New ECB Report Warns of a Crash Unleashed by… Its Own Policy

Showing that central banks can create dilemmas, but can’t solve them, the European Central Bank is now warning of the financial crash (devised by itself) in its biannual Financial Stability Review of November. If the bank keeps tightening monetary policy, “disorderly adjustments” are threatened, whereas if it doesn’t, inflation will continue to spin out of control. Of course, there is no solution within the system: the only solution is a Glass-Steagall type of separation of speculative banks from commercial banks.

We quote directly from the report: “Euro area financial stability conditions have deteriorated further, reflecting rising inflation, higher interest rates, weaker growth prospects and financial market repricing. Inflationary pressures have risen both globally and in the euro area since the publication of the previous FSR, driven by elevated food and energy prices and their pass-through to other prices. This has prompted an adjustment of monetary policy stances by major central banks, contributing to tighter global financial conditions and increased financial market volatility. The mix of high inflation outturns and rising interest rates has continued to weigh on economic growth in many advanced economies. Against this background, one-year ahead recession probabilities have increased markedly, in both the euro area and other major advanced economies.”

And then more from the horse’s mouth, on the “disorderly adjustments” provoked by its Quantitative Tightening: “The risk of disorderly adjustments has risen with increased market volatility, knock-on effects for margin demands and lower liquidity in some market segments. Significant financial market repricing has translated into higher market volatility, in particular — but not exclusively — in bond markets. In addition, some signs of lower market liquidity have emerged in euro area corporate bond markets, especially for high-yield bonds. This could make it harder for participants to adjust portfolios, reprice assets or raise financing in periods of stress. Furthermore, the cash and collateral stress that can arise from large price moves and volatility that trigger unexpectedly large margin calls poses a risk for some derivatives market participants, as recently seen in euro area commodity derivatives markets and U.K. sovereign debt markets. This combination of developments makes markets more vulnerable to disorderly adjustments.”