6. QE by ECB

ECB could perform stimulus via local banks

2019-01-24: ECB keeps interest rate unchanged at -0.4% due to economy slow down, Brexit, and possible recession in Germany. ECB is considering another stimulus.

Negative rate by ECB has caused unbalanced in worldwide economy including its sky rocket housing markets plus other housing markets outside of European Union.

ECB could also consider QE via local banks, i.e. banks within EU. ECB should raise interest rate to 0.5% and let EU banks to lend to EU businesses at 1.5% annual interest. Banks would get 1% commissions for screening qualified companies and collecting interest payments for ECB. The life of loans would be limited to 5 years.

Because EU is a union of many countries, but each country has contributed differently to ECB and EU as a whole. ECB doesn't want to lose money neither, i.e. loans must be recollected in full after 5 years.

What should ECB do to make fair share to local banks? Probably ECB should base on business income tax reported by each country within EU and take an average. For example, in 2018 Germany business paid $2B in tax, Spain paid $1B, France paid $2B  (assuming EU has only 3 members). Then ECB would allocate the planned stimulus amount 2/5 for Germany, 1/5 for Spain, and 2/5 for France. Let local banks in Germany, Spain and France perform lending.

If a business didn't generate any income or report income tax, it would be a bad business.  Why should you give them money to burn?

Loans could be backed up by bonds or preferred shares. Local banks are good at investment and know that those are fixed term loans.

Having low or negative interest rates didn't mean local business got money needed from a local bank.

Bankers said that they would pay a loan loss with 10% on an original loan to ECB.

If ECB allocated (QE) stimulus amount based on

·        GDP: some would argue that “stronger economy gets more money”.

·        Total personal income tax: populated country may get more money, but they didn’t contribute to job creation.

·        Business income tax: these companies are profitable and hiring, thus central will have better chance to get back money on loans.

If ECB based on GDP, probably Germany and France would get a lot of money, but there would be a lot of complaints. Based on business income tax, Germany and France would also get larger shares, but everyone agreed.