Liquidity released, bubbles ahead, how to regain control ?

Dear reader,

Let there be no mistake. Since the ECB decided to fire its 'bazooka' there is a relief of tensions in the sovereign bond market of those candidates in the Eurozone this move was intended for. By releasing its massive liquidity to the banks of eurozone it basically offered (almost) free money for everyones grabs.
So far indicators such as overnight deposit of banks at the ECB show ever growing astronomical figures. Clearly showing that interbank lending is still way off a situation which could be described as 'normal'.

We see an influx of the massive liquidity released by the ECB in order to prevent first the collapse of member states of the EMU and then of the Euro as currency without its members and their central banks. States were at the brink of running dry of funding, creating a realistic danger of the breakdown of their societies when wages of state employees couldn't be paid anymore or social benefits, pensions etc.

So as an immediate measures driven by an emergency the author sees it as 'justified' to put out this fire but it must also be seen that such move restricts or even removes the central bank of their usual 'carrot and stick' approach in order to steer the economy anti-cyclicly. So who cares about the basic lending rates anymore when every bank in their right mind took up so much cash like a sponge for 3 years in order to hoard it (overnight at the ECB although some economists deny that (link later, sorry)) , purchase state bonds, buying stocks , pump it the commodity markets and thereby creating helping to surge inflation without the money flowing into the economic cycle possibly doing more harm than good. So far we see no indicators that this injection of emergency cash is doing something 'useful' like being used for loans to companies producing products, creating jobs, creating wealth , reducing federal deficits. OK, it might trickling down to the pockets of share holders of BP, Shell etc and by doing so can be creamed off as well, but i guess we all agree that a trickling down to businesses and consumers would be much more beneficial.

Last week the ECB put out the announcement that basic lending rate remains unchanged at 1% (as almost everyone expected) but the two releases of LTRO flat flood money already making this 'adjustment screw' rather ineffective. Inflation is on the rise as Mr Draghi was communicating on his big press conference last Thursday and under normal circumstances we would see a tendency to tighten this screw. But these aren't normal times- So what to do ?

Well ... the author came across some interesting remarks on Twitter issued by Megan Greene of RGE which said basically that researchers currently don't have more than just a clue where all this ECB cash is being directed by those banks. (No exact way of knowing) Although we sign of decreasing interest rates for state bonds it is more or less unclear where the money did go to or where it is intended to go to. So it is fair to say that the ECB released 1 tn Euro into a 'BLACK HOLE'. It shouldn't sound as a accusation but more like a cry for utmost immediate transparency in order to show economists and governments alike what channels this 'extra cash' is flowing into. By forcing banks to keep statistics on exactly that and releasing them rather quickly.

Second would be that governments react to those released figures of which not a few economists assume that they are put into lucrative but not necessary helpful financial products in the way to apply also a 'carrot and stick' method. What can governments do best ? Right play with taxation rules in order to fill their honey pot but also in a lesser degree to steer the economy. So they can actually diversify taxation on different 'money flows' meaning to decrease taxes on profits made out of providing loans to businesses and individuals and increase those on those profits of financial products not giving stimulus to local economies. As a side effect this reoccuring Tobin tax debate can be shut off once and for all.(See recommendations by Dutch CPB already translated here)
But taxation 'carrot & stick' should not only apply to banks in order to stimulate growth invoking loans but also to companies which take up such loans in order to be more competitive or produce new products etc. By giving tax breaks not only by granting a deduction of interest rates for those loans but also give additional tax breaks* simply by applying a factor which those loans can be multiplied with in order to increase their weight on the balance sheet as a foundation to calculate revenues from. Simply reduce tax revenues in the same way the revenues from highly speculative operations are increasing. Making this a fiscal 'null sum' game in the first place but giving the right incentives to business providing a decrease in government social benefit payments and in the longer term also rising revenues because of much increased business activity.

So summed up ...it comes down to two things:

Transparency
and taxation used for steering/stimulating 'real economy' not to enlarge state 'honey pot' (federal state budget)

[update Mar 12th 2012]
Thinking about inflation risks by diverting funding from financial products to investments in 'real economy' it might help when inflation is rising above unacceptable levels to tighten the demands for bank capitalization above the desired 9% according to Basel III. It should also contribute to more stability just in case the financial system  gets itself again into 'rough seas'.
[/update]

*Joseph Stiglitz: "If you want to encourage investment, what you do is lower taxes on firms that invest and you raise taxes on firms that don't invest."(Twitter: @joestiglitz Mar 3rd 17:55 UTC+1)
Some related links:

"Achieving the impossible" by Joseph Stiglitz 

(found after publication of own thoughts!)

Apr 29th 2012 Bundesbank and German government about to fight real estate bubble

LTRO (link list) 
last updated April 2nd 17:06 UTC

# = German language