Europe needs a new model
The eurozone economy continues to spiral downward:
PARIS “” Unemployment in the euro zone rose to yet another record high in the first two months of the year, official data showed Tuesday, providing confirmation that the economy remains in a deep freeze.
The jobless rate reached 12 percent in both January and February, the highest since the creation of the euro in 1999 . . .
European officials continue to hold out hope that the economy, which continued to shrink in the first quarter of 2013, will begin turning around in the second half of the year. Many private sector forecasters are more pessimistic, expecting a contraction of as much as 2 percent in the euro zone’s gross domestic product this year, after a 0.9 percent contraction last year.
While there is general agreement that the current course for addressing the euro crisis “” heavily focused on budget- balancing measures that reduce overall demand “” is not working, the need for emergency action like the recent bailout of Cyprus has appeared to inhibit any deep rethinking of economic policy.
In the absence of new measures to stimulate growth at the European and national levels, all attention will be focused Thursday on the governing council of the European Central Bank, which meets in Frankfurt to consider whether to maintain interest rates at their current record low or cut even further.
Britain, the largest E.U. economy outside the euro zone, had an unemployment rate of 7.7 percent in December, the latest available month.
In the United States, the jobless rate fell in February to 7.7 percent, the lowest since late 2008. The consensus among economists surveyed by Reuters is for U.S. nonfarm payrolls Friday to show a gain of 200,000 jobs in March, after a gain of 236,000 in February.
The European labor market has now declined for 22 straight months, making this the worst downturn since the early 1990s, Jennifer McKeown, an economist in London with Capital Economics, wrote in a note. In particular, she said, the rise in France’s February jobless rate to 10.8 percent from 10.7 percent in January “looks very worrying.”
“With fiscal tightening still putting downward pressure on disposable incomes and consumer confidence at very low levels, household spending is likely to fall further in the coming months,” Ms. McKeown said.
On Tuesday, a report by Markit Economics showed the euro zone’s manufacturing sectorcontracted again in March, with an index of purchasing managers activity dropping to 46.8 from 47.9 in February. An index level below 50.0 suggests contraction, while a level above that suggests expansion.
The manufacturing index has contracted every month since August 2011. Manufacturing activity in Germany and Ireland, which had been expanding, began to decline again.
The euro zone manufacturing sector shed jobs in March for a 14th consecutive month, Markit reported, with “steep rates of declines reported in France, Italy, Spain, the Netherlands, Ireland and Greece,” and only Germany and Austria bucking the trend.
Let’s summarize:
1. Fiscal austerity has failed, i.e. the eurozone needs more AD. Everyone seems to agree on that.
2. The countries with high unemployment are mostly too broke to do more fiscal stimulus, and the Germans don’t want to pay for the mistakes of others. So fiscal stimulus is off the table.
3. The US and the UK, also had severe financial crises, but have unemployment rates of 7.7% and falling, while the eurozone has a rate of 12% and rising.
4. The Fed and the BoE were more aggressive than the ECB in trying to boost AD.
5. The ECB is considering a reduction in interest rates.
Does it take a PhD in economics to understand what the eurozone obviously needs to do?
And yet my European commenters tell me that economics is different in Europe. They don’t use the Anglo/American macro models. There is virtually no discussion of the need for monetary stimulus to boost NGDP on either the right or the left.
I’m certainly not saying that everyone in the world should think like we Anglo-Saxons. God knows we have plenty of problems, plenty of blind spots. I wouldn’t want the French to copy our passenger rail or nuclear power industries. But when a model of the world has clearly failed, don’t you need to start looking at alternatives? Is there any model that has failed so completely, so abysmally, as the macro model that led the euro-elite to create the euro and then instruct the ECB to totally ignore aggregate demand shortfalls? I suppose Soviet communism would be close.
PS. Things are so bad in the eurozone that even a reduction in interest rates won’t help all that much—they need far more aggressive action from the ECB.
PPS. Also check out Matt O’Brien’s excellent column on the euro-mess.
PPPS. TravisV asked me to comment on the recent Martin Feldstein piece. There’s nothing new—David Beckworth has already refuted the view that low interest rates are caused by Fed purchases of T-securities. (So has Paul Krugman.) The Fed still holds roughly the same small share of T-securities they held a decade ago. Both nominal and real rates on T-bonds have been falling steadily for 30 years, as tighter money has steadily reduced NGDP growth rates. I would simply add that Feldstein’s column shows the folly of trying to outguess the markets:
The very low interest rate on long-term United States Treasury bonds is a clear example of the current mispricing of financial assets.
When the market conflicts with your model of the economy, don’t question the market, rethink your model.
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2. April 2013 at 07:09
‘I suppose Soviet communism would be close.’
Oh no, not close, far in excess. That took concentration camps and secret police to keep it going. The current Euro-delusion still has mostly voluntary cooperation keeping it in place.
2. April 2013 at 07:12
Do you think Europe is stuck in its current fiscal policy or do you think there’s any room to somewhat mitigate the austerity without necessarily launching massive stimulus projects designed to fill in the output gap?
2. April 2013 at 07:43
“And yet my European commenters tell me that economics is different in Europe. They don’t use the Anglo/American macro models. There is virtually no discussion of the need for monetary stimulus to boost NGDP on either the right or the left.”
Economics is not different in Europe. Europe needs a boost in aggregate demand (and fiscal tightening).
– European commenter 😉
2. April 2013 at 07:43
“David Beckworth has already refuted the view that low interest rates are caused by Fed purchases of T-securities.”
Actually, all Beckworth did was advance the theoretical assumption that says if the Fed is putting an upward pressure on the price of treasuries, then the Fed has to be owners of “large quantities of treasuries.” But that assumption is wrong, because prices can be affected by the Fed through implicit “put options”, and “borrower of last resort” factors. This is the same thing as saying “the Fed is putting upward pressure on rates through purchasing t-securities.” It doesn’t have to actually be owner of large number of treasuries, it just has to convince the market that it will buy treasuries at whatever price that will keep them low as the Fed promised to do, which is accomplished by larger than “normal” purchases. Adn nobody would deny that this is what they have in fact done. The market is now adapted to a higher rate of treasury monetizations.
What happened to the focus on expectations? Seems like when the topic is interest rates, MMs are taking the more orthodox “spill over/Cantillon” type argument that puts all the weight on actual monetary inflation, and little to nothing on expectations. Interesting.
2. April 2013 at 07:56
“Both nominal and real rates on T-bonds have been falling steadily for 30 years, as tighter money has steadily reduced NGDP growth rates.”
This is an advance of the theoretical assumption that NGDP growth rates are the driver of interest rates. However the evidence is not conclusive on that:
http://research.stlouisfed.org/fredgraph.png?g=h5U
Despite NGDP growth averaging roughly 5% from around 1985 to 2008, AAA interest rates continued to decline (alongside a long term decline in the fed funds rate).
The period of around 2002 to 2006/7 saw increasing NGDP growth, and yet interest rates continued their long term decline.
Since 2010 annual NGDP growth has remained around 4%, and yet interest rates continued their long term decline.
There is something else responsible for the long term declining trend in interest rates.
At most, you can say that interest rates are higher(lower) than they otherwise would be had NGDP growth been lower(higher). I don’t think it’s right to say that the cause for the long term decline is declining NGDP.
Even if NGDP did not collapse 2008, interest rates would likely have remained on a long term declining trend.
2. April 2013 at 07:58
Et tu, Telegraph?
http://blogs.telegraph.co.uk/finance/jeremywarner/100023849/minimum-wage-should-be-substantially-raised-not-cut/
‘I’m not saying that statutory introduction of a living wage would be without its downsides. The most serious of these is that it would be inflationary. Some small traders, already struggling to compete with the likes of Tesco, might be put out of business. But if phased in over time, the long term economic impact on domestic demand would be overwhelming positive and to my mind undoubtedly preferable to alternative approaches to demand management such as fiscal stimulus or further money printing.’
Britain’s answer to David Stockman, I suppose.
2. April 2013 at 07:58
I don’t think it matters how expansionary the ECB is. There are 3 main problems:
1. They need different currencies and flexible exchange rates to adjust imbalances in both trade and in capital flows
2. Countries like Greece, Spain, etc have debts denominated in a rigid currency that they have no control over–this is like Germany having to pay its debts in gold after World War 1; it’s not gonna happen
3. The Eurozone is not one country(like the US), it is a monetary union without a fiscal union–which makes it impossible to deal with
Milton Friedman was right, you can’t have a monetary and banking union without having a centralized taxing authority. Here in the US, if you can’t find a job in California, you can easily move to another state to find work. There are countries in Europe that have less labor mobility than the entire United States.
The Euro will never work; it will eventually be disbanded completely. The Euro will fail for the same reason that the gold standard failed in the 1930s. Fixed exchange rates do not work in the long run. All fixed exchange rates do is create imbalances in trade and in capital flows.
2. April 2013 at 08:04
Geoff,
Interesting that you mention evidence here, since you said just recently;
“The only way to settle the dispute here is by judging and analyzing the two theories on a ground OTHER than the historical data (the evidence).”
Link for the sake of courtesy, although I would not misquote you.
http://www.themoneyillusion.com/?p=20421#comments
Further;
“The theory I have laid forth is fully 100% consistent with the historical data.”
Why do theories presented by Scott and David Beckworth need to face evidence when you stated earlier they don’t? If you’re willing to consider their evidence, why don’t you present your own?
2. April 2013 at 08:07
“When the market conflicts with your model of the economy, don’t question the market, rethink your model…”
…except when it comes to money production and the resulting market determined price inflation and NGDP growth rates. Then it’s OK to second guess the market, and not rethink one’s model.
Damn market prices are too sticky for the market actor’s own good, so it’s good that they be gathered up like wild chickens into the state controlled monetary henhouse. They’re too stupid to set the right prices for labor on their own anyway. Trick them on the side of decreasing real wage rates through deceptive inflation that only a small minority of the population really understands.
Then advise the chicken farmers on the right non-market rule. If the market “wants” local deflation, through trade deficits abroad, then damn the market and demand the farmers counter-act such self-destructive behavior.
But yeah, don’t question the market…
2. April 2013 at 08:12
Ben J:
Good catch Ben J.
“Why do theories presented by Scott and David Beckworth need to face evidence when you stated earlier they don’t? If you’re willing to consider their evidence, why don’t you present your own?”
It’s because Dr. Sumner and Dr. Beckworth are empiricists, and so I was addressing their theories on their own ground.
This isn’t a problem, if you can understand that not everyone adheres to the same epistemology, but nevertheless arguments and discussions are had. I do that with everyone I debate. I use their epistemology when considering their arguments. Ultimately though, I know I’m right or wrong based on a priori logic.
In my own mind, and to others who use actual economic science, we don’t use historical data to prove or disprove theories. But we can’t easily help empiricists understand how to do it properly, without going through a painstaking intellectual overhaul, which they refuse or are unable to do.
2. April 2013 at 08:18
1. Well, hold on, fiscal austerity was never suppose to create jobs or growth, it was supposed to avoid a sovereign debt crisis — the proper name for the policy is “solvency” and it seems to have mostly succeeded in that no country is yet insolvent.
2-5. Yes.
The problem is that the split between currency and gov’t has produced a strange incentive — countries can now get their fiscal spending monetized if they are irresponsible enough.
Unfortunately, they still haven’t cut fiscal spending enough (or at all, for the most part) so they’re stuck in an odd sort of trap: the responsible countries don’t want to print currency to benefit the irresponsible countries, the irresponsible countries don’t want to get their fiscal house in order such that monetary stimulus is less offensive to the responsible countries.
2. April 2013 at 08:20
And I thought I was presenting evidence, Ben J. I was presenting the same data Dr. Sumner and Dr. Beckworth are using, but I am interpreting it differently than they are.
You may not get this, but the reason you believe I am not presenting evidence is because I am not in agreement with their theoretical interpretation of the same data. So it gives the illusion that they have a monopoly over the evidence, whereas I am just talking hot air.
2. April 2013 at 08:23
TallDave – you’re wrong. See Mike Konczal: http://www.nextnewdeal.net/rortybomb/its-alberto-alesinas-world-and-were-all-just-unemployed-it
The Alesina/Ardagna study was the major intellectual force behind the arguments made for austerity in both the United States and Europe. Saying that nobody ever argued that fiscal austerity was supposed to create jobs or growth is complete revisionist history. Keynesians didn’t invent the idea of “expansionary austerity” as a straw man out of thin air.
2. April 2013 at 08:28
Patrick, Yes, I suppose I was just making a bad joke.
Aidan, They are too broke to do significant fiscal stimulus, and even if they weren’t it wouldn’t help much with current monetary policy. Having said that, cuts in employer-side payroll taxes or VAT taxes might help a little bit.
Martin, That’s good to hear.
Geoff, As always you are distorting my comments. Where did I say NGDP is the only factor affecting interest rates? NGDP growth was running 19% in late 1980 and early 1981, and has run around 2.5% since mid-2008. I’d say that’s a pretty dramatic slowdown. It’s the main reason why interest rates have fallen over the past 30 years. I’ve discussed many other factors that also influence rates in other posts.
Patrick, That quotation sounds awful. Britain should be looking at the German model.
Suvy, I agree that Friedman was right about the euro, and he’d certainly recommend easier money in the eurozone today. He also favored easier money under the international gold standard of the early 1930s.
2. April 2013 at 08:31
Geoff, You said:
“It’s because Dr. Sumner and Dr. Beckworth are empiricists”
I’ll bet you canot find a single post in the past 5 years where I call myself an empiricist. You just keep making things up.
2. April 2013 at 08:34
The very low interest rate on long-term United States Treasury bonds is a clear example of the current mispricing of financial assets.
OK, I had to laugh at that. Investors will not be flocking to this play.
Does Feldstein really think the default risk is a major component of the price of Treasuries? The CBO projections are interesting, but I wonder what they said ten years ago.
I think Feldstein might also miss the point on long-term bonds — many long-term investors aren’t that concerned about losses in value due to interest rate changes, because the revenue stream is what they care about, and it never changes.
That said, I’ve stopped buying long-term bonds, but because I think the Fed will change policy, not because the current policy is inflationary.
2. April 2013 at 09:00
[…] See full story on themoneyillusion.com […]
2. April 2013 at 09:18
Dr. Sumner:
“”It’s because Dr. Sumner and Dr. Beckworth are empiricists”
“I’ll bet you canot find a single post in the past 5 years where I call myself an empiricist. You just keep making things up.”
I’ll bet you cannot find a single paper, book, or speech where Hitler called himself a fascist dictator, or where Aristotle called himself a nominalist, or where Wayne Gretsky called himself the Great One, or where Kierkegaard called himself an existentialist, or where I call myself a lying demagogue, or where…need I go on?
What’s your point? That an individual has to declare he adhere to epistemology or philosophy X, before he can rightly be regarded as doing so? That’s a bunch of malarky.
My argument that yourself and Dr. Beckworth are empiricists follows from the way you approach economic problems. Remember when I asked what would it take for you to accept that NGDPLT is flawed/incorrect/wrong, and you said “I’ll have to observe unemployment persist and low output to persist for however many years given that NGDPLT is being practised”? That’s empiricism buddy!
2. April 2013 at 09:36
Dr. Sumner:
“Geoff, As always you are distorting my comments. Where did I say NGDP is the only factor affecting interest rates?”
Where you said “Both nominal and real rates on T-bonds have been falling steadily for 30 years, as tighter money has steadily reduced NGDP growth rates.”
Where were “the other” factors?
“NGDP growth was running 19% in late 1980 and early 1981, and has run around 2.5% since mid-2008. I’d say that’s a pretty dramatic slowdown.”
Inflation was negative in 1931, and it was in double digits in the 1970s, I’d say that’s a pretty dramatic increase.
I’m not much interested in choosing start and end dates that show one direction when averaged, but ignoring all the times in between.
“It’s the main reason why interest rates have fallen over the past 30 years.”
I strongly suspect that the main reason interest rates have fallen is that there is a long term bubble in bonds which unrestrained central banks (in concert with FRB commercial banks) have unleashed. It’s not surprising that the bond price run occurred when it did.
I know you reject any claim to or estimation of a bubble, but there you go.
2. April 2013 at 09:42
“I strongly suspect that the main reason interest rates have fallen is that there is a long term bubble in bonds”
lol
2. April 2013 at 09:44
ChargerCarl surprises the masses with a stunning analysis of interest rates! What a scintillating intellect! What verve!
2. April 2013 at 09:59
ChargerCarl:
Is there going to be something resembling a contextual comment anytime soon? Or is it just “lols”
2. April 2013 at 10:05
The ECB has taken the place of Rommel´s tanks!
http://thefaintofheart.wordpress.com/2013/03/31/pictures-of-tragedies/
2. April 2013 at 10:22
And Barack Obama is Gonzaga (all flash, no staying power;
http://blogs.wsj.com/economics/2013/04/02/consumers-are-wichita-state-of-u-s-economy/
Consumers Are Wichita State of U.S. Economy
2. April 2013 at 10:27
Your metaphor would have worked better if he hadn’t won a second term.
2. April 2013 at 11:01
The view from the ECB is that there’s simply not much they can do. Bond markets are much thinner than in the US since it’s a bank-financed economy, and there is no European financial instruments, which raises complicated distribution questions. So they don’t think QE is adapted to euro conditions, and they also perceive banks’ appetite for LTRO as limited.
Those seem valid objections to me – but I’d be happy to read a concrete proposal of a policy tool which could achieve a better NGDP/unemployment target. I doubt forward guidance (even with NGDPLT) would do the trick if it’s not backed by some kind of action.
2. April 2013 at 11:07
Marcus,
I LOVE that sentence!
“The ECB has taken the place of Rommel´s tanks!”
Everybody needs to repeat that until it’s a very common expression.
2. April 2013 at 11:46
Great stuff from Joe Weisenthal on Feldstein!
“If Anyone Tells You There’s A Treasury Bubble, Just Show Them This Chart”
Read more: http://www.businessinsider.com/treasuries-are-not-in-a-bubble-2013-4#ixzz2PKxvK5zx
2. April 2013 at 12:15
The Eurozone is not an “optimal currency area.”
There are 4 critera for a sucessfull currency union:
Labor mobility, price and wage flexability across the region, a risk sharing / fiscal tranfer mechanism, and simlar business cycles.
The Eurozone lacking in all of these. Labor mobility is low. Prices and wages are not adjusting, there is no fiscal union, and the North and South are in completely different parts of their respective business cycles.
I wonder what is happening in the alternate universe where the Irish and the Spanish refused gurantee bad bank debt, to bail out large creditors, and only protected the small depositors that they had actually agreed to guarantee. Those countries not be swimming in so much debt, and “austerity” would not be necessary.
2. April 2013 at 12:18
Iceland seems like an interesting point of comparison, although the population is so small that it’s even harder than normal to make contrast different nations.
2. April 2013 at 12:42
“ChargerCarl surprises the masses with a stunning analysis of interest rates! What a scintillating intellect! What verve!”
no different than calling anything and everything that clashes with your worldview a “bubble”
2. April 2013 at 13:01
I fully agree that the monetary situation is catastrophically tight in the Euro Area, and especially so in the periphery. But what would be the consequence of serious monetary easing? Well, in all likelihood, demand would be stimulated most in the periphery, and not in the core. Consequence: a opening up again of large intra-Euro current account imbalances, imbalances which are unsustainable in the long term.
What the Euro Area needs is a monetary easing + extra stimulation of demand in the core
2. April 2013 at 13:54
Geoff, It’s obvious you don’t know what an empiricist is. (Hint, it’s not someone who occasionally refers to real world facts.) In case you are interested I’m a philosophical pragmatist, not an empiricist.
You also seem to lack an understanding of basic logic, or the meaning of words. You cited me saying this:
“Both nominal and real rates on T-bonds have been falling steadily for 30 years, as tighter money has steadily reduced NGDP growth rates.”
And then asked:
Where were “the other” factors?
Nothing in what I said implies that NGDP is the only factor influencing interest rates. I suppose if I had said “The mining boom increased Australian output” you’d claim I was denying that any non-mining factors could have possibly contributed to increased Australian output. Sometimes your logic takes my breath away. It’s odd to see someone gradually morph into MF before our eyes.
You’ve read my blog long enough that you’ve come across my discussion of other factors that affect interest rates. Not sure why you pretend you haven’t.
ChargerCarl, It’s even worse, he thinks “easy money” has reduced inflation from 13% to 1.5%.
markss, You are wrong, the ECB does not want higher inflation or higher NGDP, that’s why they refuse to cut interest rates.
You said;
“Those seem valid objections to me”
They aren’t valid at all, as no one claims QE is the best way to implement monetary stimulus, there are far better tools available.
In any case, if they wanted to do QE there are plenty of eurozone government bonds that they could buy, so I don’t understand that objection at all.
If there’s a will there’s a way. But right now there is no desire for faster NGDP growth at the ECB. And I have no idea why.
Francois, I’m not sure the result would be an excessive CA deficit, as the real estate boom is over. But if there was the proper remedy is a change in regulation. Monetary policy should focus on what it does best, which is stabilizing the path of nominal spending. Regulation should address any problems of excessive borrowing (which is the problem flowing from CA deficits, when there is a problem.)
2. April 2013 at 14:07
Dr. Sumner:
“Geoff, It’s obvious you don’t know what an empiricist is. (Hint, it’s not someone who occasionally refers to real world facts.) In case you are interested I’m a philosophical pragmatist, not an empiricist.”
Just FYI, those are not mutually exclusive philosophies. Pragmatism is a philosophy of ethics. Empiricism is a philosophy of the foundation of knowledge. If you’re a pragmatist, it doesn’t mean you can’t be an empiricist, and vice versa.
I appreciate your opinion, but I know what an empiricist is, and you’re an empiricist. Your response to my question of what it would take for you to KNOW that NGDPLT is wrong, was a textbook empiricist response. You clearly said the foundation of knowing was through experience. You didn’t say it is established as right or wrong on the basis of a priori reasoning.
I challenge you to show me what you think empiricism means, because it is strange to be told I don’t know what it is, when I know what it is and explained what it is.
“You also seem to lack an understanding of basic logic, or the meaning of words. You cited me saying this:”
“Both nominal and real rates on T-bonds have been falling steadily for 30 years, as tighter money has steadily reduced NGDP growth rates.”
“And then asked:”
“Where were “the other” factors?”
“Nothing in what I said implies that NGDP is the only factor influencing interest rates. I suppose if I had said “The mining boom increased Australian output” you’d claim I was denying that any non-mining factors could have possibly contributed to increased Australian output.”
If that is all you had said, then you would be arguing that it was the mining boom that increased Australian output.
“Sometimes your logic takes my breath away. It’s odd to see someone gradually morph into MF before our eyes.”
Don’t know what that means.
“You’ve read my blog long enough that you’ve come across my discussion of other factors that affect interest rates. Not sure why you pretend you haven’t.”
Low interest rates are due to money having been tight.
Gee, after seeing that statement umpteen times, gosh, how on Earth could anyone have inferred that NGDP is the driver of interest rates on this blog?
I sense great hostility in your responses. Sorry if I pissed you off, really.
2. April 2013 at 14:20
Actually, pragmatism and empiricism are both ethical philosophies in the strict sense, because they both presuppose a particular set of rules conduct for knowledge, what I mean is that pragmatism distniguishes itself by the “method” (I am thinking of William James’s version of the pragmatic theory as summarized by his statement that “the ‘true’ is only the expedient in our way of thinking, just as the ‘right’ is only the expedient in our way of behaving”, as well as the fact that pragmatism sees no fundamental difference between practical and theoretical reason, nor any ontological difference between facts and values), while empiricism distinguishes itself by “what facts to consider”, namely experience as opposed to a priori reasoning.
The main point is that one can be both a pragmatist and an empiricist. To be a pragmatist leaves the door open to being an empiricist. Indeed, William James noted that “all true processes must lead to the face of directly verifying sensible experiences somewhere.” That’s empiricism in a nutshell from one of the world’s most eminent pragmatists.
2. April 2013 at 15:28
[…] The U.S. 10-year yield is about 1.8%, down from just over 2% before Cyprus. Some people say Treasury prices are rising because the Fed is buying up so much of the debt stock, though Sumner reminds us that this is not so (the PPPS at the bottom). […]
3. April 2013 at 01:06
Well, I might be wrong but the reason seems pretty clear to me: The northern countries and in particular the Germans do not want to see their massive savings to be inflated away. For this reason any substantial changes in monetary policy are unwanted. Whether this is good or not is of course a different question…
3. April 2013 at 06:17
Scott: “Is there any model that has failed so completely, so abysmally, as the macro model that led the euro-elite to create the euro and then instruct the ECB to totally ignore aggregate demand shortfalls?”
I do not buy this argument that ECB is “designed” not to help in this catastrophy. As a person who lives in a world where desire (or design) of pople who create institusions falls many times short of what they wanted. It is as much about application as it is about feedback and ability to learn from mistakes.
I see that many influential commenters even the likes of Paul Krugman seem to go very easily about absolving central bankers from their responsibility. But they should not have it that easy. As for the ECB, they failed hard not only on their disability to change and adapt. It is not as if they tried to find some room in existing institutional infrastructure and somebody slapped them on their wrists. It is not about them trying, it is about them doing exact opposite. How could you otherwise explain things like:
1) ECB still not being at zero lower bound. Up until now they did not use even the most standard tool there is to help insufficient demand – a tool which itself is in other places widely criticized as insuffccient
2) ECB has a mandate of price stability, but explanation of this mandate is their responsibility. Holding euro HICP inflation close to 2% is only one possible way to explain price stability mandate. Up until now ECB actively defends this explanation of their mandate as the correct one against mountain of evidence to the contrary. Starting from housing prices not being reflected in this measure, continuing with HICP inflation oversensitivenes to exported shocks and tax increases and many others.
3) When it comes to becoming lender of last resort for financial sector, suddenly ECB is full of new and progressive ideas. In this regard “institutional obstacles” to policies like LTRO are easily circumvented. You cannot have it both ways – claiming that ECB has tied hands by “institutional design” when facing insufficient AD and then the same hands are very free to crush other institutions into dust.
If anything, ECB is not held helpless in the middle of institutional constrains. It may held in the middle of power struggle of influential groups that try to excercise power in the Eurozone. But in this aspect ECB is player on its own with its own agenda – a player that chooses their battles. And as it happens they are simply not on the side that fight for solving this crises.
3. April 2013 at 16:31
Geoff, Pragmatism can be just as applicable to epistemology as empiricism. It should be obvious that when I contrasted the two I was implying that I look at all relevant arguments in support of a proposition, not just empirical data.
I can’t tell if you keep raising these silly points to be cute, or because you are actually in way over you head in discussing philosophy.
You said:
“If that is all you had said, then you would be arguing that it was the mining boom that increased Australian output.”
Case closed. I hope all of your fans read this comment.
Till, I haven’t seen anyone propose that German savings be inflated away.
JV. You said:
“1) ECB still not being at zero lower bound. Up until now they did not use even the most standard tool there is to help insufficient demand – a tool which itself is in other places widely criticized as insuffccient”
This supports my argument, they could do more, but have chosen not to. As far is who is to blame, I’ve obviously put a lot of blame on the ECB in the past. But I can’t help notice that almost no one seems to be asking them to do more in terms of monetary stimulus. In Europe even the countries being hurt by ECB policy don’t seem to be demanding a higher inflation/NGDP target. Instead they focus on other issues like debt and fiscal union and bank bailouts. So when I blame the euro-elite I mean just that, the ECB elite and the academic elite and the fiscal authority elite, and the media elite. All of them.
I concede that you are better informed on this issue than I am. If I’m wrong I’m certainly willing to focus my blame solely on the ECB.
4. April 2013 at 00:36
Isn’t the question, why would the ECB care? Not why should it care, but why would it care? If no one who matters are holding them responsible, why change policy?
And if the crises is believed by the euro-elite to be a path to an ever-closer Union, why would said elite want the crisis to stop?
Mind you, no one who has read Adam Ferguson’s “When Money Dies” on the Weimar hyperinflation is likely to underestimate the power of bad models. But, then the question is, why would they want to change their model? See my previous questions.
4. April 2013 at 01:04
“Till, I haven’t seen anyone propose that German savings be inflated away”
ssumer,
if I get you right, you are proposing monetary stimulus. Since no one is going to tamper with reserve ratios and rates are already quite low – what is left? Seems like printing money is mainly left (and hence implicitly proposed one could argue)
This is not wanted by the Northern Europeans for several reasons (and one of them is, rightly or wrongly, ‘inflating savings away’). Hence, no monetary stimulus is the result we see.
Of course, if you are proposing any other way of monetary stimulus that I did not think of, feel free to correct me…
4. April 2013 at 02:37
Speaking of epistemology…. in the middle of the night, fires simultaneously break out at the homes of an engineer, a chemist, and a mathematician.
The engineer jumps from his bed, quickly attaches a hose to the fire hydrant outside, sprays the whole house, and immediately puts out the fire while flooding most of his home in the process.
The chemist wakes, purposefully strides to his study, does a series of calculations, carefully measures into buckets the exact amount of water needed to extinguish the fire, and then puts out the fire albeit after his calculations and measurements have allowed extra time for the fire to damage his house.
The mathematician rubs his eyes, wanders into the bathroom, lights a match, douses it under the faucet, declares “the problem is solvable,” and then goes back to bed.
4. April 2013 at 17:23
Lorenzo, This is certainly not leading to ever closer union.
Till, Read some stuff in the right column of my blog, I have much better ideas than “printing money.” And I certainly don’t favor high inflation.
dtoh, That’s a good one.
7. April 2013 at 16:22
Dr. Sumner:
“Geoff, Pragmatism can be just as applicable to epistemology as empiricism. It should be obvious that when I contrasted the two I was implying that I look at all relevant arguments in support of a proposition, not just empirical data.”
Agreed. I was focusing more on the ethics of method.
“If that is all you had said, then you would be arguing that it was the mining boom that increased Australian output.”
“Case closed. I hope all of your fans read this comment.”
Case re-opened:
You: “Unemployment rose the way it did after 2008 because NGDP fell.”
Me: “Ergo, if NGDP did not fall, then unemployment would not have risen the way it did.”
You: “Uh oh. Um, yes.”
Me: “Ergo, unemployment rose the way it did only because NGDP fell.”
You: “Noooooooooo!”
Another example:
You: “I lost weight because I exercised.”
Me: “Ergo, exercising is why you lost weight.”
You: “Don’t be ridiculous. I exercised and had liposuction.”
Me: “OK, so exercise and liposuction is why you lost weight.”
You: “You fool! Don’t you know anything? I lost weight because I exercised, had liposuction, and ate healthier foods.”
Me: “OK, so exercise, liposuction and eating healthier is why you lost weight.”
You: “I feel like I’m talking to a brick wall. Are you really this stupid? I lost weight because I exercised, had liposuction, ate healthier, and attended seminars and focus groups to learn how to live healthier.”
Me: “Okaaaaay.”
22. February 2017 at 09:12
[…] and Greece,” and only Germany and Austria bucking the trend.” http://www.themoneyillusion.com/?p=20471 While the ECB is very belatedly thinking about lowering interest rates […]