Friday, November 18, 2011

Wyplosz Lashes Weidmann


The EZ crisis is approaching a tipping point beyond which market panic and slow government reaction threaten to create a generation-defining loss of jobs, savings, and pensions. This open letter to the president of the German central bank presents arguments that counter German objections to using the Eurozone’s last remaining defence against economic calamity – the ECB.

Dear Jens,
A growing number of competent economists have come to the conclusion that the debt crisis will not come to an end until the ECB intervenes as lender of last resort. You have taken the opposite view. The question, for me, is why?
As I see it, your objection rests on three points:
  • Legality of bailouts;
  • moral hazard; and
  • independence of the ECB.
These are important issues, but the answer cannot be simply: “No, never.”

1 comment:

FrédéricLN said...

Well, the right reason is a fourth one. It's the fact the ECB does not have the money it would lend. The ECB raises no taxes and sells no goods. Actually, as a Central Bank, the ECB can lend money it has not , but only if that money is reimbursed afterwards. If not, it's a net loss, and… the States have to refill the ECB will really earned money.

So, why would the ECB lend to failing States that would never reimburse? It does not make any sense.

It only starts to make some sense if it is a very short-term and transitory measure; if the ECB-lent money really "saves" the States and brings them in a position where they become quickly sustainable — and can reimburse.

As far as this scenario is not likely (and it is presently not), the ECB should not play this illusion game.