“We must buy government bonds” – who said it? No, it wasn’t Ben Bernanke or Alan Greenspan, it wasn’t Jean-Claude Trichet or his successor Mario Draghi, nor was it Mervyn King, Carney, Shirakawa, or Hildebrand. The answer, as shocking as it may sound, was…
It was Axel A. Weber. The head of the German Bundesbank, big and barrel-chested, with an erect Teutonic posture and slicked-back hair, he looked a little like the television gangster Tony Soprano.
He was suggesting that the ECB use its unlimited supply of euros to go onto the financial markets and buy bonds of Greece and the other nations that were having trouble financing themselves. Many of the others in the room were stunned — not just by the suggestion, but also by its source.
Why is this a shock? Because as everyone who has followed monetary developments in Europe in the past two years knows, it was the German Bundesbank, and its current head, Jens “Uberhawk” Weidmann, who have been the most vocal opponents to debt monetization anywhere in the Eurozone. Or at least theatrically and superficially so.
It is therefore exquisitely surprising and delightfully ironic (certainly to the German population, who may be about to feel quite betrayed by their “prudent” central bankers) to find out that the bank that gave the first idea for outright European debt monetization in 2010 Europe (even if ultimately it was watered down for the gullible public as a “sterilized” intervention even if such a nuance is ultimately meaningless when backstopping sovereign debt and is merely for optical, political and media reasons), thus making it clear to all the other global central bankers that post-Weimar Germany is fine with engaging in precisely the act that led to the most traumatic hyperinflationary incident in modern “developed world” history, was none other than the Bundesbank!
We learn all this thanks to the WaPo’s extended narrative, “Three days that saved the world financial system” which focuses on those days in May 2010, presented in great detail on these very pages, when the entire world was about to collapse once more. However, while the direct focus of the WaPo article are the means by which the first instance of global central banker intervention was achieved (primarily through the Fed’s currency swaps we first explained were used to bailout the world back in 2009) and the circumstances surrounding said decision which took place in the bastion of modern central planning: the headquarters of the Bank of International Settlements in Basel (another topic very well-known to our readers), all of which are topics beaten to death on Zero Hedge, what did stun us it the realization that it is quite possible that the Bundesbank has been the biggest double agent in the history of central banking, putting on the most elaborate, hawkish ploy imaginable, only to unleash the most dovish episode of monetary policy in Europe in the modern era.
The WaPo provides more color on this:
Weber and the Bundesbank tended to be the staunchest defenders of monetary orthodoxy in the currency union — protectors of the idea that a central bank must never fund governments, lest inflation take hold. The memory of the early 1920s, when runaway inflation rendered savings worthless, was deeply entrenched in the German psyche. Weber, at the helm of the Bundesbank, was charged with making sure that it would never happen again.
And here, immediately, the backtracking for public consumption begins:
Now Weber was suggesting just a little bit of flexibility. The ECB wouldn’t be funding governments directly, he noted that night in Lisbon, just strategically intervening in markets to prevent rampant and irresponsible speculation from bringing down the euro. It wouldn’t be printing money at all, he argued; the ECB could intervene on the bond markets while sucking an identical amount of money out of the banking system, reducing the risk of inflation.
The above is hogwash. What Weber did, now Chairman of perhaps the most systemically unstable bank in Europe after Deutsche Bank: UBS, and thus a prime recipient of the benefits of unleashing monetization in Europe, is to tell his subordinate, ECB’s (figure)head Jean-Claude Trichet who was always reliant on Germany to validate and approve his actions in advance, that Germany is now and henceforth ok with direct monetizations of debt.
The backtracking continues:
Maybe, when Weber woke up on Friday, May 7, he reevaluated in the cold light of day ideas he had kicked around in an academic, theoretical way the night before. Maybe he realized how much internal blowback he would face at the Bundesbank and from the German press if he endorsed bond purchases. Maybe the ghost of Rudolf von Havenstein, the German central banker who presided over the 1920s hyperinflation, visited him in the night.
Whatever the case, by morning Weber had changed his mind. And he was not one to keep his opinions to himself. On the three-hour flight from Lisbon to Frankfurt, he typed an e-mail: If the ECB bought government bonds without the governments making an ironclad commitment to back one another’s finances, the central bank would be ultimately responsible for Europe’s financial well-being. Greece was fundamentally insolvent, and ECB lending wouldn’t change that. Further, the purchases would violate the spirit of the treaty that created the central bank in the first place.
If the Governing Council outvoted him and bought bonds, Weber continued, he wanted his opposition to be known publicly, and if Trichet did not tell the world of Weber’s opposition, he would do so himself.
It was an unveiled threat. Weber hit “send” on the e-mail upon landing in Frankfurt, and the 22 council members all knew that if they moved to buy bonds as a strategy to save Europe, it would come at the cost of deep fissures within their central bank.
More hogwash: if the German Central Bank emmisary had indeed “changed his mind”, none of what subsequently happened, would have transpired, because it simply would have been halted in its tracks. No: what Weber did was simply covering up his tracks knowing full well the full fallout his action would have in Germany, and the crushing blow it would deal to Angela Merkel if the public suddenly saw her as the person who had agreed to gamble with Weimar 2.0
All of this is circuitously confirmed by the WaPo’s conclusion:
For Weber, losing the argument over bond buying wasn’t the end of things. The rules under which ECB Governing Council members operate call for them to keep quiet about how they vote. Unlike the Fed and the Bank of England, which release minutes of their meetings that detail how committee members voted, the ECB keeps such information secret for 30 years. The theory, of course, is that this should make it easier for officials to make decisions that are in the best interest of the euro zone as a whole, rather than represent the interests of their own countries. Another fundamental principle is that the national banks of Europe — the Bundesbank and Banque de France, for example — would carry out the orders of the ECB Governing Council and buy and sell securities accordingly. Like the twelve U.S. Federal Reserve banks, it is these institutions that actually carry out policy set by the committee.
To Weber, the Governing Council had so thoroughly ignored its own rules and orthodoxies that those principles were now in question.
Shortly after the Governing Council meeting Sunday evening, Weber convened a conference call of the Bundesbank Executive Board. He and colleague Andreas Dombret were still in Basel, the other board members in various locations in Germany. Officially Weber wasn’t supposed to tell anyone what the Governing Council had decided, but this was so momentous that he posed a serious question to the board members: Should we do it? Should the Bundesbank follow its marching orders from the ECB and buy billions of euros’ worth of Greek and Portuguese bonds, violating its long-cherished principle of not using the printing press to fund governments?
If they had answered “nein,” it’s nearly certain that the euro would have unraveled within days, the ECB would have lost all credibility and Germany would have been forced to reinstitute the mark as its currency. The global financial markets would have entered a tailspin more dramatic than what followed the bankruptcy of the Lehman Brothers financial firm in 2008. Staring at that precipice, the Bundesbank leaders decided it was better to hold their nose and violate orthodoxy than to unleash such dangerous consequences.
Indeed, the Bundesbank answered “Ja“, and it answered so to a statement posed initially by none other than the person who was running it at the time: a question which in retrospect may have changed the course of European history, and while buying some time in which to kick the can, it has fundamentally doomed Germany (and all its other insolvent European neighbors) to precisely the same fate that Germans living in the 1920s had hoped would be forever avoided.
Perhaps Weber’s successor, the just as adamantly defiant Herr Weidmann, will now be kind enough to come out of his good central banker closet finally, and join the rest of the world’s central planning ‘permadoves’ who know that any deviation from the “all in” monetization course the world is set on right now (until the end), will merely spell an immediate end to a failed and imploding status quo.
The shocker, if only to Germans and those who are fascinated by such things, is that when things finally spiral out of control, as they will, and when every Hans and Franz is asking why one needs a wheelbarrow to buy a loaf of bread…. again…. they can look in the mirror, because it was their very own Bundesbank that betrayed them all on that night on May 6 in Lisbon, when a rhetorically inclined German central banker said clearly enough “We must buy government bonds” opening the floodgates.
And so the buying began. Where it ends, only German history books from the 1920s, and those seemingly very few who have actually read them and learned from them, know.
Because this time is never different.
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P.S. There is another excerpt in the WaPo article that deserves substantial attention, if only by all members of Congress. To wit: “In the end, the council was overwhelmingly in favor of buying bonds — but also in favor of keeping that decision a secret from the finance ministers and heads of state until they had reached their own deal. If they found out that the ECB had decided to intervene, it would remove the pressure on them to act.” Cue the record deadlock three years later that the US House and Senate find themselves in, if for no other reason, than knowing that with Chairman Ben running the show via various monetary levers: why just look at the S&P and DJIA – they are both at record highs so all must be well! In short, there is absolutely no reason for any political party to compromise any more and to budge on ideology. Because the central banks are now fully in control of both Europe and the US, an outcome which removes all accountability from politicians collecting a paycheck and lobby dollars, just as they like it. And as long as the central banks are in control, all shall be well. However, once the Fed loses control, as it will, as it did in 2007 and always has in the past when a bubble ultimately bursts, it will be Ben Bernanke’s head that Congress – so very appreciative of Bernanke’s efforts to date of course – will demand on a silver platter for public consumption. We wish you all the best, dear Chairman, and hope you make it to your retirement before it all comes crashing down.