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.

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.

Cover up failing? The threads are there, but will anyone pull them? Allowing, or worse, ochestrating the false description of a loan as a deposit directly enabled over lending ……. that was a cover up too! How far should we go back?

QE is not what it purports to be!

Cormac,

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.

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. http://en.wikipedia.org/wiki/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.

“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.

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.
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) …..
.
http://imarketnews.com/node/14493
.

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?

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!!!!

Yoganmahew
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?

Cormac,

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: It..is 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.

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.

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).

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

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.

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.

http://www.finfacts.ie/irishfinancenews/article_1019628.shtml

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.

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.

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 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.”

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.

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 ?

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.

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.

This analysis of the PIIGS crisis is the most sober/accurate analysis I’ve read from the US so far. Not sure if the writer is American or European.

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:

http://www.finfacts.ie/irishfinancenews/article_1019847.shtml

‘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.

Uber-bear and Royal Bank of Scotland chief credit strategist Bob Janjuah has some interesting thoughts on all of this …………..
http://www.cnbc.com/id/15840232/?video=1513069570&play=1