Fixing the monetary transmission mechanism

The Free Exchange blog on the Economist website features some articles on this topic:

19 replies on “Fixing the monetary transmission mechanism”

The general attitude to bank transmission mechanisms in the periphery seems to be “if it’s broken, don’t fix it”

The great thing about this crisis is you can pick sensible economic opinion from basically any date since crisis onset and it’ll be better than whatever crap the establishment are spouting

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The Wolf

The second response is that if governments need to run deficits, to support demand at a time of private sector weakness, they can always borrow from central banks. Yes, this is “printing money”. It is also an insanely radical policy recommended by no less insane a radical than Milton Friedman, back in 1948. His view was that the government could expand the money supply during recessions and contract it in the subsequent booms. A country with a fiat currency and a floating currency could, thus, stabilise the economy without destabilising credit markets


the Munch

“Global investors have recognised a fundamental truth, that this is not a sovereign debt crisis at heart, as Germany and the European Central Bank keep on telling us, but a banking crisis and a crisis of policy co-ordination failures. “

I wonder how much of the transmission mechanism failure is due, in Ireland at least, to the wider state of the economy rather than the abject state of the banks.

I mean, in Ireland, there are shocking levels of SME loans in distress. The riskiness of the SME sector would prohibit lending by even the most healthy of banks.

Most SMEs in the domestic economy depend on local demand, of which there is currently none. Given the over-indebtidness of households, the only way domestic demand is going to return is via inflation and nominal growth – both of which are impossible because of the Germanic philosophy of the Euro and the ECB.

How much longer does the political experiment that is the Euro have to go on before we get to radical change or dissolution?

@ wt

It’s multifactorial. Banks FUBR, mass contraction in export markets, ineffective economic approaches, policy incoherence at EZ level, emigration due to factors already mentioned, credit rationing leading to house price falls etc.

@ All

It seems to me that the really relevant contribution is “Banking union on the cheap will fail” as it combines both correct economic and political analysis. The “nostrums” of Schaeuble are, indeed, running out of road.

In this context, the CESIfo paper on the previously hot topic of Target 2 balances is relevant. I started reading it on the assumption that some disgruntled staff member of the ECB was about to bring an end to a promising career by confirming the theses advanced by Professor Sinn. Quite the opposite is the case. The expert paper dismantles what remains of the most erroneous conclusions drawn by him but also illustrates the near technical impossibility of unpicking the euro without major disruption to the global economy.

However, the conclusion drawn in the paper, and by Charlemagne, seems correct. Everything is on hold until the outcome of the German elections is known. That is unless the pressures building up, notably in Spain, make the wait politically impossible.

@ All

The reference in the last paragraph is to the “Banking union on the cheap will fail” paper.

Garicano is right on the money. But all of this was obvious two years ago. Here’s a notion: if this had happened in a well-run system, there would have been a European Parliament inquiry into the mis-design of the common currency, naming names, and another one into its mismanagement.

Whatever the ECB can do, it’s important that governments and central banks keep up the pressure on banks to lend to startups and SMEs with prospects.

Firms up to 5 years old are a key sector for an economy and what is needed is lots of creation as there is inevitably also lots of destruction.

My son recently got a reasonable level equipment finance loan without any security from AIB, for his recent startup. This wouldn’t have happened without external pressure.

I’m in optimistic mood this week….

Spain on Friday reported its first monthly trade surplus since 1971…Japan with the help of its cash bonanza reported the best G7 growth in the first quarter and it was forecast that the US budget deficit will fall from 7% in 2012 to just above 2% in 2015. The UK avoided a recession in QI and Sir Mervyn King was less gloomy than normal at its final quarterly economic outlook presentation.

France passed some labour market reforms and faced down the forces of social conservatism by enacting a same sex marriage law.

Richard Bruton announced another committee of worthies, this time to advise him on entrepreneurship!

It’s striking in the Irish parliament how so few are competent or interested to challenge policy makers on their ramshackle enterprise policy.

Jim O’Neill, the former Goldman exec and son of an Irish postman, who coined the term BRICs, wrote in the Telegraph this week:

To some extent, softer growth in China is not bad news for the rest of us. It is probably a major reason why a number of important commodity prices have seen significant reversals. That’s not great short term for many commodity-intensive producing countries, but it is good news for many others.

One of the reasons why the likes of the UK may have struggled to rediscover economic growth since 2008 is the persistent rise in imported commodity costs, adding to pressures on real disposable incomes.

But, if commodity prices are now easing, that’s no longer the case. It could also mean the decline in sterling since 2009 might still bring some reward for the economy, which has until recently been so hard to detect. Also, as long as China’s consumption continues to perform well, that is what really matters to anyone wanting to export more to them.

So what about the recent evidence from our own and other so-called developed economies?

@ Flj

As Rehn points out, the US is not the EU and the handling of the crisis is not a morality tale. It is rather a ding-dong between 17 nation states (with the odd intervention on the pitch of some outsiders, one of whom is rather burly and actually provides 75% of the financial services associated with the game).

FYI an interesting exchange between two well-known German economists, one of whom is the leader of the new AfD party, which sums up the German dilemma.

France, and especially Spain, will have to bring a lot more to the table if there is to be any move by Berlin on the Garicano menu. What is obvious is often not politically feasible whether in a domestic or an international context.

(As the text is made up of dialogue, Google Translate makes an intelligible job of it).


It’s interesting that Noonan and Corrigan are less confidant as the return to market nears.

They know of course that ‘conditionality’ means a continuation of the bailout with some better optics on sovereignty but the PR fig leaf that they want may not be forthcoming as Draghi wouldn’t want the OMT to be perceived as easy to tap.

@ MH

I agree! Personally, I would welcome a continuation of the involvement of the troika as there is as yet little or no evidence that the competence of Irish politicians and administrators has improved or that there has been any radical re-thinking of their “traditional” policy approach.

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