Lets Play Weidmann Says…

Posted by Chris on January 16, 2015 in Uncategorized | Leave a comment

Liaquat Ahmed’s “Lords of Finance” tells the story of the American, British, French and German central bankers trying to hold the world together in the midst of the great depression. The most striking story in the book is the saga of Germany’s post World War I struggles to pay reparations. The German government printed trillions of marks to keep its government solvent, while a young Adolf Hitler stewed over how far his beloved Germany had declined.

This is why Jen Weidmann and the Bundesbank have such a huge aversion to printing money, especially when buying government bonds. Today’s headlines on the European Central Bank’s QE plan are as follows:

QE PLANS SEE NATIONAL CENTRAL BANKS BUYING OWN-COUNTRY DEBT

*ECB TO SET 20%-25% PURCHASE LIMIT FOR COUNTRIES’ DEBT: SPIEGEL

EXCLUSIVE: ECB SOURCES: QE TIMING, SIZE, SCOPE YET TO BE DECIDED. COULD BE BETWEEN 700-800BLN EUROS -MNI

DRAGHI PRESENTED PROGRAM TO MERKEL

Most recent speculation has said that QE will be proportional to GDP or capital put into the ECB. If this program is done via GDP split, Germany will need to do about 30% of the buying, purchasing bunds that mostly already have negative yields. Either way Weidmann and the Bundesbank will be expected to do the majority of the bond buying. Obviously, why would he do that if he doesn’t agree with the policy. In 2011 Juergen Stark resigned from the ECB’s executive board over small scale bond buying, at this point why would Germany be the backbone of a program that they are fundamentally opposed to?

Additionally, why does Draghi… an independent central banker need to present the program to Merkel? He has said before he doesn’t need unanimity to proceed with this. That may be true, but it is becoming clear that they do need full support of the Germans to do this. The final decision is up to Weidmann, not Mario Draghi.