Categories Economic Performance EMU European politics Fiscal Policy World Economy Thank goodness for independent central banks Post author By Kevin O’Rourke Post date June 2, 2009 11 Comments on Thank goodness for independent central banks Angela Merkel has just given us a compelling reason to be grateful for central bank independence. Update: Wolfgang Münchau is pessimistic about future ECB independence here. Related ← Deadweight Loss and “Job Creation” Plans → Infiniti Finance Conference at TCD 11 replies on “Thank goodness for independent central banks” Yes, curse her for her concern about loose monetary policy :roll eyes: Matt +1 The print party will soon be over – templates coming home to roost. Before this turns into a party for our loyal and dedicated Austrian following, let me whole-heartedly agree with Kevin. Ms. Merkel seems not to see the contradiction in her intervention calling for a “return to independent and sensible monetary policies”. Independent from whom? Ms. Merkel condemns the combined judgement of Bernanke, King, and Trichet, presumably because her own advisers think they know better. For me, this conjures up visions of Mrs. Thatcher and Sir Alan Walters and all the other vagaries of politically controlled British monetary policy prior to 1997. Thankfully, M. Trichet is genuinely independent and will continue to do as he sees best. Now back to the Austrians …. Matt says “Yes, curse her for her concern about loose monetary policy.” What did God say unto Mises regarding independent central banks again? That government intervention never ever tends towards short-term goals by loosening rates? @ Karl I accept your invitation! Just what caused the GFC as it is fetchingly called in the msm? Had it anything to do with central bankers, who repeatedly said that they could see no asset bubble or that if one existed, it was none of their business? Selling liabilities as assets and dodgy accounting in banks and insurance companies? So that ultimately, unsigned loan applications were successful? Regulators dismantling all the “safeguards” put in place after the last depression? And the crisis continues, but because of the policy vacuum, all the pollies and their “economic” allies can do is print more money. (Far less than the private sector used to of course! But we can always go to war……) I am off to lie down before I get apoplexy. Merkel seems to be sensible. But then she is female. Remember Iceland! I’ll assume the supportive intervention is for the usual reason: editorial support. “Ms. Merkel condemns the combined judgement of Bernanke, King, and Trichet presumably because her own advisers think they know better” Funniest comment I’ve heard – My 80 year old mother knows better than those clowns – FAIL Merkel isn’t sensible… Although she seems to have enjoyed reaping the benefits of Schröder’s reforms… As regards Eurozone monetary policy, her implicit point appears to be that the ECB is not independent, but instead crumples under pressure from the Fed and its like… Hysterical. Before pillorying Chancellor Merkel it might be worth while to bear a few factors in mind. Chancellor Merkel is facing a Federal election in September. There is a growing popular feeling in Germany that Germany, once again, is being tapped to bail-out the profligacy of the PIGS. Unlike the Fed, the ECB, largely at the behest of the Bundesbank, was constituted to target inflation without a specific brief to consider general economic activity and employment levels. The German people appear to retain an over-riding horror of hyperinflation. The German people also shouldered the huge cost burden of re-unification from 1989, contributed significantly to the eastwards expansion of the EU and emerged with a much leaner export-focused economy that led, almost inevitably, to the liquidity surplus in the Eurozone which many financial institutions dissipated in a feeding frenzy on short term, highly-leveraged, risky returns and the PIGS blew on a property bubble. Given Chancellor’s Merkel’s Lutheran background I would not be surprised if she were looking for some evidence of remorse, repentance and reform. Instead, I suspect, she is seeing evidence of the 2007-Nostaligia that Colm McCarthy eloquently warned against in a previous post. Futhermore, I doubt she is unaware that the ECB, in the guise of providing continuing liquidity to banks, by accepting government bonds as collateral is indirectly financing government debt. This was finally confirmed by Dr. Somers before the relevant Oireachtas Committee, but it is a perversion of the role of the ECB. And I suspect other PIGS are playing the same game. The simple fact remains that the economic success of Germany contributed to the liquidity glut in Eurozone – as the export-driven growth of China (and East Asia generally) plus the unearned surpluses of oil and gas exporting countries contributed to the global liquidity glut. This fundamental problem remains; asset bubbles and financial sector irrationality are just symptoms. The challenge for current account deficit countries is to start producing the goods and services that consumers in the current account surplus countries wish to buy – and this must extend beyond the marketing of real estate and exotic financial instruments. Ireland has developed a strong track record as an export platform for MNCs, but rapidly increasing costs of doing business and infrastructure deficiencies have caused serious damage. Yes, we have to fix the banks and get the public finances under some measure of control, but there will be no future until the costs of doing business are tackled and there is serious investment in human and fixed capital. @ defenders of Central Bank Independence, I’d generally accept that central banks should be independent, but this is in the context of politicians typically wanting the punchbowl full to the brim. In this case, Ms Merkel seems to be urging caution. There is a need to make sure that any short term measures form part of a clear longer term strategy. In the ECB’s case, what are the conditions for emergency measures to be withdrawn. This is not clear at present, but it looks as though the Irish government and banks are forming long term plans on the assumption that certain facilities will be available on an on-going basis. A clear exit strategy would help identify weaknesses and create a more sustainable solution. In Ireland’s case, consideration should be given to future bank funding. Recapitalising banks to get credit flowing also requires access to funds (e.g. Irish Life & Permanent have a relatively good level of capital but low deposits). Although the ECB may provide these funds in the short term, what happens when this changes? Or what happens a bank that has a substantial amount of NAMA bonds as assets if the ECB rate goes to 5%? I’m not saying I agree with Ms Merkel but it is to be expected that countries with higher rates of saving and lower levels of private sector credit (like Germany compared to the US and Britain) will be less enthusiastic about quantitative easing. Compared to the grandstanding criticism that the Fed usually gets from American Congressmen, Ms Merkel is pretty mild. Within limits, it’s good for Central Banks to get some political pressure so they don’t become too insulated from the people. Everything in moderation. Comments are closed.