This is from EUbusiness:
Some analysts have argued that the ECB risks turning into a “bad bank” if it keeps buying government bonds from troubled eurozone countries.
The term “bad bank” refers to a financial structure created to take on risky debt so commercial banks can get their finances in order.
Trichet disagreed with this view.
The issue, of course, is that of the ECB buying government debt (in this case, that of Greece) directly from (in this case, French) banks. I share the criticism expressed by “some analysts”. Who is the ECB to let euro zone banks “off the hook” by buying some of their assets at (probably) inflated values before a financial crisis? Isn’t saving banks from the abyss the task of national governments? At least this was how it used to be handled when Hypo Real Estate and others went bust.
I think the ECB is now completely in the dark, with their monetary policy of inflation targeting a complete failure. They are trying so hard to avoid the mistake of the Great Depression (not increase money supply) that they are rushing into very un-orthodox policies without being forced. At least this is my point of view.
The ECB used to be an institution that ensures price stability, following one rule. Now it decides which banks are saved and how, without a clear mandate and without any democratic control. The democratic deficit of the EU is getting larger.
UPDATE 20/06/2010: The recent news nicely connects with my article above. China is rowing back, after having supposedly said to loosen the dollar peg (see FT), and Greece is getting help from – you guessed it – China (see FT). At the same time, Trichet is still neglecting to understand the logic of economic imbalances and blames everything on Germany and France. When will the ECB finally admit that the allocation of capital by markets in the euro zone was inefficient? It was the real estate bubbles in Spain, Ireland and elsewhere that led to a recession which put government finances under stress, especially where governments bailed out insolvent private sector banks. What we see now are secondary effects.