What we are witnessing is a touching belief in the ability and willingness of central banks to prevent investors suffering losses
Financial markets have a lot of faith in Mario Draghi. Too much faith, in all likelihood. They rallied last summer when the president of the European Central Bank said he would do "whatever it takes" to save the euro. And they rallied on Thursday when the ECB cut interest rates to 0.5%. Bond yields fell across the eurozone, hitting record lows in France and dropping below 10% in Greece. Stock markets liked the news, too.
But did the news warrant the upbeat response? Not really. Let's be clear, the reduction in the cost of borrowing for the eurozone was welcome. It was also signalled in advance, long overdue, and the bare minimum that the ECB could have delivered when recession is deepening quarter by quarter and Japanese-style deflation appears to be just around the corner.
Draghi hinted that the ECB might consider negative deposit rates, which would mean that banks would have to pay for the privilege of parking money at Europe's central bank. That threat, it is hoped, will encourage banks to lend rather than hoard their cash. And he said the ECB would consult with the European Investment Bank and the European commission about the possibility of measures that could boost credit flows to small- and medium-sized companies.
By no stretch of the imagination does this amount to a rescue plan for a eurozone facing a second calendar year of declining output and with unemployment at a record 12.1% and rising. The Bank of England had its Funding for Lending Scheme in place by the middle of 2012; the ECB is still at the drawing board stage.
This is perhaps not surprising. The ECB is a conservative institution, although it has become less so under Draghi's stewardship. Its freedom of action is constrained by Germany's insistence that the problems of the troubled countries of the eurozone are caused by the lack of structural reform, and not insufficient demand. It was clear from Draghi's press conference that the decision was not unanimous and it did not take a genius to surmise that Jens Weidmann, the president of the Bundesbank, was a dissenting voice.
So why are markets so chipper? We can rule out the idea that the ECB's rate cut will prompt a recovery in output. (Although it may help, at the margin, to underpin consumer and business confidence.) The decline in Greek bond yields suggests that the markets believe the risks of a break-up of the single currency have markedly diminished since Draghi issued his "whatever it takes" reassurance in July 2012. The immediate threat to monetary union is certainly diminished, but it is a heroic assumption – given the deepening slump, the recurrent sovereign debt crises and the structural differences between rich and poor countries – to imagine that the risk of break-up has disappeared altogether.
No, what we are really witnessing here is a touching belief in the ability and willingness of central banks to prevent investors suffering losses. In the early part of the last decade there was something known as the Greenspan put: every time Wall Street was in trouble, the chairman of the Federal Reserve would ride to the rescue with a cut in interest rates. In 2013 we have the Bernanke put, the King put and now the Draghi put. Bad economic news is treated by the markets as good economic news, because they believe lower interest rates or more quantitative easing will follow. Eventually one of two things happens: the recovery actually does arrive. Or reality sets in.
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