The primacy of monetary policy continues unabated as central banks go further and further down the rat hole of increasingly desperate measures to boost demand. First, it was quantitative easing. Now, the latest scheme is negative interest rates. They tell us that monetary policy is not exhausted and that still more policy initiatives lie ahead, particularly helicopter money. However, we should be sceptical that any of these policies will gain meaningful traction before another economic downturn. Brief comments below
There are a lot of competing narratives going around as to why Greece is in such trouble relative to the rest of the eurozone. A lot of this centers on whether Greek fiscal profligacy or poor credit controls by foreign banks was the main cause of the Greek debt crisis. Let me throw my hat into this ring with a few comments. What I say below will generally shade toward the problem being one of fiscal profligacy worsened by an ECB monetary policy that was inappropriate for the eurozone periphery as a whole and Greece in particular.
The existence of capital controls eliminates contagion and makes it possible to bail-in deposits that would normally be considered to have systemic consequences. The more I look at it, the less benign this bailout deal appears. Indeed it looks to me as if it was set up to do considerable damage to the Greek economy. Once this becomes apparent, Greeks are surely likely to change their minds about staying in the Euro.
So where did they get the money?
It’s an all too familiar story. Inflows of foreign capital, mainly from Scandinavian banks, attracted by low interest rates and a population hungry for credit – credit advanced, of course, against property. Latvian house prices soared and there was a construction boom. Easy credit, wealth effects and incomes from construction and real estate activities also fuelled a consumption boom: suddenly Latvia, one of the poorest countries in Europe, was flooded with Porsches and Bentleys.
In the 2008-9 crisis, Latvia suffered more than any other country despite its extensive bank reforms after the 1995 crisis. Yet only one of its banks failed (Parex): the rest were bailed out by their foreign owners. So the question is, if Latvia’s banks were actually in better shape than those in other countries, why did Latvia suffer the worst recession in the world? To be continued……
There are no big themes dominating the news today. So it is a perfect time to hit a couple of themes with an economic and market theme approach. Let’s talk banks, Japanese trade, the currency wars and deflation.
Back in 2012, three economists published a paper via the San Francisco Fed that looked at nearly every advanced economy business cycle from 1870 forward with the object of understanding the role of credit in the business cycle. Matthew Klein at the Financial Times alerted me of the paper.Now, what the economists found, not surprisingly, was that “financial-crisis recessions are more costly than normal recessions in terms of lost output; and for both types of recession, more credit-intensive expansions tend to be followed by deeper recessions and slower recoveries”. I want to discuss this both in terms of endogenous money and in terms of its implications for the present recovery and proposed recovery solutions. What follows is pretty wonky but very important as a thought piece for framing the economic environment.
Last week, the ECB announced that it would begin purchasing securities backed by bank lending to households and firms. Whereas markets and the media have generally greeted this announcement with enthusiasm, this column identifies reasons for caution. Other central banks’ quantitative easing programmes have involved purchasing fixed amounts of securities according to a published schedule. In contrast, the ECB’s new policy is demand-driven, and will only be effective if it breaks the vicious circle of recession and negative credit growth.
This is a brief update to my last member post from this morning. Just reviewing what the ECB has done here, we see them taking four out of the five easing measures I outlined in May. The ECB could lower rates. Check The ECB could allow its balance sheet to rise. The ECB has been sterilizing the 170 billion euros […]
By Markus K Brunnermeier and Yuliy Sannikov This post originally appeared on Vox and represents what this site believes is a very likely action the ECB could take for monetary easing later this week. Eurozone monetary policy transmission is broken. A key aspect of this is the failure of credit to get to small and medium enterprises, and consumers. This […]
Yesterday, I wrote up a piece at the New York Times’ Room for Debate forum about the legacy that Tim Geithner left behind, given his recent memoir “Stress Test”. The question was : “Did the government miss a historic opportunity to reshape the financial system — or was its moderate approach correct?” I recommend you read the other answers from […]
There is a battle within the European Central Bank. Some want to take stronger action. Others do not think it is necessary. It is not just a matter of counting up who is on what side of the issue. It is not simply about majority rules. The ECB seeks consensus. As is well appreciated, there are important political and legal obstacles to buying European sovereign bonds.