Just a few short weeks after German Finance Minister Wolfgang Schaeuble criticized U.S. monetary policy with his “with all due respect, U.S. policy is clueless” statement, the FT reports the ECB is contemplating expanding its sovereign bond purchase program.  That is, “printing money” to drive down European sovereign yields, which they believe are too high and do not reflect fundamentals.   The FT writes,

The hint that the ECB could recalibrate its response to the unfolding crisis came as the premiums that Italy and Spain pay over Germany benchmark interest rates hit fresh highs since the launch of the euro. The euro’s monetary guardian had already stepped up purchases of Portuguese bonds, traders reported…
Speaking in the European parliament on Tuesday, Mr Trichet would not comment “at this stage” on the bond programme “in the light of the current situation”. But the programme was “on-going” and decisions on its future would be taken by the 22-strong governing council, which next meets on Thursday. He also refused to rule out the possibility of eurozone governments issuing joint bonds, although the ECB was not endorsing such a step.

The ECB has bought €67bn of bonds since May and will have to significantly increase purchases to stem the panic now gripping the Eurozone.  We wrote earlier how the gold market may be sensing the ECB will be forced to monetize the rollover of Eurozone sovereign bonds in 2011.   More from the FT,

Willem Buiter, chief economist at Citi, said: “The involvement of the ECB is likely to rise, despite its statements – and probably wishes – to the contrary.” He argued recently that the ECB backed by governments could give the new European bail-out fund a €2,000bn loan.

Gary Jenkins, head of fixed income at Evolution Securities, argued the ECB could try “real quantitative easing” through purchases of €1,000bn-€2,000bn of bonds. “It might be politically unpalatable. But it would be an immediate way of creating a firebreak.”

Wow, €1,000bn-€2,000bn!  This would send gold up $1,000 in a nanosecond if markets sensed it had any credibility, even as the ECB contends they have and will sterilize any bond purchases.

Nevertheless, markets have reached the tipping point where they no longer have confidence in the ability of many Eurozone countries to pay back the debt they’ve accumulated and/or possess the political will do so.  The ECB thinks otherwise,

The ECB thinks financial markets are badly mis-pricing risk. Mr Trichet said that “pundits are under-estimating the determination of governments”.

What will the Germans say?  Stay tuned!