
Mario Draghi, European Central Bank President
Many people feel that we live in a free market. But what is a free market? Whenever government intervenes in the market, it hampers the free market. Free market economist Adam Smith said this about government's role:
"To protect its people against foreign invasion; to protect its people
from one another; and to construct certain public works such as roads
and infrastructure for which private individuals would not reap
sufficient benefit to justify the cost."
When you look at contemporary governments, they have definitely swayed from Adam Smith.
European Union countries are in a financial mess. They are simply spending much more than they are taking it in. In a free market and I consider governments just one organization in a market, any entity that can't pay it's bills will go bankrupt or default on its bills.
However, the European Central Bank, led by President Mario Draghi feels they have to intervene. Instead of letting the free market take its course and allowing EU countries (Greece, Portugal, etc.) default, they are interfering.
One way of doing this is buying their debts. See, when a sovereign country needs money they issue government bonds. A bond is simply a way for a country to raise money. The problem is that for a country like Greece, the perception is that they are a greater risk to default on their bonds than other bonds. So to alleviate this concern in a free market bond buyers expect a higher interest rate to make up for the perceived risk. This is where the ECB comes in, per a Wealth Cycles article:
"In early September the European Central Bank (ECB) announced another
program of buying up bonds issued by Eurozone nations in the secondary,
or retail, market. The program, known as Overt (as opposed to covert)
Market Operations, is said to be aimed at lowering the cost of
borrowing for struggling Eurozone nations, several of which are buried
in debt and declining economies. Of course history shows that interest rates rose
in the most ironic of unintended consequences the last two times this
was tried in Europe. The ECB’s intervention comes with strings; in order
for it to buy a nation’s debt, the nation’s government must agree to
the demands of EU leaders, implementing tax rate hikes, and other fake
austerity programs."
The ECB has temporarily bailed out troubled EU countries that need money. By buying their bonds dubbed as Overt Market Operations, the EU is basically printing money to these EU countries that have overspent. As a result, these countries are now even worse in debt. Not only that but the EU has expanded the money supply and will probably cause long term inflation.
This bond buying by the ECB is nothing new. In the United States the Federal Reserve has been buying US Treasury bonds and other ot it's own government bonds for years.
Draghi justifies their government bond buying by saying:
Investors, he told the Bundestag, are “charging interest rates to
countries they perceived to be the most vulnerable that [go] beyond
levels warranted by economic fundamentals and justifiable risk premia.”
This fear, he said, is “unfounded.” The market is wrong.
In other words Draghi is blaming the free market. That is what is wrong with most heads of central banks, they hate the free market. They want government intervention.
To me, however this is part of a bigger problem. In most countries the people vote politicians in who advocate this type of government intervention. In Europe, in America, in Japan the results are the same. The people keep voting government officials who want the government to "do something." What they don't realize is that the more governments "do something" the worse the problem becomes.
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