I recently suggested that Eurosystem rules could be skirted by pumping liquidity into a private bank and then letting that bank purchase Italian debt.
Jens Weidman shuts that idea down by implication, along with any more systemic moves to make the ECB a Lender of Last Resort
The president of Germany’s powerful Bundesbank has firmly rebuffed international demands for decisive intervention in the bond markets by the European Central Bank to combat the eurozone debt crisis, warning that such steps would add to instability by violating European law.
Bundesbank president Jens Weidmann told the Financial Times that only politicians could resolve the crisis, and he rejected the idea of using the ECB as “lender of last resort” to governments.
He also criticised actions taken by eurozone governments as “inconsistent”, and warned that their plans to involve private sector banks in rescue plans for Greece could add to the eurozone’s woes. Such private sector involvement, he said, could undermine market confidence in the eurozone’s crisis-fighting tools such as the rescue fund, the European financial stability facility.
The institutional failure on display here is mind boggling.
One is tempted to say that German officials are trying to “thread the needle” and get peripheral countries to agree to deep structural reforms before stepping in and doing whatever is necessary to save the Euro.
However, I just don’t get that sense. I think he really means the following
“I cannot see how you can ensure the stability of a monetary union by violating its legal provisions,” Mr Weidmann argued. “I don’t see how you can build trust in a system that violates laws.”
Which is to say his commitment to principles is deeper than his commitment to actual states of nature. If one actually believes that securing a monetary union going forward is the essential goal then assuring that the monetary union is not destroyed in the short term has to be the primary concern. Weidmann seems to suggest that it is not.
What’s deeply interesting is that from a game theoretic point of view “a credible commitment to be irrational” will certainly increase the chances of Weidmann opponents giving in. But ,with no fundamental limits on the strategy space, it cannot increase the chance of Weidmann actually getting what he wants.