Sunday, June 08, 2014

The ECB tries to fight deflation, the lattter-day Heinrich Brünings wring their hands in despair

The ECB has recently decided to lower the cost of capital lent to banks even more and to actually charge banks a small negative interest rates with funds they park with the ECB. They don't have much wiggle room in taking such actions, because in the depression conditions of the eurozone, interest rates are already up against the zero lower bound and several eurozone countries are actually in deflation (Cyprus, Greece, Portugal and Slovakia). And the eurozone as a whole is in a "lowflation" situation headed for actual deflation.

Heinrich Flassbeck explains why the ECB's efforts are pushing on a string, desirable though he considers them to be, in Die EZB senkt die Zinsen: Eine richtige Entscheidung, aber keine Lösung für die Eurokrise flassbeck-economics 06.06.2014: "Weil die EZB deflationäre Tendenzen bekämpft, muss sie alles dafür tun, dass das Wachstum in Europa anspringt." ("Because the ECB is fighting deflationary tendencies, it must do everything that would start up growth in Europe.")

He praises the ECB under its current chairman Mario Draghi:

Sie leugnet die Deflationsgefahren nicht, sie verharmlost sie nicht, sie nimmt sogar die (lächerliche) deutsche Kritik an der „Enteignung“ der Sparer in Kauf und sie kündigt an, noch andere, unkonventionelle Mittel einzusetzen, wenn es so nicht reicht.

[It isn't denying the danger of deflation, it isn't minimizing it, it is even taking in stride the (laughable) German criticism about the "expropriation" of savers and it is signaling that it will employ still other unconventional methods if it doesn't suffice.]
And he explains the basic macroeconomics of why the ECB is pushing on a string here:

Was nützt es, Banken mit mehr Eigenkapital auszustatten oder mit einem negativen Einlagezins für geparkte Gelder bei der EZB zu bestrafen, wenn sie keine Kredite vergeben, weil sie keine Kunden haben, die in Sachkapital investieren wollen? Und es fehlt an Kreditkunden für Sachinvestitionen, weil die wiederum nicht ausreichend Kunden haben, die genügend Güter nachfragen, um auch nur die vorhandenen Produktionskapazitäten voll auszulasten.

[What good does it do to provide banks with more internal capital or to punish them with a negative savings rate for funds parked with the ECB, if they aren't giving out any credit because they don't have any customers that want to make capital investments? And they lack customers for credit to make capital investments, because they in turn don't have enough customers demanding enough goods that would even use up the current production capacity.]
Conventional wisdom in Germany is even more fixated on pretending that the Great Depression never happened than is the case in the US. Which is saying a lot. So with the Christian Democrats and the Social Democrats joined in Chancellor Angela Merkel's Grand Coalition government in Germany and backing her ruinous Herbert Hoover/Heinrich Brüning austerity programs for the eurozone, much of the public discussion over the eurozone crisis is kind of whacked.

The ECB's latest actions of course put earnings on conventional savings accounts down even closer to zero than they already were. "It's expropriating money from savers!", say the Heinrich Brüning fans. Marc Beise in in a Süddeutschen Zeitung video blog, "Die Droge Geld ist keine Lösung" 06.06.2014 argues that the ECB exceeded its mandate with the action (not so), grumps that the ECB is paying attention to something other than the German economy in isolation, it's going to hurt old people (a stock argument for tight money) and complains that it gives too much help to the crisis countries in the eurozone, and ends with a sneering warning that this will generate inflation.

The SZ's Alexander Hagelüken joins in the conventional wisdom garment-rending, Geldverschenker ohne Weitblick 05.06.2014. He uses a propaganda dig that also appears in Beise's commentary: that the ECB is acting like the American Federal Reserve. Yes, center-right and center-left opinion in Germany is actually in such a state of macroeconomics-denial that the American Fed looks like a dangerously radical model to them.

I'm beginning to think the German media's rush to the American journalistic model of groupthink and lazy reporting is advancing at a faster pace lately. The Fed has a dual mandate of guarding both price stability and combating unemployment. The fact that most of the time it cheerfully ignores the latter doesn't mean it's not part of the mandate, and it should be. In recent years, under Fed chairs Ben Bernanke and Janet Yellen, it has used measures like "quantitative easing" to give more attention to the employment mandate. Much to the horrors of American conventional wisdom, of course. And, like the ECB today, with interest rates bumping up against the zero lower bound, there's really not a lot the Fed can do to increase growth, though every little bit helps. (There's a lot to the heterodox view that the Fed's powers to influence the course of the economy are generally vastly over-rated, but that's a topic for another time.)

The ECB has a mandate for price stability but not for maintaining a healthy rate of employment. It's one of several structural problems with the euro currency zone. The dig that Hagelüken and Beise make that the ECB is acting like the Fed is basically just a snarky but also deliberately obscure way of saying that the ECB is exceeding its statutory authority by its recent action to loosen the money supply. And in that context, the conventional assumption is that it means keeping inflation low.

Hagelüken's opening sentence is telling in this regard: "Ein richtiger deutscher Bundesbanker hält natürlich nur ein Modell einer Zentralbank für angemessen: das der Deutschen Bundesbank." ("A real German central banker naturally holds only one model of a central bank for adequate: that of the German Bundesbank.") The key word here is German. Hagelüken and Beise in their commentary don't give a flying flip about the eurozone economy of which Germany became a part like all the other members when they joined the eurozone. They are using the narrow nationalistic focus that Merkel and her party as well as the Social Democrats have embraced and that has brought the eurozone to its current chronic crisis.

And what's a good whine of this kind with our old friend hyperinflation? "Vorbei die Zeiten, als Europas Währungshüter nur auf Preisstabilität starrten, als lauere hinter jeder Ecke das Inflationsgespenst von 1923," Hagelüken mourns. ("The times are goine when Europe's guardians of money were fixated only on price stability, when around every corner the ghost of the 1923 inflation lurked.")

Awesome! He doesn't mention the German H or N words, but all good conservatives know that the hyperinflation of 1923-4 brought Hitler and the Nazis to power in 1933! Like this:

Table from: Peter Gay, The Dilemma of Democratic Socialism: Eduard Bernstein's Challenge to Marx (1952)

BTW, Heinrich Brüning, "the Hunger Chancellor," was in that office 1930-32 pursuing Merkel-type austerity programs in Germany itself during the start of the Great Depression. I'm just saying.

Mark Schieritz explains that even in a narrow interpretation of the ECB's overly-restrictive official mandate, it should be doing whatever it can right now to combat lowflation/deflation (Draghi darf das Zeit Online 05.06.2014):

Es ist die Aufgabe der EZB, für stabile Preise zu sorgen. Darunter versteht die Notenbank eine Inflationsrate bei nahe zwei Prozent. So sind die Regeln. Im Moment beträgt der Preisauftrieb in der Euro-Zone gerade mal 0,5 Prozent – eine klare Zielverfehlung also. Die Vehemenz, mit der die Zinsentscheidung hierzulande kritisiert wird, ist deshalb unehrlich: Läge die Inflation so weit über dem Ziel, wie sie jetzt darunter liegt, dann würde halb Deutschland nach höheren Zinsen rufen.

Wer Draghi zum Stillhalten verdammen will, der ruft ihn dazu auf, die Regeln zu brechen. Das Argument, die niedrige Inflation spiegle nur die nötige Kostenanpassung in Südeuropa wieder, zieht jedenfalls nicht mehr: Selbst im boomenden Deutschland ist die Teuerung zu niedrig.

[It is the duty of the ECB to concern itself with stable prices. By that the central bank understands an inflation rate of around 2% {the ECB's current official target rate}. Those are the rules. At the moment, the rise in prices in the eurozone is averaging barely 0.5% - a clear falling short of the goal, therefore. The vehemence with which the decision of interest rates is being criticized here in Germany is thus dishonest: if inflation was running so far over the target as it is currently running under, then half of Germany would be crying for higher interest rates.]
There is a danger that the latest actions can create new bubbles that will add to the financial problems while doing little to counter deflation and depression. As Flassbeck writes, "die Staaten sie in ihrem Liberalisierungswahn geradezu dazu ermuntert haben, durch Investments an den Märkten für vorhandene Vermögenstitel virtuelle Vermögenswerte zu „schaffen“, die sich irgendwann wieder in einem großen Knall in Luft auflösen werdem [sic]" ("the state in their liberalization frenzy have all but encouraged [the banks] through investments in the markets for existing asset titles to "create" virtual asset values, which with then sooner or later with set off another big bang in the air").

In other words, the neoliberal deregulation mania has created a situation in which banks are allowed to use additional liquid capital like the ECB's recent actions will produce in order to create new investment bubbles rather than do what they can to generate growth in the real economy.

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