Central banks alchemy fails to convince

Alchemist.pngAlchemists have always claimed to be able to perform the impossible. The most common claim was that they could turn lead into gold.

In Europe, the European Central Bank has been trying the same trick. It claimed to turn near-worthless Greek bonds into German-quality euros.

Now its German board member Jürgen Stark has followed German Bundesbank president Axel Weber in resigning over the issue. The reason is obvious:

• The ECB action can only work for a short period. Greece, as the blog has argued since May 2010, will never be able to pay its bills
• Germany will then end up paying the bill, when it is finally agreed that lead is not gold.

The ECB has made a major mistake by becoming an alchemist. It has lost support within N Europe, which adds to the political issues now surrounding the fate of the Eurozone itself.

Across the Atlantic, the US Federal Reserve also became an alchemist when it launched its $600bn QE2 programme. As the blog has noted over the past year, this aimed to prove that liquidity was the same as capital.

Printing money can provide liquidity to financial markets. But it cannot repair the balance sheet in the housing market. As with Greece, banks that lent capital unwisely will not be repaid.

And just as in Europe, two Fed Governors, Charles Plosser and Richard Fisher, have rebelled against Fed policy. They argue that the Fed’s focus on supporting the stock market has done nothing for the real economy.

Tomorrow, the blog will look at the key issue of why the two most important central banks in the world have made such similar errors of judgement.

About Paul Hodges

Paul Hodges is Chairman of International eChem, trusted commercial advisers to the global chemical industry. The aim of this blog is to share ideas about the influences that may shape the chemical industry over the next 12 – 18 months. It will try to look behind today’s headlines, to understand what may happen next in important issues such oil prices, economic growth and the environment. We may also have some fun, investigating a few of the more offbeat events that take place from time to time. Please do join me and share your thoughts. Between us, we will hopefully develop useful insights into the key factors that will drive the industry's future performance.

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