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Source link: http://archive.mises.org/15371/irelands-central-bank-printing-money/

Ireland’s Central Bank Printing Money

January 19, 2011 by

Bagus explains the moral hazard here. The problem is that Ireland is too big to fail, and it is guaranteed by the ECB. News story:

A spokesman for the ECB said the Irish Central Bank is itself creating the money it is lending to banks, not borrowing cash from the ECB to fund the payments. The ECB spokesman said the Irish Central Bank can create its own funds if it deems it appropriate, as long as the ECB is notified.

News that money is being created in Ireland will feed fears already voiced this week by ECB president Jean-Claude Trichet that inflation is a potential concern for the eurozone.

However, a source at the ECB said the European bank is comfortable that the amounts involved are small enough not to be systemically significant. The ECB has been lending money to banks in Ireland at just 1pc, as long as the banks can put up acceptable collateral.

{ 8 comments }

Ohhh Henry January 19, 2011 at 5:07 pm

However, a source at the ECB said the European bank is comfortable that the amounts involved are small enough not to be systemically significant.

Superficially this might sound calm and cool – hey no problem let this little country do whatever they want as long as they don’t bug us, but to me it sounds like desperation, almost giving up. Or like letting a shed burn down while concentrating on protecting the house.

So you let Ireland print their own money, do you let similar-sized regions in the Eurozone do the same? Like say, Scotland or Lower Saxony. If the money printing gets out of hand (about as certain a prediction as that the sun will rise in the east), do you try to firewall or isolate the Irish Euros with capital controls so that they become a de-facto separate currency? I can see trade within Europe going down the drain pretty fast in this case, unless the business people quickly come up with a stable substitute to use for settling accounts (like gold ETFs).

Bogart January 19, 2011 at 5:29 pm

I disagree with Mr. Bagus in that the Eurozone and USA are different in that the member states can run deficits but that is not the same with the US Fed. That is just not true, California, Illinois, New York State, etc have been issuing bonds for years trying to pay for budget shortfalls. It is only the words that are different, the budget deficits are there.

Ned Netterville January 20, 2011 at 11:09 am

“Tis the most distressful country mine eyes have ever seen,
They’re busting men and women whilst the fatted banksters glean.

Jim P. January 20, 2011 at 11:34 am

Hmm… That kind of makes the bankers sound delicious.

Mike Borcherding January 20, 2011 at 11:44 am

Actions like this are predictable when your policy is based on Keynesian economics. It is almost a certainty that this will eventually destroy the Euro.

David Hayes January 20, 2011 at 11:53 am

So, Ireland’s CB prints Euros, and distributes them in Ireland. Then the Irish (almost regardless of who got the new Euros first in Ireland) will have the quick influx of the new money and get to use it first, before the value falls from the inflation. Does this in essence mean the ECB is condoning Ireland sealing punching power from the rest of the EuroZone? (I realize I treated Ireland as its own entity, instead of the separate interest that compose it.)

Corollary question, if all the countries can print Euros in the Eurozone, what is to stop them from having a printing war to legally steal wealth from the other nations and cause a “tragedy of the commons”?

Rick January 20, 2011 at 1:23 pm

Good questions David. My thinking was similar as I was reading this post. Without making any specific predictions, I wouldn’t be surprised to see your questions answered in 2011-12.

Ned Netterville January 20, 2011 at 6:39 pm

“The ECB spokesman said the Irish Central Bank can create its own funds if it deems it appropriate, as long as the ECB is notified.”

That seems to be the only limitation on the ICB inflating Presumably the rest of the PIIGS and every other Euro country central bank can join in inflating the Euro as the mood infects them. ECB limitation: “Just tell us so we can tell our friends and relatives whether and when to buy (stocks, commodities, gold, etc.,) or sell, which, given the Federal Reserve’s relationship with Goldman Sachs and J.P, Morgan during the late financial “crisis” and subsequently with QE2, seems to be the primary purpose of central bankers.

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