Dear Mario and Ben – monetary policy is getting tighter and tighter by the minute

On the first page of the Market Monetarist bible it says that we can observe whether monetary policy is getting tighter or looser by watching the markets. From a US perspective US monetary policy is getting tighter when the US dollar strengthens, stock prices drop, bond yields drop and commodity prices fall. Guess what folks – monetary policy is getting a lot tighter today!

Is this what we need?

Insufficient powers of (European) central banks

Here is Ben Bernanke and Harold James (1991) on “Insufficient powers of (European) central banks”:

“An important institutional feature of  the interwar gold standard is that, for a majority of the important continental European central banks, open market operations were not permitted or were severely restricted. This limitation on central bank powers was usually the result of the stabilization programs of the early and mid 1920s. By prohibiting central banks from holding or dealing in significant quantities of government securities, and thus making monetization of deficits more difficult, the architects of the stabilizations hoped to prevent future inflation. This forced the central banks to rely on discount policy (the terms at which they would make loans to commercial banks) as the principal means of affecting the domestic money supply. However, in a number of countries the major commercial banks borrowed very infrequently from the central banks, implying that except in crisis periods the central bank’s control over the money supply might be quite weak.”

I wonder whether Ben Bernanke is having the same unpleasant feeling of déjà vu as I am having and what he plans to do about – because apparently nobody in Europe studied economic history.

 

 

 

“Incredible Europeans” have learned nothing from history

The conservative Partido Popular won the general elections in Spain over the week and PP leader Mariano Rajoy will now become Prime Minister in Spain. That makes it three – that is the number of new Prime Ministers in Southern European countries in a couple of weeks.

So the European crisis continues and as in 1931 this is to a large extent a political crisis and policy makers seem unable to learn much from the past. Here is Scott Sumner for you:

“The events of the last few years have caused me to radically revise my views of the Great Depression.  Not in terms of the causal factors, those have been amply confirmed.  Falling NGDP does create domestic and international financial turmoil—no doubt about that.  But I used to think people were stupid back in the 1930s.  Remember Hawtrey’s famous “Crying fire, fire, in Noah’s flood”?  I used to wonder how people could have failed to see the real problem.  I thought that progress in macroeconomic analysis made similar policy errors unlikely today.  I couldn’t have been more wrong.  We’re just as stupid as they are.”

I am only quoting, but find it hard to disagree. One thing is to agree with with Scott Sumner (I am used to that), but agreeing with Paul Krugman is slightly less normal for me, but here he is (and I agree):

“I had some hopes for Mario Draghi; he has just done his best to kill those hopes. In his view, it’s all about credibility, defined thusly:

Credibility implies that our monetary policy is successful in anchoring inflation expectations over the medium and longer term. This is the major contribution we can make in support of sustainable growth, employment creation and financial stability. And we are making this contribution in full independence.

Unbelievable. Right now, the ECB has too much credibility on the inflation front; the spread between German nominal and real interest rates, which is an implicit forecast of the inflation rate, is pointing to disastrously low medium-term inflation“.

Draghi also seems to suffer from a variation of the “Gold Standard mentality”. Anybody who have studied the Great Depression should find recent European events surreal. Day-by-day history repeats itself. It is tragic.

If there is any European policy makers out there reading this – you should take a look at events of 1931 – try not to repeat anymore of events from that tragic year. You could start reading my comment on 1931.

PS I wonder if Mariano Rajoy know how Spain avoided the Great Depression 80 years ago…(hint: Spain was not on the gold standard).

PPS I have been thinking – FX policy is the responsibility of EU Finance Ministers rather than of the ECB. You can draw your own conclusions.

PPPS Tyler Cown also has a comment on the European crisis.

PPPPS Ambrose Evans-Pritchard has a comment on Spain that is unlikely to cheer up anybody.

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