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ECB faces mutiny from national bank governors as recession deepens

By Ambrose Evans-Pritchard

Last Updated: 8:04PM GMT 23 Feb 2009

….Mr Trichet said the ECB has increased its balance sheet by €600bn (£525bn)
since the Lehman collapse in September. The bank is providing “unlimited
liquidity” in exchange for a wide range of collateral, including
mortgage bonds issued for the sole purpose of extracting ECB funds.

But the ECB’s leading voices have adamantly refused to contemplate going to
the next stage: buying bonds and other assets with “printed money”.
They see that as the Primrose path to hell. This week the tone has abruptly
changed, suggesting that a majority of the 16 national bank governors on the
ECB council are having second thoughts.

The apparent ring-leader is Cypriot member Anastasios Orphanides, a former Fed
official and a world authority on deflation traps. He said on Monday that
the ECB may have to go beyond “zero-bound” rates and revealed that
an “internal discussion” was under way.

Italy’s Mario Draghi is in the “activist-easing” camp. “The
experience in the US in the 1930s and Japan in the 1990s suggests that it is
necessary to fight, in the early phases of the crisis, the tendency for real
interest rates to rise,” he said.

Finland’s Erkki Liikanen is of the same opinion. “We are facing the worst
financial crisis in our time. It is important not to exclude, ex ante,
any measures.”

Julian Callow from Barclays Capital said 10 ECB governors are now doves.

This amounts to a mutiny against the Bundesbank-dominated executive in
Frankurt. It is no great surprise. They have to answer to their democracies.
The plot is thickening….Link to article

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