association for luxury escorts in the Spanish capital has gone on a general and indefinite strike on sexual services for bankers until they go back to providing credits to Spanish families, small- and medium-size enterprises and companies.

    It all started with one of the ladies who forced one of her clients to grant a line credit and a loan simply by halting her sexual services until he “fulfills his responsibility to society.”

    1. @Sam,

      HIt ’em where it hurts and I don’t mean the pocket book.

      How about OccupyCallGirls. I wonder whether the ladies are members of Indignados.

      There is a famous Greek comedy about this in a slightly different context — Lysistrata by Aristophanes.

      1. @Tom Hickey, I don’t see many retirees digging in dumpsters “yet” while the natural rate of interest is zero…. How much longer can they hold out? Many own thier home, so house prices doesn’t affect thier budget, but higher energy bills and food bills and medical do affect the budget.

        James Rickards

        Retirees the Victims of Federal Reserve’s War on Saving
        By James Rickards

        March 26, 2012 RSS Feed Print James Rickards is a hedge fund manager in New York City and the author of Currency Wars: The Making of the Next Global Crisis from Portfolio/Penguin. Follow him on Twitter: @JamesGRickards.

        This week the Economic Policy Subcommittee of the Senate Banking Committee will hold a hearing on the shortfall in retirement savings in America. This shortfall has many causes including inadequate savings, financial mismanagement, unrealistically high projected returns by pension plans, and public policy that is hostile to investment.

        One of the most important causes of the shortfall is the Federal Reserve’s zero interest rate policy which offers retirees and near-retirees almost no interest on savings held in the form of bank accounts, Treasury bills, or money market funds.

        In response to a financial crisis resulting from a collapse in housing values, the Federal Reserve began to cut interest rates in 2007. The federal funds rate was lowered from 5.25 percent in August of 2007 to effectively zero by December of 2008, and it has remained at or near that level ever since. The Fed has declared an intention to keep short-term interest rates at this near-zero level through late 2014. If this intention is fulfilled, the entire course of the zero rate policy will have lasted six years, an unprecedented and extraordinary policy move on the part of the Fed.

        The rationale for this policy as expressed by the Fed has gone largely unexamined and unchallenged. Seasoned economists and everyday Americans have deferred to the Fed’s expertise and have trusted the Fed to do the right thing to fix the U.S. economy in the aftermath of the Panic of 2008. The view is that Chairman Ben Bernanke knows best and debate is unnecessary. Yet, the costs of this policy are more apparent by the day.

        It should come as no surprise that an unprecedented policy should have unprecedented, unforeseen, and unexpected results. By many measures, the Fed’s policy has failed to achieve its goals and is leaving the U.S. economy worse off when compared to a more normal interest rate environment. The principal victims of these failed policies are those at or near retirement who face a Hobson’s Choice of gambling in the stock market or getting nothing at all. A look at the negative effects on retirement savings shows:

        •Increasing income inequality. Zero rate policy represents a wealth transfer from prudent retirees and savers to banks and leveraged investors. It penalizes everyday Americans and rewards bankers, hedge funds, and high-net worth investors.

        •Lost purchasing power. Zero rate policy deprives retirees and those nearing retirement of income and depletes their net worth through inflation. This lost purchasing power exceeds $400 billion per year and cumulatively exceeds $1 trillion since 2007.

        •Sending the wrong signal. Zero rate policy is designed to inject inflation into the U.S. economy. However, it signals the opposite—Fed fear of deflation. Americans understand the signal and hoard savings even at painfully low rates.

        •A hidden tax. The Fed’s zero rate policy is designed to create a situation in which nominal interest rates are lower than inflation resulting in negative real interest rates. This is designed to encourage lending and spending because the real cost of borrowing after inflation is negative. For savers the opposite is true. Real returns are negative which erodes the value of savings—a non-legislated tax on savers.

        •Creating new bubbles. The Fed’s policy says to savers, in effect, “If you want a positive return, invest in stocks.” This gun to the heads of savers ignores the relative riskiness of stocks versus bank accounts. Stocks are volatile, subject to crashes, and not right for many retirees. To the extent many are forced to invest in stocks, a new stock bubble is being created which, as with all bubbles, will burst leaving many retirees not just short on income but possibly destitute.

        •Eroding trust and credibility. Economic science has been heavily influenced in recent decades with the findings of behavioralists and social scientists. While the social science research is valid, the uses to which it is put are often manipulative in ways deemed suitable by Fed policymakers. This approach ignores feedback loops. Once retirees realize the degree of interest rate manipulation they will lose trust in government more generally.

        The United States, indeed the world, is mired in a swamp of seemingly unpayable debt. In these circumstances, there are only three ways out—default, inflation, and growth. The first is unthinkable. The second is the current path of the Fed although it can only be pursued in stealth. The third is the traditional path of the American people. Growth does not begin with consumption, it begins with investment. Only when private productive investment is encouraged and pursued does consumption follow as the fruit of that investment.

      2. @Save America,

        “Growth does not begin with consumption, it begins with investment. Only when private productive investment is encouraged and pursued does consumption follow as the fruit of that investment.”

        Follow that one and the only “consumption” you’ll get will be financial tuberculosis.

  6. @Tom

    Yes, it does recall it, but the delicious part is that in this case it is the bankers who are object of the favors, and not from their wives–who doubtless are delighted with their lavish lifestyle–but from those who operate “outside the pale.” They are “caught in the act” in two ways and are shown to be twice over the scoundrels everyone suspected them to be.

  7. Just to add to the difficulties facing retirees ..The japanese over 60s have found that the most effective way to retire without sufficient savings is to go to prison ! over 60s represent more than 20% of all offenders ..and a much higher rate of re seems they will do anything to stay in prison and be with their friends or fellow inmates (Their state pension only covers 50% of their living expenses) .
    So one way or another the state is footing the bill ..and crime is increasing at the youth level (unemployment ) and at the seniors level (underfunded savings) …

  8. Warren,
    Wasn’t the main goal of LTRO that banks could refinance themselves?
    Many had issued debt before that came due early 2012 and they did not see much chance to refinance themselves in the market. Of course they always could go already to the ECB as Lender of last resort, but never for such a 3 yr facility.

    1. yes, it was to provide 3 year floating rate funding rather than funding that had to be continually rolled over.

      but still seems to me there was more too it that hasn’t been disclosed.

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