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Wednesday, November 25, 2015

When is a Bailout not a Bailout

Simon Wren Lewis wrote "It raises important issues about how to reinterpret a no bail out policy when OMT is possible,"

Heh indeed. The crucial credibility of the commitment to Calvinist virtue of the European Central Bank is entirely based on the distinction between lending money to a Treasury and buying bonds issued by that Treasury.

Buying bonds that no one else wants is an forbidden sinful bailout. Open market operations are standard central banking. Open markets being what they are, open market operations involve selling something or a price lower than the asking price of anyone else buying something for a price higher than any other bid. Roughly half of open market operations must involve buying a bond at a price no one else is willing to pay because markets work that way.

The fundamental central economically and morally crucial distinction is between buying a bond to drive up its price (drive down its yield) for good macroeconomic reasons or doing the exact same thing to bail out a Treasury.

This is a rule which can't be enforced without ESP. Even with ESP the central banker and the enforcer have to have a clear idea about a distinction based on words alone and not on desired outcomes. Also there is no enforcer.

The no bailout policy is like a rope made of sand except for the parts about ropes, sand and making.

1 comment:

Peter said...

It's not just Germans who see monetary policy as a bailout. John Taylor and Paul Ryan, before he was Speaker, wrote Bernanke a letter about bailing out Obama.