Malicious ECB rate hikes
by Rebecca Wilder
Lieblings quote of the day by Dean Baker:
“The ECB is run by a perverse cult that worships 2.0 percent inflation and is prepared to sacrifice almost all other economic goals to meet this target.”
The article goes on to argue that the ECB should increase its inflation target to 3-4% in order to facilitate positive wage growth in the debt deflationary economies like Spain. I’ve argued a similar point in the past.
However, I’d like to add that this “perverse cult” called the European Central Bank (ECB) raised its policy rate on April 13 – a point in time that correlates perfectly with a shift in trend across euro-area bond markets. Specifically, April 13 marks the upswing in risk premia on Italian, Spanish, and Belgian bonds relative to German bunds. Hmmm…policy mistake?
Rebecca Wilder also posted at Newsneconomics
Never attribute to malice what may well be just incompetence.
Hmmm, I’d like to see a broader discussion of interst rate policy at this juncture. There are many factors at play.
Japan’s has kept its discount rate near zero since I think mid nineties. Did it work wonders there? And how will U.S. baby boomers earn a return on their retirement savings with bank deposits earning a negative real rate? How will that help the economy?
Also, with the higher ECB rates, have their economies underperformed the U.S (I have not had a chance to do a comparison)?
Frankly, I doubt we will would see a real difference between holding rates at 0 or 3%, when the real problem is borrowing will not return to previous rates no matter what the rate is, not even close, and when it does it will be 10 years from now. In fact, part of me feels that slightly higher rates could even stimulate spending for retirees, which will be a growing class over the coming years?
Also higher rates might cause an influx of dollars into the U.S., keeping bond rates down by demand, and a stronger dollar may give consumers more purchasing power.
To me the real problem is that the monetary base has grown, but none of that is going to consumers. It is all capital going to bank balance sheets. The policy that will work is the one that gets that base to consumers. Are low rates that mechanism?
Governments have gone into debt to provide succor for zombie banks (in US add tax cuts and empire wars).
In effect the governments sell “war on liquidating unsolvent bank” bonds. Then bankers whom the bonds saved cry “too much government debt” or overhang.
It is inconsistent unless viewed as war on the “beast of social safety nets”.
The ECB like the US policy “elites” are touting the anti New Deal.
Incompetence will do the right thing more often than malice. 🙂
Interesting remarks. So when the ECB bought italian bonds it was just like a fireman trying to reduce a fire he started ?