Has Mario Draghi lost his touch? If yes, that is good news for Eurozone..

There was a time when Mario Draghi was the most celebrated central banker of the world. His famous words “Within our mandate, the ECB is ready to do whatever it takes to preserve the euro. And believe me, it will be enough”  stirred European  markets like nothing else could. Suddenly markets jumped and ECB ended up lowering yields without spending a penny. This was in 2012 and 2013 leading to several awards for the central banker.

And now we are in 2015, The same news sites which celebrated Draghi are wondering whether the central banker has lost his touch. One’s luck in central banking can only stretch so far. It is the usual story. The awards should instead be titled as the luckiest central banker of the year. Those central banks who claim that they are not cheerleaders of markets are living in utopia. The success of a central banker is just dependent on how markets perceive and cheer the monopolist leader. Most of these awards anyways are usually sponsored by the financial street directly or indirectly.

On to Draghi:

The European Central Bank’s president dropped plenty of friendly hints to bond and currency markets at his press conference Wednesday: the recent rise in inflation is no surprise; economic figures have been a bit disappointing; and, most importantly, the ECB will implement its EUR1 trillion-plus quantitative easing program to completion and is even willing to add to it if needed.

Yet investors reacted oppositely to what would have been expected. German bond yields soared, and the euro rose against the U.S. dollar. Easier monetary policies typically reduce yields and currency values. 

Judging by Wednesday’s reaction, it appears markets latched onto Mr. Draghi’s comment that he wasn’t concerned about recent turbulence in bond markets. “We should get used to periods of higher volatility,” he said, suggesting the ECB won’t step in and adjust its stimulus programs to calm markets. 

In a sense, the recent rise in bond yields—though Germany’s 10-year yield, at around 0.93%, is still super low—reflects a normalization in the economy and inflation. Consumer prices are up in the eurozone and returned to positive territory last month faster than many analysts had thought they would. That implies a higher bond premium to safeguard against inflation. Firmer economic growth typically has the same effect on yields. Hopes for a deal between Greece and its creditors have dampened demand for ultra-safe assets like German bonds.

A deeper message from Wednesday’s market reaction to Mr. Draghi’s press conference is that seven years after the onset of the financial crisis, the global economy and financial markets are still highly dependent on monetary policy. For investors, that means bouts of volatility that central bankers can’t, or won’t, intervene to resolve.  For Mr. Draghi and his peers this means their words still matter greatly whether they like it or not, and need to be chosen carefully.

Happy realisation.

We have still not got the main message. Central banks and monetary policy can just influence nominal stuff and cannot really do much about real economy. One even doubts their influence on nominal side given they cannot even create inflation now which we thought was really easy. So to have so much belief in govt appointed technocrats to monitor and manage the economy is against basic principles of market economics. All we get is some spurt in asset markets which is not as much policy but more due to luck. As the central banker’s  luck eventually runs out, we get to understand the reality.

Central banks are truly like a dinosaur in the room who interfere with financial markets like no one else does. And then most of them lecture us about need to let markets function. Sure, they will only function if you allow them to function.

The econ academia which is always against govt has somehow huge hopes from central banks. This is perhaps because most academicians do not perceive joining govt (at most be advisers) but really look forward to becoming a central banker. After all nothing else gives you so much power. Sititng in a coy chamber, one can just keep interfering with things. That too without any need to win elections and be accountable to public. To this they have very cleverly added phrases like central bank independence and what not. So that it is all very nice and pretty.

Overall this is great news for EZ. It will now look at real solutions to resolve its economies rather than just look for newsbytes and black magic from Draghi. The next question is, is there a real solution?


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