Saturday, April 12, 2014

ECB Concedes that Deflation Is a Worry Requiring Immediate Action

Mario Draghi conceded that he is worried about deflation and is prepared to move toward unconventional monetary policy to combat it. He blames the strength of the euro and speaks of the need for "monetary stimulus" to combat it. According to the Financial Times, however, the plan is not to buy assets on the open market, as the Federal Reserve has done, but to cut interest rates on deposits by banks with the ECB, possibly into negative rate territory, which would effectively be a tax on these deposits.

9 comments:

Mitch Guthman said...
This comment has been removed by the author.
Mitch Guthman said...

The most useless man in Europe strikes again! Evidently his concern is that deflation might not occur and it might not be as devastating as Germany and the Troika desire, so this would seem to be Draghi's way of making sure that Europe enters a deflationary death spiral. It is as though the collapse of the Weimar Republic and Japan's lost decades never happened. Entrusting the welfare of Europe's economy to fools and knaves will surely be its downfall.

Art Goldhammer said...

Mitch, I don't make a habit of arguing with commenters, because life is short. But I'm genuinely curious about your hostility to Draghi. What do you think would have happened to Europe without him? Most observers would grant that his forceful interventions stopped a disorderly breakup of the Eurozone, which would have collapsed half a dozen economies, thrown millions of people out of work, and precipitated bankruptcies and litigation lasting centuries. He is not the man responsible for austerity; arguably, he would prefer stronger fiscal intervention, but in its absence, like Bernanke, he's doing what he can within the limits of his statutory authority. Just why do you think he's the "most useless man in Europe." I totally disagree.

Art Goldhammer said...

Mitch, I don't make a habit of arguing with commenters, because life is short. But I'm genuinely curious about your hostility to Draghi. What do you think would have happened to Europe without him? Most observers would grant that his forceful interventions stopped a disorderly breakup of the Eurozone, which would have collapsed half a dozen economies, thrown millions of people out of work, and precipitated bankruptcies and litigation lasting centuries. He is not the man responsible for austerity; arguably, he would prefer stronger fiscal intervention, but in its absence, like Bernanke, he's doing what he can within the limits of his statutory authority. Just why do you think he's the "most useless man in Europe." I totally disagree.

Mitch Guthman said...

@ Art,

Draghi did indeed save Europe from this parade of horribles but it’s important to remember that the world was brought to the brink of a financial Armageddon not by forces beyond its control but by a long series of extremely poor choices made by Draghi and his ilk. The threat of financial collapse, of bank runs and sovereign debt borrowing costs spiraling out of control would not have existed if the ECB had acted like a normal central bank, including being the lender of last resort for Eurozone countries and not trying to create an artificial gold standard. The thing that instantly averted each was these threatened disasters was that Mario Draghi gave a speech promising that the ECB would act more like a normal central bank—that’s all it took to prevent bank runs and lower sovereign borrowing costs to acceptable levels and he could’ve and should’ve done it long before Europe reached the precipice of disaster.

It’s also important to remember that Draghi didn’t act except under tremendous pressure. I suspect that, left to their own devices, Draghi and company would have blithely lead Europe into the abyss secure in the knowledge that it would all lead to a better tomorrow.

Crediting Mario Draghi with saving Europe from the disaster you mention is like crediting an arsonist who agrees to stop pouring gasoline on the fire he started with saving the building from burning down.

As to what he might or might not prefer, who knows? What I do know is that he's the head of the ECB and if he thought that austerity and tight money was taking Europe to the precipice, he had an obligation to speak out even if it meant sticking his neck out, too.

Basically, the head of the ECB can't simply go along to get along. If he can't get the ship to change course to miss the iceberg then he needs to warn everyone so that they can take action. Otherwise, I think you have to assume that he believes the course of austerity and turning the euro into artificial gold is the right course to follow---in which case, he's the man who is responsible for the shipwreck.

Art Goldhammer said...

I think it's not quite fair to hold Draghi responsible for what Trichet did. Nor is it fair to blame him for "creating an artificial gold standard," which is simply what it means to have a single currency. The need for additional institutions to make that currency work (such as Eurobonds) is not Draghi's doing. And the ECB is prevented by its charter from acting as a lender of last resort, despite which Draghi, using considerable imagination and ingenuity, devised the Outright Monetary Transaction and Extraordinary Loan Authority to do what needed to be done. I understand your emotion but find your analysis to be way off the mark.

bernard said...

I suspect Draghi is a lot more realistic than the conservatives running Europe and most European countries.

I am in doubt however with this negative interest rate thing as I seem to remember that Japan tried that some years ago without much success.

On another note, you should have told us more prominently if you did at all that you translated Piketty's opus as I read your blog very frequently and never knew until reading Krugman's review in the NYRB! Congratulations.

FrédéricLN said...

Excuse me for a quite unrelated comment. One column by Krugman I approve absolutely in full, including the conclusion "So never mind the debate about exactly how much damage high-frequency trading does. It’s the whole financial industry, not just that piece, that’s undermining our economy and our society."

The relationship with French politics: a book has been just published on the topic, the author is a senior police officer, that *may* re-ignite the debate in France about the financial industry. Jean-François Gayraud (https://fr.wikipedia.org/wiki/Jean-François_Gayraud), "Le Nouveau Capitalisme criminel". An interview here : http://www.mediapart.fr/journal/international/140414/le-trading-haute-frequence-est-un-systeme-de-fraude-de-grande-ampleur

FrédéricLN said...

oops, the missing link: http://www.nytimes.com/2014/04/14/opinion/krugman-three-expensive-milliseconds.html?emc=edit_th_20140414&nl=todaysheadlines&nlid=33184583