Mario Draghi Is Playing With Fire
Remember asset-backed securities and the 2008 global financial crash? Desperate to jumpstart Europe's economy, the European Central Bank chief is making them presentable again.
MUNICH — An anti-lock braking system (ABS) is named such because it is supposed to prevent the wheels of a car from locking up when braking, thus avoiding skidding. The ABS is meant to avoid the worst: crashes, destroyed cars, and of course, injury and death.
But the three letters ABS also stand for another — very dubious — practice not invented by wise automotive engineers but instead by smart-aleck investment bankers. Asset-backed securities were among the credit packages for banks and funds created seven or eight years ago that made their way around the globe. They ended up contributing to the crash of the financial markets: Nobody actually knew who owed whom — and how much — and what risks they had incurred.
And now the European Central Bank (ECB), of all institutions, wants to make these dubious securities presentable again. ECB President Mario Draghi has announced that the central bank will be buying up these and other securities to the tune of up to half a billion euros — that's 500,000,000,000 euros.
What the ECB hopes to achieve by this is to create the necessary space for banks to extend new credit. This is mainly meant to help European crisis states so that their banks can extend more credit to small- and medium-sized businesses.
It's not that it's unusual for a central bank to hold securities. When commercial banks want to borrow from the ECB, they often use top-rated securities as collateral. But it is something else entirely for the central bank to accept securities of questionable quality, especially because it puts the financial institution into a market that a serious central bank has no business being anywhere near, and one that has already led to full-blown global crisis.
Mario Draghi has been saying for months that the ECB would carefully monitor which asset-backed securities it buys. And it is true that not every credit package on the financial markets is a gamble. And yet the ECB is playing with fire.
The move also demonstrates just how badly off the central bank is right now, as nothing it has done so far to combat the crisis has actually helped. It can't even lower base interest rates anymore. The reduction from 0.15% to 0.05% is merely symbolic.
Yes, necessity is the mother of invention, but no, not all inventions make sense. And some of them, like Mario Draghi's ABS emergency brake, are downright dangerous.