Monday, October 1, 2012

ECB's "nuclear option" better as deterrent than weapon

(Reuters) - Buying unlimited quantities of bonds is sometimes described as a central bank's nuclear option, deploying an overwhelming force that threatens speculators with annihilation.

Like atomic weapons, the bank's powers to print money and buy securities are best held in reserve as a deterrent, even if their use would not wreak destruction on a comparable scale.

Having to use them to defend a country or a policy objective could cause unintended damage and expose fatal weaknesses in the political will to sustain the action.

European Central Bank President Mario Draghi seemed to borrow from the Cold War lexicon of deterrence in July when he told financial markets that the ECB would do "whatever it takes to preserve the euro. And believe me, it will be enough."

The Draghi Doctrine sounded a bit like the macho boast on unofficial Israeli Air Force T-shirts on sale in Jerusalem: "Mince with us and you'll end up as chopped liver."

But his fighting talk was soon questioned by skeptics in the financial markets and the commentariat. Read More