The ECB and Quantitative Easing

Commenter Eoin asks a good question “Should the ECB be doing quantitative easing?” My thoughts are as follows.

First, standard monetary policy tools work pretty well until interest rates hit zero.  When rates hit zero, these tools are pretty much exhausted (I know Willem Buiter has some interesting ideas to the contrary but these suggestions appear difficult to implement e.g. abolishing currency).  If inflation is low, or particularly if there is deflation, this may still imply real interest rates that are higher than desirable.

If the policy rate is above zero—the ECB’s main refinancing rate is one percent—then the first thing you should do if you are concerned about the state of the economy (and believe inflation to be contained) is cut the policy rate. Before the ECB considers any non-standard monetary policy initiatives to stimulate the economy, they should use the room they have left to employ the standard tool. 

Some ECB Governing Council members have, in the past, mused aloud that they don’t want to go to zero rates because they are worried about the complications associated with the zero-bound problem.   Effectively, this is saying “I’m staying at one and not going to zero because I’d really like to be at minus one” which makes no sense.

Second, if short-term policy rates are at or very close to zero, that doesn’t mean other important rates on longer-termed debt such as those on government debt or mortgages are zero, so targeted intervention in these markets by the central bank could reduce these rates and help to stimulate the economy.

The science on this is a bit murky. On the one hand, you can argue that financial assets are like any other product and that increased demand for them drives up their price, which implies lower bond yields. On the other hand, the primary force determining prices for individual financial assets is arbitrage (ketchup economics!) so there will be limits to the price that the general public will pay for a particular asset if there is a close substitute available.  

In practice, the way to think about this is that each asset usually has some underlying no-arbitrage price consistent with the case in which there are no transactions frictions but that, in reality, transactions frictons (bid-ask spreads, gaps in market pricing, difficulties in finding a buyer in tough times) are pretty important. So asset prices also contain a “liquidity premium” related to these frictions. If there is strong demand for an asset due to a central bank purchasing large quantities, this is likely to reduce the interest rate on this asset by lowering this premium.

However, in big markets like those for popular government bonds or mortgage backed securities, it appears that very large amounts of central bank money needs to be pumped into the market to obtain relatively modest reductions in rates. As of yet, the jury is out on the exact effect on interest rates of the Fed and BoE interventions, but they seem to have been modest. So, I’m all in favour of QE as practiced by the BoE and the Fed in the circumstances they found themselves in but it seems to be a pretty limited tool.

What about the ECB? Well, there’s a problem that applies to the ECB that doesn’t apply to the Fed and Bank of England. What do they buy? If they are focusing on government bonds, whose bonds should they buy? The BoE and Fed programs were open, clear and transparent. The ECB’s new program is secret and of uncertain length.

If the ECB were really undertaking QE as practised by the Fed, then they would first cut policy rates to near zero and then, if they were purchasing government bonds, they would purchase bonds of member countries in quantities proportional to their share of the ECB capital subscription. (Alternatively, governments could set up a Euro area bond with proceeds shared among the member countries and the ECB could intervene in these markets.)   I would be all in favour of a program like this if the circumstances warranted (and I think they might).

That this is not what the ECB are doing shows that this program is not quantitative easing in the UK or US sense, but rather a program to deal with fiscal crisis in some member states, perhaps motivated by a desire to contains its effects on the rest of the Euro area’s banking system.  I am far less enthusiastic about this opaque and poorly-motivated program.

Note that I got this far without using the press’s favourite term about QE “printing money.”  Clearly, it’s not printing money, since these transactions are all electronic and may or may not lead to an increase in the stock of currency. Beyond that, while the central bank creates money in the process of purchasing these assets, it also does this when it undertakes its normal monetary policy operations. These are normally temporary operations but, in the case of the ECB, the massive increase in the size of the refinancing operations in recent years is “printing money” every bit as much as QE, though it is never described as such. 

The picture usually painted of people running off to the shops to spend the newly printed money is pretty silly—the link between any particular measure of the money supply and economic activity is pretty tenuous.  In any case, QE is better seen as a program aimed at getting down interest rates on important instruments rather than something to do with firing up the printing presses.

46 replies on “The ECB and Quantitative Easing”

I doubt politically that Germany would agree to a EuroBond or should that be EuroBund for the moment. The statements by the Bundesbank Chairman seem quite viciously against the buying of bonds in general so I’m not sure if pushing Germany further would be a good move.

@Mossy I think thats a little premature considering EZ inflation is below 2% and deflation is a worry for a number of countries.

The 36B of bonds they have bought so far seem to be southern and Irish the lack of transparency on the issue is very worrying for the ECB who aren’t particulalrly transarent in geraly anyway.

This seems to be standard operating procedure for the EU institutions – everything kept in the dark and no transparency. The public line is “this is all very complex, we’ll sort it out, we’re working in your best interests and you have no need to worry your pretty heads about it”. The problem is that voters, seeing the mess this approach has landed them in, may no longer accept this line.

However, I think your general point is valid. This is not QE per se, nor is it the intention. The electronic transfer seems to involve purchase of bonds and the proceeds being placed on deposit in the ECB. Aiman, on the previous thread, seemed to suggest a complete “flight from risk”. Not a good sign, but could be a time to put some regulated assets on the market, as there is “good money” looking for secure, reasonable, long-term returns.

Inflation is desired because deflation is “bad”! Theft by small amounts of inflation allow democracy to work. Too much inflation will lead to higher interest rates.

Interesting times ahead!

Oh goodie, Hungary just said they’re going Greek – new government has said they will shortly announce the “true state of the finances”, apparently the previous government may have been fudging some data. Says chance of avoiding a Greek situation “slim” and talk of default “not an exaggeration”. Nice.

“”After the figures reflecting the true state of the economy (become public), within 72 hours an economic action plan must be put on the table,” Prime Minister Viktor Orban’s spokesman Peter Szijjarto told TV2 television.

“It cannot be about…an adjustment, about patching up (the economy)…measures aimed at improving the financial situation must be linked with deep structural changes,” Orban told the same television channel over the phone from Brussels.”

I highly doubt that ECB will ever resort to Q.E.First of all, of late,
have risen too many concerns about its “de facto”politization
as follow up to its involvement in the Eurozone’s bail-out, secondly
ever since it started its program of sovereign bonds’purchase, it came
under fire from the Germans, both A.Webel, governor, and J.Stark, chief
economist of the ECB, publicly voicing out their concerns about the
inflationary threats of such a policy. Its director has spent countless
hours defending the central bank’s stand in a number of interviews
to the German press.
However, to follow up on Paul Hunt’s comment, what remains of the
ECB’s mission if deflation is to spread around Europe ?
Imho, among the structural reforms called by the Brussels technocrats,
it would seem to me, given the number of “un-orthodox policies’used by
the ECB since the inception of the financial crisis, and what amounts to
‘shadow bail-outs’ for a very damaged European banking system, with
no lending activity ( lending to the private sector grew 0.1% yoy, while
the loans to non-financial companies further decreased according to the
ECB’s Financial Stability report ) thus providing them with liquidity, a good part of it being ‘parked’by the banks at the ECB, the time has come
to reform the ECB

And more…

“He did not give details on the plans. His spokesman reiterated the budget was in a “much worse” state than what the previous government put down in the budget law and “skeletons were continuously falling out of the closet”.”

Hungary default would directly affect the following exposures (assume this is total bank lending/assets there)…

Dec-09 numbers
Austria: $40bn
Germany: $31bn
Italy: $25bn
Belgium: $17bn

The expansion of central bank balance sheets since 2008 shows that, compared to the US and UK, the ECB has been very tardy i.e. it needs a large extra dose of QE.

The accelerating decline in Eurozone M3 shows that ECB policy has been a failure in combatting debt-deflation pressures. That is another factor pushing us towards QE.

The fall in Bund yields was yet another indicator pointing in that direction.

But the Austrian-school types who dominated the Bundesbank prevented the ECB from engaging in QE. Now, thank goodness, the politicians have intervened and given the ECB a hefty kick up the arse.

Herr Trichet can bleat as much as he likes about the ECB’s independence. But QE and Euro devaluation spells the monetary easing that we need but which he and his band of “experts” delayed and would rather have prevented. QE and Euro devaluation should disproportionately help Ireland.

But Irish government bond yields (and their yield premium over Bunds) continue to climb. That would indicate that the ECB QE is either insufficient and/or believed by markets to be insufficient.


While the distinction you draw between what you class as quantitative easing versus a policy to “deal with fiscal crisis in some member states” due to the method of ECB execution, surely the salient monetary affect is the same – a increase in high powered money via an expansion in the ECB balance sheet.

But a question, does the purchase of what is now sub-investment grade (by S&P at least), provide disproportionate relief to the aggregate balance sheet of the financial sector (subsitution of liabilities on the ECB traded for liabilities on the Greek state should increase the risk adjusted asset base of financial corporations).

@ Cormac,

The Cavalry better turn up fairly soon. Irish 10 years out to nearly 5.5% v a peak of over 6% on the week end prior to the ECB. Bank funding is allegedly drying up too. Banks do not want to lend to each other, preferring instead to give it to the ECB. We are lucky we have all that cash on deposit down at NTMA as funding at this level of sovereign yields is getting suicidal. Bank Treasurer’s must be sweating over liquidity again.

The public perception of printing money is crucial to the working of QE. The whole idea is to create an expectation of inflation.

Roosevelt did this in the depression. He took several steps to create inflation, thereby forcing frightened moneyhoarders to reinvest their money, or watch it lose value. it worked spectacularly, and at a global level, I am convinced that a modest amount of inflation is the only thing that will restart the investment cycle. At present, there is almost no penalty for keeping money in ultra-safe havens with little or no-returns, so why would investors risk their money on new ventures. Might as well stuff the mattress. A little inflation would change the whole dynamics of the situation.

Or Central Banks could just raise interest rates, encouraging depositors to place their cash in the hands of the money transmission mechanism… which do you want first, the cart or the horse?


I thought thta was a useful expostion of QE in general. But I too am struggling with the distinction beween DFed/BoE and BoJ (I think) QE, and the ECB’s actions. The latter is not unsterilised intervention in the short-term money markets as previously but outright purchases of government, and other bonds.

Because of this, it seems it will be the subject of a challenge, for allegedly contravening the ECB’s own statutes in the German Constitutional Court.

But if the stated motivation is different in the case of the Fed and BoE versus the ECB, the action is exactly the same.

A good dose of inflation, as a consequence of aggressive quantitative easing, would bailout what is essentially a grossly overleveraged system.
Would that be such a bad thing?
Would it be better than a ‘lost decade’ of deflation?
Could another bubble be the least painful way out of the current mess?
With the right ‘spin machine’ we actually could get people “running off to the shops to spend the newly printed money.”
In fact that would be a much easier job than you seem to realise.
Maybe, “QE is better seen as a program aimed at getting down interest rates on important instruments rather than something to do with firing up the printing presses,” but I kinda like the idea of firing up the printers, it just seems so easy.

Uber-bear and Royal Bank of Scotland chief credit strategist Bob Janjuah has some interesting thoughts on all of this …………..

Quantitative easing would have been great about 6 months ago when the euro was too strong. The ECB could easily have printed about 300 bn at that time and taken it all in sinorage with little or no effect on inflation or the euro value. The Brits and the Yanks did it but the ECB have their head in the sand on this one, driven by the Germans and events 70 years ago.

@ Cormac

‘Sadly, as monetary economics is barely understood and as Europe lacks a common polity, the ECB will probably escape any real accountability for its repeated policy failures’

The ECB is doing it’s (orthodox) best, but it’s not just monetary economics which is badly understood. It is is time we put the politics back into political economy.

There is no shortage of liquidity in the Eurozone; the problem is demand.

The US poor private sector employment data on Friday illustrates that the recovery is going to remain tepid at least for sometime in developed economies.

There has been a very severe recession and contrary to some expectations, the pre-Aug 2007 credit and asset booms are not coming back to fuel the world economy. The switch of the world’s growth engine to emerging economies is not a substitute for returning consumer spending to the good old days.

The culture of lending has changed and the big banks have been making some big profits from trading in securities rather than from the real economy.

US lending growth in 2009 was the lowest since 1942.

Apart from weather issues, Eurozone retail sales in recent months have been hit by the end of car scrappage schemes.

German manufacturing production is 17% behind its historical peak; it was however the only EU country to have increased employment in the past 12 months.

Cormac Lucey’s point about the ECB’s “repeated policy failures” is irrational.

The Fed took on some Bear Stearns assets and bailed out AIG and the federal mortgage financiers.

Should the ECB directly guarantee business loans?

As for Ger’s point on inflation, it has worked at times in the past when it was unexpected. However, with the end of the “China effect” — where import prices of many consumer goods fell year after year — and greater likelihood of commodity price spikes, inflation isn’t a problem until it suddenly becomes one.

It would help to have transparency on the exposures of European banks and on the fiscal side, all the big EU economies have to contend with rising debt.

The following is EU27/China trade data for 2009:

Trade in goods

EU goods exports to China 2009: €81.6 billion
EU goods imports from China 2009: €214.7 billion

EU’s imports from China are mainly industrial goods: machinery & transport equipment and miscellaneous manufactured articles. EU’s exports to China are also concentrated on industrial products: machinery & transport equipment, miscellaneous manufactured goods and chemicals.

Trade in services

EU services exports to China 2008: €19.9 billion
EU services imports from China 2008: €15 billion

There are few consumer products apart from Nokia phones, that China would import from Europe; dairy and meat products can be supplied by Australia/NZ.

So a rise in Chinese demand would be mainly for the ouput of world class companies such as Siemens and VW.

For more on german exports, see here:

@ Dave

The Founding Fathers recognised in the Constitution that the people could only aspire to a “more perfect union” and so in Uncle Miltie’s final location, California, it is today also a fiscal train wreck as Democrats used a simple majority to spend as much as they could while Republicans used their power under the two-thirds requirement for taxation changes to block the taxes needed to pay for that spending.

The PIIGS have some infrastructural capital after gorging at the trough.

Allowing entry to traditionally badly governed countries with cultures of corruption and a weak sanction mechanism was a mistake.

They have the option now to check out of the Hotel California but as the Eagles sang, it would seem like they are still in the manure business.

Reform in countries like Ireland only happens when there is a deep crisis: It hasn’t happened yet.

@ Cormac

Your graph suggests that the old monetarist at the BUBA would now be cutting rates to zero given the trend in M3 and even comtemplating even more radical anti deflationary measures. Instead Weber and Stark seem intent only on undermining ECB policy. It cannot be because they are worried about inflation. There has to be another consideration. the only one I can think of is fear of the wrath of German voters. When Central bankers start kow towing to populist politics, all credibility is gone.

One hope the G20 Finance Ministers get thse guys into a corner and talk some sense into them.

@ tull

Populist politics is what elected Hitler. The Nazi disaster happened because Post WW1 victors decided to ‘squeeze Germany until the pips squeaked’. Ex nihilo nihil fit. Millions paid the price of that vicious imposition, whose many evil legacies include the Middle East mess.

Central bankers are big political beasts. What sort of politics should they ‘kow tow’ to ?

@ Paul

I hear what you are saying and you are right. I thought ECB council members were supposed above partisan politics and act in the general interest of the region. However, Weber and Stark look too partisan at this stage and see to be following a narrow Bild like agenda.

Having “Sun readers” as policy makers is not what we need right now.

In 1933, President Roosevelt could have had his 40% dollar devaluation but in adopting an isolationist stance in the World Economic Conference, he emboldened the Nazis in Berlin and militarists in Tokyo.

@ tull mcadoo

The suggestion that Axel Weber and Jürgen Stark are reacting to an agenda set by a tabloid newspaper is risible.

We want people of principle in public life until it doesn’t suit.

Surely the self-interested position for Prof. Weber is to go with the consensus to ensure a smooth path to succeed Jean-Claude Trichet in late 2011?

You can only be an absolute eejit if your view is that Axel Weber and Jürgen Stark are at the level of “Sun readers.”

@ MH,
We want people of competance and principal in public life. The ECB Conduct of Monetary policy over the last decade has to use your word been “risable”. It was too loose for the periphery in the early years and too tight for the EZ at the onset of recession. Remember, the ECB actually tightened pre Lehman as the world economy went of the cliff. If you do not believe, consult Mr Lucey’s graph of M3 and you will see that the ECB presided over a credit bubble and now are fiddling while the EZ burns.

We should be very worried at the flattening of the risk free bund curve, the blowing out of credit spreads, the decline in M3 growth and the collapse in the Euro. They are all signalling to us that the EZ economy is heading for a serious depression that will lead to a wave of defaults and possibly a break up of EMU, unless policy is changed.

We rightly slam public and private governace here for its role in creating our unique mess, but I fail to see whay influential members of the ECB council should not be immune from criticism.

That said, I take your point about comparing Stark and Weber to sun Readers. Perhaps I was a little hot headed. Accordingly, I wish to apologise to all Sun Readers.

@ tull

Thanks for the nod. The ECB’s efforts to export sound finance reminds me of the US in their efforts to ‘export democracy’. Like Christianity, the receiving culture has its own way of assimilating the concept. Gary Trudeau has a nice take on it all.

I don’t blame the Germans for being pissed off with us PIIGS for our economic illiteracy. Scheize. It’s a natural reaction, but it’s best to see the wreckage as part of life’s rich tapestry.

Europe is a work in progress. Die Schau muss weiter gehen.

@ tull

It’s great to be a Monday-morning quarterback!

The ECB was both responsible for a credit bubble and was obsessed with inflation!

The ECB’s only mandate is price stability over the medium term. As the oil price was heading for $150 per barrel, the ECB was cautious in raising rates in mid-2008.

Ciarán O’Hagan of Société Générale wrote in the FT days before the July 2008 meeting of the governing council: “The 25 basis-point rise in interest rates that the European Central Bank is expected to announce on Thursday is nothing more than a token move….There is now a window of opportunity for the ECB to reinforce that credibility and raise rates by far more than the market expects. It should not be allowed to pass.”

When the facts changed in Sept 2008, the ECB began to aggressively cut rates.

It should not have been a surprise that the ECB would set policy rates for its biggest areas of economic output.

Besides with US rates at 1%, how high could EA rates go without damaging exports?

Greece and Portugal account for less than 5% of the Eurozone’s GDP. Even when Ireland and Spain are added in, the so-called peripheral countries or PIGS account for less than one-fifth of the region’s GDP.

In the past the Bank of England has set rates based on house price inflation for the SE of England when low rates would have been better for the North of England and manufacturers.

In the period 1999-2008, in terms of trade and jobs creation, the euro can be judged a success.

At Davos in Jan 2007, Trichet warned that investors needed to prepare themselves for a significant “repricing” of some assets.

More than a week later, HSBC warned of big subprime losses at its US operations.

In the succeeding months, Bernanke/Paulson said the issue could be contained.

On Aug 9th of that year, when credit markets froze, the ECB injected €95bn into the Eurozone banking market;

In the US, the lowering of the discount rate to allow banks get emergency funding at the Fed’s so-called “discount window,” failed to have an impact.

By December, the other central banks had moved towards the ECB position of auctioning funds to the markets against a wide range of collateral, rather than expose individual banks to the stigma of seeking emergency funding.

Eaten bread is of course soon forgotten.

EA manufacturing and services sectors are not facing depression but serious overdue reform in countries such as Ireland is needed to get the support of taxpayers in other EMU tom assist them.

@ Micahel Hennigan

When the ECB raised interest rates in July 2008, Eurozone M3 had already been in decline for a number of quarters. Based on precisely the monetary factors which the ECB claims to follow (“second pillar”), there was therefore no need for that interest rate increase and it was damaging to the wider Eurozone economy. It accelerated the deflationary pressures which triggered the current recession. (I sharply criticised that interest rate increase at the time in Business & Finance).

But the ECB is obsessed with its own credibility. So they decided, unanimously, to raise interest rates then. In doing so they showed more interest in their jobs than in the jobs of the European citizens who ultimately pay them.

We now have M3 declining in the Eurozone and a serious threat of a Eurozone-wide banking crisis. A double-dip across the entire Eurozone is an increasing liklihood. And the ECB has been forced into action – but by political pressure rather than by its own expert insight.

On Thursday May 6th, Herr Trichet said (speaking in French) “non, non, non” to the question of whether the ECB would buy Greek government bonds. Yet, on Sunday May 9th, the ECB effectively decided to do just that within minutes of Eurozone finance ministers announcing their $750bn emergency fund.

The ECB’s rhetorical insistence on its independence and on unanimous decisions at its governing council are not the actions of a strong organisation. They are the symptoms of an insecure organisation. It’s all rather reminiscent of our own dear central bank, now awaiting publication of Dr Honohan’s diagnosis.

hi Karl

fascinating tpic

2 observations

the ECB should not be sterilising their bond purchases now as there is no outright risk of inflation in the medium term horizon

secondly and more importantly
the BoE did QE and it did impact on bond yields of gilts and corporates so it was successful
however it did nt lead to any noticeable increas in money supply as had been expected

my take from this is that
the ECB will need to do proper QE without sterilisation very soon indeed

however i fear they have missed teh boat as a 1% refinancing rate is too high – i agree with you here – and they are loath to increase or risk increasing hte money supply

result will be devastating…..stagdeflation scenario…. no good news in the offing i m afraid

yours etc Kevin

“Paul Krugman argues strongly in favour of quantitative easing …”

Not really. He argues strongly in favour of increased fiscal deficits. He will argue in favour of QE later. Then he will argue in favour of outright debt purchased by central banks.

I take issue with one point in his piece, which is the same issue I always take with him:
“Counties not in that situation are not facing any pressure from the markets for immediate cuts; as of this morning, 10-year bonds were yielding 3.51 in Britain, 3.21 in the US, 1.27 in Japan.

Yet the conventional wisdom now is that these countries must nonetheless cut — not because the markets are currently demanding it, not because it will make any noticeable difference to their long-run fiscal prospects, but because we think that the markets might demand it (even though they shouldn’t) sometime in the future.”
He is talking nonsense. Greek bond spreads (over bund) more than doubled in a couple of weeks. The bloomin’ yield doubled in not much more than two weeks! The country went bust in a month. Who else is stupid enough to play that game of chicken?

The Japanese experience, IMO, and despite (or maybe because of) what Richard Koo says, may be the best we can hope for. Periodic stimulus shots to shorten the length of the balance sheet recession, otherwise known as debt-deflation. The debt must be defaulted (written down over time is the soft version of this), repaid (at rearranged terms is the soft version of this) or replaced (sovereign debt replacement is the soft version of this). The problem with all the soft versions is that they take a long time before their effects wear off, as we see from Japan. The problem with the hard versions is that they are really hard and the risks are huge (as we may see in the price of gold).

@ MH

Ciaran O’Hagan, sometimes of this paris will not thank you for reproducing that quote. It only goes to prove that even Homer Nods and how ever much we prophesy here, we stand a 50/50 chance of being dead wrong.

Look back to 2008 and the world economy was entering a slump and the woorst banking crisis was slowly unfolding. The ECB RAISED rates just a matter of weeks before Lehamns, WaMu, Depfa and Anglo collapsedTalk about timing.

I think Cormac Lucey’s critique of the ECB is pretty devastating. Since inception they have been informed by the trend in monetary aggregates. The hard men of the BUBA on the council are supposed to be guided by this particular North Star. Yet what did they do. When M3 was growing strongly in the EZ, policy was too loose and they were tightening when it was declining. Now when most of the indicators are signalling there is a deflationary problem these guys should be exploring all measure possible. Yet they seem intent on actually tightening fiscal policy acroos the EZ, not just in the periphery and the hard men seem unwilling to confront the problem.

Why would we want to be a member of a club where policy is determined by incompetants. Unless of course the alternative was to be run by even bigger incompetants. Perhaps we should give Mervyn a ring.

@ Cormac Lucey


For an anti-euro fundamentalist like yourself, I’m not going to try and change your religion.

M3 had fallen slightly in mid-2008 but was still at double its target level while the other “pillar” was in the stress area of the barometer.

As to your reference to Dr. Honohan’s forthcoming verdict on the dismal dozyland on Dame Street, as a member of the PD nomenklatura that provided the chorus for economic arson, it would indeed be a surprise if any of you accepted your share of responsibility.

@ All

American economist Dr. Adam Posen who is a member of the Bank of England’s MPC writes in The Economist on Japan: troubling that huge monetary creation seems to have had no impact. The general assessment by econometric investigators to date is that QE did have some impact on inflation expectations and expectations about monetary policy as a commitment mechanism, but had little direct effect on asset or other prices…we need more humility about what we are capable of doing with monetary policy once deflation begins, especially with unconventional measures once the zero lower bound on interest rates is reached.

Monetary policy has been unable in Japan to remove deflation quickly in any easy way. Movement in prices there (or even in the UK today) has hardly been commensurate with what many of the monetarist persuasion would have predicted, given the scale of bond purchases undertaken. Looking at Japan, it is clear that QE had the right sign, in the sense of removing fears of tightening, but did not have a predictable or even large short-term result in surmounting deflation.

So if a currency falls, those export nations with massive balances will dump it! Devaluation may overshoot? There has been a substantial counter argument that says the $US will get stronger in this GFC. Flight to ahem, strength! Can’t buck the market!!!!

I said risks seem to be increasing and you seem to agree. Is this the last gasp at making $ out of OPM? The real economy seems more and more seperated from the “investment” economy. Until the latter collapses altogether?

The trend to monitor folks who are building up cash balances ouitside the banking system continues. It suggests that some day, there will again be a bank closing and a few days later, a new currency launched? If the US is going to do this, will the Euro follow? A maximum amount exchanged per head? Someone has plans in the works, with many possibilities to be covered?

@ yoganmahew

Debt hawks, such as yourself and Niall Ferguson, make a compelling case that, over the long term, our ever increasing debt and deficits will take us all to ruin.
Admittedly Krugman doesn’t give a good explanation for how we’ll deal with problems in the long-term, especially if we adopt a Keynesian strategy of spending our way out of recession.
But neither do debt hawks acknowledge the short-term pain and misery that will come from cutting spending in the midst of a weak recovery, actions Krugman says will actually exacerbate the debt-and-deficit problems by reducing tax receipts.

A quick-fix solution to current problems would be for the ECB to just bite the bullet and start mopping up everyone’s debt.
Although, the German Constitutional Court is now weighing the possibility of imposing an interim order against Germany’s participation in the E750 billion EU/IMF fiscal rescue package, as reported in yesterdays German Der Spiegel magazine (I personally believe this is a non-runner as, I believe, German industrialists secretly have no problem with quantitative easing, which will debase the currency and boost their exports) …..

Why is everyone so afraid of default?

Let risky instruments asssociated with bad sovereign investment go to the wall – they will implode, forcing PIIGS to actually undertake the necessary reforms instead of paying lip(stick)service to them.

Then, the conservative capital will flow into those instruments which actually represent low-risk, forcing down the price on Bunds etc.

The ECB should only worry about price stability. Seems to me prices are within target now, so why are we worried?

“Debt hawks, such as yourself and Niall Ferguson, make a compelling case that, over the long term, our ever increasing debt and deficits will take us all to ruin.”
Oh, don’t mistake me for a debt hawk… I’m a deficit hawk 😉

“But neither do debt hawks acknowledge the short-term pain and misery that will come from cutting spending in the midst of a weak recovery, actions Krugman says will actually exacerbate the debt-and-deficit problems by reducing tax receipts.”
Eh, you are doing us and debt hawks a disservice. Nobody is under any illusion that cuts will be very hard and they will impact growth. See my last paragraph above. The question one must satisfy oneself on is which is the harder and which is the fairer.

Having made the mess, is it fair for us to leave it to our children and grand-children to clean it up through a period of stagflation? Or should we take our depression hangover for the wild ride we’ve given outselves.

The quick-fix you propose is indeed the end-game for Mr. Krugman, I believe. It and inflation, anyway (i.e. monetising debt). I agree with you that if it is the end game, it should happen now – better to do it while there is outright deflation.

@ Michael Hennigan

You are uttering a falsehood when you suggest that I am an “anti-Euro fundamentalist”. I am not.

Please try not to attribute views to me except those which I have actually uttered, if you can. Feel free to make as many personal comments as you like – it stimulates debate!

My view is that the Euroarea, as constituted, was nowhere near an optimal currency area.

Ireland, Greece, Spain and Portugal should not have joined. It’s questionable whether Italy should have joined. A core of Benelux, Germany and France would have been economically feasible and advantageous. But politics trumped economics and now we get to pay the economic price.

I have held that view since the mid-1990s when I was working in banking in Frankfurt. It looked pretty obvious that a large cut in the price of Irish borrowing (interest rates) would stimulate a large rise in the demand for borrowing.

Marry in haste, repent at leisure.

@ Cormac Lucey


I don’t make personal comments e.g. James Dillon’s remarks in the Dáil, that his antecedents were fighting for Ireland while Dev’s were “bartering budgerigars in the backstreets of Barcelona.”

It’s legitimate to make the point about the PDs and I acknowledge that you have said in the past you did warn about the direction of public policy.

Nevertheless, you were an insider as consigliere to the last de facto leader of the party.

@Cormac Lucey

Don’t Hungary, Iceland and Latvia suggest that the Euro is actually not particularly central to the European debt crisis? A priori, it would seem very optimistic to suggest that more flexible exchange-rate arrangements in the EU would have turned back the assault of the global credit madness.

I can see a limited value of this and all of its value depends on which bonds are being bought.

If safe bonds are bought (one example would be German government bonds), then the issuer can more easily engage in deficit spending/investing which hopefully would drive some demand.

Many investors are desperate for security. Drive up the cost of security by decreasing the yield and maybe the fiscally responsible then can engage in better spending. Paying less interest to banks and the money saved can be used for structural investments.

Buying high risk bonds is a waste of time and money; the ECB should not engage in high risk activities nor does it have the mandate to do so.

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