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A nitpick:
the Frankfurt overnight rate plus some politically acceptable fixed acceptable yield curve

That said, my feeling is that

Repeal of the prohibition on direct ECB purchase of sovereign bonds, and a mandate to purchase sovereign bonds at a price no less than [the one corresponding to] the Frankfurt overnight rate plus some politically fixed acceptable yield curve (the precise shape of which is beyond the scope of this missive).
is too specific a mandate, an probably too rigid to be optimal or even politically acceptable at all.

All that is needed is a mandate for the ECB to act as a market-maker of last resort, which together with Jake's

A change of the ECB's mandate, ... towards having a supervisory role over the private banking sector, to prevent credit bubbles
would be subsumed within a Financial Stability mandate.

But Financial Instability needs to be understood in a Minsky sense. Unfortunately Trichet and friends believe just raising regulatory capital requirements is enough and the market will provide. Policing market stability itself doesn't fit their worldview. Trichet presided the Basel III committee and is now in charge of the European Financial Stability Board, which I fully expect to fail in their mandate given their faulty, market-worshipping macroeconomic outlook.

Required reading on Market-Making of last resort:

Willem Buiter on for-profit banking:
The intermingling, in private profit-oriented businesses, of the provision of public goods or services with regular profit-seeking activities, represents an extremely unhealthy state of affairs. The public provision of private goods is a well-documented disaster. The private provision of a public good without effective regulation (especially when provision is by a complex private businesses for which the public good is but one concern among many), can be a disaster of comparable magnitude.
(Central banks as market makers of last resort 4; liquidity, markets and mechanisms, August 23, 2007)

See also:

Yes, I am a fan of Willem Buiter.

Keynesianism is intellectually hard, as evidenced by the inability of many trained economists to get it - Paul Krugman
by Carrie (migeru at eurotrib dot com) on Fri Feb 4th, 2011 at 04:36:05 AM EST

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