Thursday, November 07, 2013

Conventional wisdom is killing the eurozone

It's not as though our "quality press" doesn't regularly produced shabby commentary. Two words: Tom Friedman.

But this week I've been particularly impressed with a couple so far.

One was Very Serious Person Richard Cohen's What art says about the past Washington Post 11/04/2013

He actually says there than until he saw the 12 Years A Slave movie - a 2013 film - he never before realized this: "slavery was not a benign institution in which mostly benevolent whites owned innocent and grateful blacks. Slavery was a lifetime’s condemnation to an often violent hell in which people were deprived of life, liberty and, too often, their own children."

It's nice that Very Serious Richard Cohen, famously Very Serious about going to war in Iraq in 2003, has just learned what any middle school graduate should have a basic grasp of. But, gosh, maybe someone should show him a war movie so it might dawn on him than in wars lots of people get killed and maimed and stuff. Or maybe he's just been talking to the voices in Maureen Dowd's head. I had to double-check to make sure this wasn't a parody from the Onion.

The other was an economics commentary by Christian Rickens, Zinspolitik der EZB: Der Westen verlernt das Wachstum Spiegel Online 07.11.2013. He strings together so many lazy, conventional, conservative notions in one column that he could be an economics adviser to Angela Merkel!

Poor Rickens is just perplexed and puzzled and perturbed by the fact the ECB has been sinking the interest rates as low as they will go and still it's not producing much of any economic growth. He's just bewildered by the whole thing.

Maybe he hasn't noticed the depression that's been going on since 2007-8. He also seems never to unaware of the concept of interest rates up against the zero lower bound. Paul Krugman has been explaining it for years, as in this 10/15/2013 blog post, Five On The Floor:

As some of us tried to argue right from the beginning, hitting the zero lower bound changes everything. It’s not just that the rules change for monetary policy, although they do: some people have been warning for the whole five-year period that the surge in the monetary base will cause runaway inflation, and it keeps not happening. It’s also true that we enter the territory of paradoxes; the paradox of flexibility, but also, and more crucially, the paradox of thrift, in which attempts by some players in the economy to save more end up leading to less, not more, investment.

For those who don’t know or don’t get the paradox of thrift, it’s actually very simple: if people (or the government) cut their spending, and the Fed can’t offset this move by cutting interest rates, the economy will contract — and the economy’s contraction will reduce the incentive to invest, so that investment actually falls.
He goes on to show how the eurozone's recent experience has been a grand illustration of the "paradox of thrift." He also notes of the paradox of thrift when interest rates are basically zero, "I know that many economists just refuse to accept this proposition, which seems absurd to them." I'm not sure that Christian Rickens has even heard of it.

Gavyn Davies recognized in a post a few days how important recognizing the zero lower bound and its importance for economic policy, The ECB confronts the zero lower bound 11/03/2013: "Given the constraint of the zero lower bound, this suggests that they [the ECB] should be contemplating a more dramatic shift in strategy, such as area-wide quantitative easing, if only to get the exchange rate down."

ECB cuts interest rates to new low, worries about recovery stalling Euronews 11/07/2013:

The ECB lowered interest rates again, but has not undertaken the unconventional monetary policies that we've seen some of from the Federal Reserve and the Bank of Japan, i.e., quantitative easing. A Bloomberg View editorial, Don't Jump Onto Europe's Bandwagon 11/07/2013 explains:

The U.S. Federal Reserve and (belatedly) the Bank of Japan are buying assets on an enormous scale with the aim of lowering long-term interest rates. This quantitative easing has risks, but in both cases the evidence suggests it has worked. The European Central Bank, though, has largely refrained. It bought bonds at the height of the crisis but neutralized the effect of the transactions on the money supply. It also undertook a big program of short-term lending to banks, but that's winding down. No doubt there are legal and, above all, political impediments in the European Union to Fed-style asset purchases, but these must be overcome, and the ECB is best-placed to make the argument.

Furthermore, it's universally agreed that the euro area needs not just a single bank supervisor — which it now has in the form of the ECB — but also a single bank-resolution mechanism. Germany and like-minded countries, however, won't hear of bailing out failing banks or their financially stressed national governments. Without a single bank-resolution mechanism, the toxic link between distressed banks and distressed governments will remain. So long as that’s true, recovery will be held back and the euro area's supposedly integrated capital market will be at risk of splintering into separate zones.
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