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Home Publications Blogs Beat the Press Inflation: The Secret Answer to the Eurozone Crisis (see addendum)

Inflation: The Secret Answer to the Eurozone Crisis (see addendum)

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Friday, 13 April 2012 05:22

Robert Samuelson is the type of guy who stands there holding a fire extinguisher trying to figure out what to do as the house burns down. In his column today he ponders the euro zone crisis. He relies extensively on Jay Shambaugh, an economist at Georgetown, telling us that Shambaugh identifies three distinct crises:

"First, there’s a banking crisis. Banks have too little capital (a buffer against losses) and have a hard time raising funds. Next is the sovereign debt crisis. The high debts of many countries raise fears that, like Greece, they may default. And, finally, there’s an economic growth crisis. Low growth or slumps afflict most of the 17 countries using the euro."

He continues:

"Each crisis aggravates the others. Because banks hold huge portfolios of government bonds, fears about the bonds’ values weaken the banks and threaten their failure. Weak banks in turn don’t provide ample business and consumer loans to increase economic growth. And feeble or nonexistent growth shrinks tax revenues and makes it harder for governments to service their debts. "

Wow, it sounds so hard. Now let's imagine that the religious zealots running the European Central Bank (ECB) learned some economics and turned away from their low inflation cult. They could do something like what was recommended by Olivier Blanchard, the chief economist at the IMF. The ECB could target a higher rate of inflation, say 4.0 percent.

If it could convince the markets it was serious about this target -- throwing out as many reserves as necessary to push inflation higher -- it would address all three of these inter-related crises. Higher inflation would directly reduce the burden of sovereign debt.

If inflation averages 4.0 percent over the next five years instead of 2.0 percent (the current target), then GDP will be roughly 10 percent higher, reducing debt burdens proportionately. This means, for example, if Greece is looking at a debt to GDP ratio of 120 percent in five years with the current inflation target, its debt to GDP ratio would be 108 percent in the higher inflation scenario.

Higher inflation will also have the effect of lowering real interest rates and thereby boosting growth. If businesses know that they will be able to sell everything they produce for 20 percent more five years from now, it will give them more incentive to invest. Higher growth will also help to alleviate government deficits and debt burdens.

Finally, the loans on banks' books are likely to look much better in a context where house prices have risen by 20 percent (this is moving in step with inflation -- that is not a housing bubble) and economies are stronger. Stronger growth will also reduce corporate bankruptcies.

The problem really is not that difficult if the people holding the fire extinguishers would use them. Unfortunately, the ECB crew, like Samuelson, seems determined to focus on its inflation fighting even as the house burns down around them.

 

Addendum:

I am well aware of the ECB charter. This is not an excuse. I recently wrote a column comparing the ECB's pursuit of 2.0 percent inflation with the Maginot Line that the French military constructed prior to World War II to defend against a German invasion.

The correct course for French generals assigned to construct the Maginot Line would be to tell their superiors that it would not be an adequate defense against a German invasion. (The Germans just walked around the Maginot Line and went through Belgium.) If their superiors refused to listen, then the appropriate response is to resign, not to commit more resources to building a barrier that was absolutely useless for its intended purpose.

Similarly, competent economists at the ECB should be saying that adhering to a 2.0 percent inflation target as the sole purpose of a central bank is grossly irresponsible economic policy. If the governments insist on acting like fools then they should be forced to find certified fools to do their job. No serious economist has any business working for the ECB at a time when its policies are leading to so much devastation across Europe.

Comments (27)Add Comment
...
written by skeptonomist, April 13, 2012 7:49
"throwing out as many reserves as necessary to push inflation higher". Does "throwing out" mean increasing reserves (if not, what)? The Fed has increased the reserves of US banks enormously and there is no sign that inflation is going any higher than it was before the crisis (except, of course, for the perennial threat of increased oil prices).

Economists have been "throwing out" this idea that the central bank can increase inflation just by incantation as if it were established knowledge, but it is no more than a wild conjecture. It would probably not do any harm, except to the blood pressure of the inflation hawks in the Fed, but it is no substitute for real action. Although the idea is conjectural, it is proposed within the incredibly cramping intellectual framework which has action of a central bank as the ultimate solution to economic problems. If economists really wanted to exercise their imaginations they could try moving beyond the early 20th-century concept of monetary regulation by bankers.
Or the ECB and Euro Gov'ts Could Just Do What Keynes Recommended
written by Paul, April 13, 2012 8:00
That is, do everything possible to increase the propensity to consume. Embrace an anti-savings campaign to get people spending their money again to increase business growth and therefore jobs.

(And no, Keynes never said anything about increasing inflation targets.)
dithering
written by diesel, April 13, 2012 8:32
"if the people holding the fire extinguishers would use them".

Where is Freud when we need him?
again why Marx hated fiat currency...
written by pete, April 13, 2012 9:58
Obviouly the riots seem to ensue when folks are told you are going to cut their wages (or increase pension contributions). When you do it fraudulently, or secretly, to use Deans terminology, inflating those real wages down, they are more passive. Net result the same, but without the burning of government buildings. Need to increase corporate profits one way or the other to get firms to produce more stuff.
Huh??
written by David, April 13, 2012 10:28
Skeptonomist makes a wild conjecture himself, when it is clear both empirically and theoretically that central banks do have an impact on inflation momentum, provided the inertia is not too large. It's not enough to be skeptical, one has to have a rational, empirical, pragmatic, realistic alternative. If skeptonomist has one, say what it is, instead of deriding others for failing to come up with one. History drove the solutions we have before us (central banks); to forget that history is a grave mistake.

Then there's pete, who apparently has never heard of people asking for raises. What, does he think we're idiot sheep, afraid to ask for cost of living increases? (and, corpirate profits are at an all time high, but they are not producing much more stuff, nor are they increasing real wages)
The problem is not the ECB, but Germans
written by Blissex, April 13, 2012 11:24
«Now let's imagine that the religious zealots running the European Central Bank (ECB) learned some economics and turned away from their low inflation cult.»

The ECB staff may have their own preferences, but whatever they are they are fully aware that the ECB exists only because Germany tolerates it.

If the ECB targeted a higher levels of inflation than that acceptable to German voters, they would be abolished very soon (it might take a few months but only because of the paperwork).

The Euro etc. is a political project first and foremost, and it went like this:

#1 Germany wanted reunification and an end to foreign occupation and a return to full sovereignty.

#2 Politicians always ask for something in exchange for any concession, and the rest of the Europe told Germany that they could get what they wanted if they bound themselves deeper into the EU by accepting a common currency.

#3 Germany agreed as long as the common currency was the DeutscheMark, and the central bank was the BundesBank, just with a name change. Thus the Euro[Mark] and the Euro[central]Bank.

Point #3 is the key here. The ECB cannot do anything about #3. They can cheat a bit, and they are doing so with the complicity of the German government, but that's the most they can do.

The problem is entirely political. If the ECB and other states made an insurrection against Germany and other states it would be a major global catastrophe. The German voters are not malicious, just paranoid (and perhaps a bit prejudiced).

Note that at the core the German objection is not that they don't want 4% inflation or EuroBonds.

The German Supreme Court in a widely approved opinion said that the objection is that a radical change of fiscal policy like that can only be taken by a fully democratic government, and the EU's government is not fully democratic because it cannot be voted out by EU electors.

Put another way, German and other EU voters together must be able to do an up-or-down vote on it, it cannot be done with a stroke of a pen by a committee of diplomats. The ECB cannot touch that, even if they were willing.

To illustrate the issue, the EU government is a somewhat like the USA senate, composed of member state delegations (and elected by national legislatures, not directly, as in the USA a long time ago), and the USA constitution says that spending bills can only originate in the House, not in the Senate. The EU equivalent to the House, the Parliament, is just a showpiece, a bit like the Electoral College in the USA.

Note that the current situation is entirely deliberate for political reasons: with the current EU arrangement Germany as a state as a much smaller weight than Germany would have as an electorate. So Germany under current rules will accept collective decisions against their interests if they are small, but not if they are big fiscal decisions.

And frankly I cannot blame them: some of the smaller states in the EU, like Greece, are run by kleptocracies who take advantage of everything and everyone (starting with their own citizens, German citizens if they could ...)
EU constitution and the Latin MonetaryU nion
written by Blissex, April 13, 2012 11:45
As to the ECB and the German issue, that is really a core issue of the EU constitutional arrangements, and the ECB cannot do anything about it.

But at least it has been made very clear to at least many people in Europe that the issue indeed is a constitutional one.

Europe has had a kind of monetary (but not currency) union before, the Latin Monetary Union, from 1865 to 1927. It was mostly a Bretton Woods style gold/silver standard. It was undermined by member states who cheated on the agreed currency rules. Greece for example :-).

There are a number of web pages on the subject including Wikipedia and they are very funny indeed, in hindsight.
A "Huh" for David
written by Ellen1910, April 13, 2012 3:03
Dean Baker's assumption that the ECB can generate inflation -- presumably by employing monetary policy -- remains unproved. I think that puts me in skeptonomist's camp and Blissex's(?).

Inflation is a monetary event but it requires an increase in money in the real economy -- that is, available to buy goods and services, not just to show up as reserves at the central bank. The principal method of increasing money in the real economy is through deficit spending 9here, by each member country) and the ECB, theoretically, has the means to buy the sovereign bonds which result from this deficit spending.

But as Blissex points out, the ECB can't do that legally, because it would constitute backdoor fiscal policy.

Disagree?
david dude, missed the point
written by pete, April 13, 2012 3:49
Inflation works by keeping prices rising faster than wages...duh...
Greenspan: Fed deals with unappropriated funds
written by Blissex, April 13, 2012 4:44
Ellen1910 mostly got it. But the problem is political and constitutional before being legal. The ECB treaties can be "reinterpreted" and anyhow only member governments probably have standing to sue before the EU courts.

The big problem is that the ECB is the servant of the EU governments, and cannot do fiscal policy against the will of the German government without Germans feeling betrayed by the EU, and that would be a gigantic catastrophe. So the ECB has to stick to their agreed job which is to be a clone of the BundesBank issuing a clone of the DeutscheMark.

The issue is sort of sensitive even in the USA; Greenspan once said:

http://www.ritholtz.com/blog/2011/12/happy-anniversary-alan-greenspans-irrational-exuberance/
«Our overall management of the Federal Reserve System should, and does, come under considerable scrutiny by the Congress. Since we expend unappropriated taxpayer funds, we have an especial obligation to be prudent and efficient with the use of those funds»

and remember the letter by the Republican House to the Fed telling it to stop helping the reelection of Obama by doing what amounted to fiscal monetary policy (easing...).
keep it ethical, nice Greenspan
written by pete, April 13, 2012 4:58
If only more felt that way, that monetary policy, especially secret monetary policy, is a tricky thing to do to an economy.

How many more bubbles and crashes will it take before the dual mandate is rescinded, or better, back to Bretton Woods. Inflation doubled from 2% to 4% since 1974. Too many bank failures due to oscillating inflation and interest rates and housing prices. A very dangerous game to play, with very limited information.
it wasn't "inflation", it was a gigantic credit bubble to redistribute income
written by Blissex, April 13, 2012 5:35
«Inflation doubled from 2% to 4% since 1974»

That central bankers describe this as an easing of the money supply to "accomodate" higher oil prices. Oil prices before 1974 were essentially set rather self-servingly by first-world governments. In the USA private debt start to grow faster in 1980 (Reagan) and got even faster in 1995 (Gingrich), and there are two nice graphs in the middle of this page about that:

http://www.gfmag.com/tools/global-database/economic-data/10403-total-debt-to-gdp.html#axzz1rxj6VAgY

«Too many bank failures due to oscillating inflation and interest rates and housing prices.»

That is not due to a doubling of long term inflation from 2% to 4; it is due to politically motivated explosions in the supply of private credit, a policy that was instituted to generate colossal low tax or tax free capital gains for landlords and proprietors in general, to redistribute income from workers to owners.

Because when income from work grows a little, that's inflationary and workers exploiting businesses, when income from capital gains booms, that's not inflationary and it is winners getting their deserved rewards. :-).

And the greedy, pigheaded middle classes in the USA, UK, etc. have completely endorsed that, because they thought they would be the winners, and sold their birthright (unions, job safety, single earner salaries, pensions, ...) for the mess of pottage of the illusion of becoming Lords of the manor of the new plantation economy, with brownskinned immigrants as their hard working servants.

As the greeks said, the gods first turn mad those they want to destroy.
...
written by Calgacus, April 13, 2012 5:46
So the ECB has to stick to their agreed job which is to be a clone of the BundesBank issuing a clone of the DeutscheMark. But it is not the clone of the BundesBank. The DeutscheMark/Bundesbank was an ordinary sort of monetary system. Something that could & did work. The Euro/ECB is an abortion, that cannot work as designed. Laws which cannot be followed, won't be. As Wynne Godley noted long ago, the end result of the Euro/ECB system can be mass starvation, for it has nothing in it to prevent this. Either do something "illegal", or mass starvation. BTW, there are plenty of other treaties, part of European law, which say things like "mass starvation is bad", that thus contradict, make illegal, the Euro suicide pact.

The ECB so far has illegally supported sovereign debt as long as austerity policies which make everything worse are adopted. I.e. giving blood transfusions to car crash patients as long as they also apply leeches and stab themselves. As Dean has written, these aren't sane people.

The big problem is that the ECB is the servant of the EU governments, and cannot do fiscal policy against the will of the German government without Germans feeling betrayed by the EU, and that would be a gigantic catastrophe. It is already a gigantic catastrophe. Perhaps the ECB "doing fiscal policy" & not applying leeches could make Germans feel betrayed, because their economics is innumerate. But not nearly as innumerate as their leaders & economists. The German people sanely wanted to keep the DeutscheMark, instead of going with the suicide pact.

But in reality, it would benefit everyone, Greeks, Spaniards etc & Germans alike, and it would not be inflationary in the current depression. If enough Germans "feel" betrayed by strengthening economies throughout Europe, including their own, by becoming wealthier, then they could just leave, thereby making the rump Eurozone a more viable entity in the near future. Of course in the long run, it has to completely fall apart or become a fiscal union.
...
written by Calgacus, April 13, 2012 5:57
Pete: Central banks can't do much against inflation or unemployment. Pretty much all they can do is create both inflation and unemployment by raising interest rates, and then these geniuses can maybe undo some of the damage they caused later by reversing their brilliant policy. But thinking that the mandate against unemployment is a problem is dumbfounding. If anything, it has kept the Fed from being as psychotic as European central banks.

If anything, get rid of the anti-inflation mandate, since mainstream ("we get everything backwards, up is down, black is white") policy against inflation - rate hikes - just tends to make inflation worse. Of course the best thing is to just get rid of the Fed, put it back in the Treasury, as it was for most of the USA's history.
What country has the best macroeconomic policy in the world?
written by AndrewDover, April 13, 2012 6:51

Canada? Japan? US? China? India? Argentina?
But I'm Allready Gone
written by zinc, April 13, 2012 8:54
It is incredible that we should be having this discussion. Yet we chat and talk, chat and talk, pretending that somehow the Federal Reserve is an independent body capable of fortifying our national security.

It is not.

Academia is corrupt. Business is corrupt. Congress is corrupt. The American people are simple minded.
I dunno...
written by David, April 14, 2012 12:14
CEO wages have quite clearly outpaced inflation, for one thing, an extreme example to be sure. But there's solid evidence that wages, adjusted for inflation, for the most part are sticky, so keeping pace with COL. Seemingly inflation can be bad news for those living off retirement savings, at least as it's done in the US; but savings rates go up with mild inflation, plus there are assets like inflation adjusted treasuries available. So buying power can be corrected with due diligence, especially if the job creators channeled some of these record profits back into the worker salaries which have stagnated since Reagan.

Ellen, I can't disagree. If the ECB can't be the lender of last resort in that system, calling it a central bank is a bit of a misnomer, oui?

I do disagree with the idea of getting rid of the Fed, for the historical reasons that it was found necessaryto exist. You may as well cut out the heart of the country and hand it to its foreign investors.

DB and others ask the ECB to be the greater fool of last resort
written by Blissex, April 14, 2012 8:57
«If the ECB can't be the lender of last resort in that system, calling it a central bank is a bit of a misnomer, oui?»

But DB and many others are not asking the ECb to be the «lender of last resort», but the taxpayer of last resort, that is to to provide free money, not loans.

A lender of last resort operates in a regime of illiquidity, provides bridging loans. A taxpayer of last resort instead makes good insolvent situation by being the greater fool of last resort, buying toxic insolvent securities and paying par for them.

DB and others are asking for the ECB to raise target inflation from 2% to 4%; what this implies is that the ECB will make colossal "profits" from seignorage by issuing new EuroMarks, and use those to write down the losses on government and private bonds from the periphery. This will reset a situation of debt-deflation in the periphery, and everybody will be happy. The Germans are absolutely against being outvoted by the periphery on this. Either they get a popular vote, where there is one-man one-vote, or no way. It is a constitutional issue.

I think that DB like BdL is essentially a technocrat, however progressive, and he is furious that stupid voters and politicians are blocking a nice technocratic trick like raising bailout money from a bit higher seignorage, screwing a bit almost everybody (mostly workers and savers) to save everybody. Especially furious that they are blocking this for silly reasons like sovereign politics and constitutional issues.

The problem is that seen from Europe those constitutional issues potentially involve dozens of millions of deaths. Absolutely nobody in Europe (except possibly the irresponsible Greek kleptocrats who are sociopaths) wants to make Germans feel betrayed and taken advantage of.

If the Germans (and the other countries who agree with them) right or wrong don't want 4% inflation targeting, we can talk endlessly, but nobody is going to tell them "fuck you!" (I hope). Because the Germans are in it with us, they are not our patsies.

Nobody can make the Germans be the greater fools of last resort. Technocratically or not. Only democratically.

This said, I think that it would do a lot of good to Germany to show that they are leaders and propose to extend German welfare (which is currently far from generous) to Greece and Portugal and Ireland for the crisis period. This might make their demands for readjustment a lot more palatable.

Because one problem with technocratic solutions like targeting 4% inflation to cover up past insolvencies as DB proposes is that Mellon we absolutely right, as far as he went: the rottenness must be purged from the system by extensive liquidations, but at the same time demand and standards of living must be supported both for humanitarian reasons and to avoid debt deflation.

Japanese or Argentinian paths are not that good, as they involve either an embalming of the financial side of the economy, or extraordinary human suffering.
The different types of Europe and why respecting Germany really matters
written by Blissex, April 14, 2012 9:46
«I am well aware of the ECB charter. This is not an excuse. [ ... ] If the governments insist on acting like fools then they should be forced to find certified fools to do their job. No serious economist has any business working for the ECB at a time when its policies are leading to so much devastation across Europe.»

The devastation across Europe that people worry about constitutional issues are thinking of makes the economic one that you worry about a trifling matter.

Germans remember what happened politically when inflation targets were raised, perhaps over-remember them, and their neighbors too.

It may be an irrational response so many decades after that, but that's what Germans feel, and their opinion right or wrong has to be respected, and they cannot be treated as irrelevant or as patsies.

Ultimately the ECB issue is that everybody knows that the current ECB is a transitional thing, and it was a case of running forward to keep momentum for the improbable but indispensable European project.

Everybody understands that the next step is fiscal union of sorts, and the discussion is really entirely about which one.

Ultimately the European fiscal and monetary policy issue is constitutional at the highest level and is not dissimilar from the "states rights" issue in America, and that caused some significant consequences.

It all boils down to what kind of Europe the Europeans want, and there are several different opinions, for example some more or less fantasy ones (I will use some humourous language to convey impressions):

* A loose confederation to be picked apart and owned by some of the other continental powers. Most European politicians know their classics and remember that the greek confederation managed for a while to deal with the Persians only to be swallowed up by the Romans, and only the Byzantine Empire managed to survive for a long period.

* For the English government the ideal Europe is a loose confederation picked apart and ruled (or rather shaken down) by the spivs and shysters in the City of London. Of course they are fools, but they are sentimentally attached to the idea that they are Sahibs and Europe can be their new India.

* For the French government the ideal Europe is Greater France, where their superior language and culture is imported by everybody and enlightened ENArques extend their wisdom for the greater benefit of the uncouth savages around them. Or at least the ideal Europe is a not so loose confederation in which their guile and trickery allows them to punch way above their weight.

[to continue]
...
written by skeptonomist, April 14, 2012 9:53
The central bank is presumed to have some effect on the money supply and on inflation through its actual current operations, which are mostly setting discount rates and open-market operations. The Fed has essentially shot its bolt on these things, and has even had several rounds of quantitative easing. The ECB has not gone so far, and one can certainly argue that its rates could be a little lower and that it could be buying many more of the bonds of the peripheral countries, but that is not what I am getting at. What I take issue with is the supposed effect of setting the inflation target higher, that is the central bank promising not to take action against inflation *in the future*. As I have pointed out before, this relies on the assumption that the threat of future action by the central bank is a significant impeding factor in the economy now. This is actually inconsistent with the argument that Dean and other economists make in other contexts, that the principal current impediment for businessmen is lack of demand, which is supported by polls. As for consumers, they will not increase spending as long as their employment is uncertain; they will certainly not go on a spending spree because the Fed promises higher inflation in the future.

I agree that more inflation would be a good thing and that the ECB is making a big mistake in worrying about inflation now (as are some of the Fed governors). But this is hardly justification for claiming that the highly conjectural effect of setting the inflation target higher would necessarily solve the problems either of the US or Europe, or even have any effect whatsoever.
The different types of Europe and why respecting Germany really matters 2
written by Blissex, April 14, 2012 10:02
The only realistic plans for Europe are those shared by everybody else, which is to have a closer union dominated by Germany, because there is no way around it. If you have a closer union it will inevitably be dominated by Germany, unless Germany is treated as a patsy forever, and they will not take that forever, and even arguing for that is incredibly dangerous.

The only question about a new Frankish/Holy Roman Empire dominated by Germany is the status of non Germans in it, and there are a few alternatives as to that:

* Old style German ambition was to have Germans as first class citizens and non Germans as second class citizens (and much worse for some others). In part because some of them were German supremacists, but in part because many felt surrounded and feared by their neighbours. Europe fought two terrible wars to persuade Germany that they did not want to be second class citizens in the Second Frankish Empire.

* Most Europeans realize that if you cannot beat them you can join them, and would not mind being part of a united but not oppressive Second Frankish Empire as long as they is a single class of citizenship. Europeans who know history know that eventually Rome gave everybody Roman citizenship, and was not too bad, and many central Europeans remember fondly the Austro-Hungarian empire, which however had the defect of the two layers of citizenship, and repressed the second layer.

* As mentioned above, some Europeans, in particular the French and the English, would rather have a disproportionate influence on the whole, and this would mean making Germans second class citizens. Which they are a bit now because they are rather underweighted at all levels of EU institutions.
This is a very very bad idea, because Germans overall are not stupid and not monsters either, but they care about being respected, having their interests respected, and even being a bit liked.

So ramming through a policy that however expedient goes against German feelings and in particular their feelings about dark periods of their history is an exceptionally dangerous thing to do, and if the ECB staff left en-masse it would not look good to Germans either, who though that the Euro[Deutche]Mark and the Euro[Bundes]Bank issues had been agreed and settled.

Again, nobody wants to work against Germany (not even the English and French really, even if some of them are unrealistic fools), and nobody wants to work without Germany, and what everybody wants is to pass this critical test of whether other countries respect Germany and viceversa. even if it is a painful test and involves some short term madness. Again Germany would do a lot of good to themselves if they were mildly generous to the populations of Greece, Ireland and Portugal instead of just dealing with their kleptocratic overlords (Portugal is different in this).

It is a very delicate situation, and economics and the humanitarian situation in Greece are unfortunately just a small part of it.
assertions without proof
written by Peter K., April 14, 2012 10:05
"The Fed has essentially shot its bolt on these things, and has even had several rounds of quantitative easing."

Prove it. The comments against central banks and inflation seem highly argumentative to me, i.e. lacking in substance.

Baker's Maginot Line is a good analogy. Another one that has been used is that Europe's low inflation target and austerity policies are like the bloodletting practiced by medieval doctors (barbers). It's just what's done even the results aren't very good.
More info to convince: Baker is right
written by David, April 14, 2012 8:31
Perry Mehrling has some rather interesting points to make regarding central banks, some of which can be found in this blogpost of his, but also read his preprint that he gives a link to therein. ineteconomics.org/blog/money-view/world-without-money-reconsidered
Suffering
written by David, April 14, 2012 8:59
Blissex: voluntary suffering is fine, unnecessary suffering is either cruel or ignorant (you pick). Germany seems to forget their role in the trade imbalances, and shouldn't be casting stones. Being in a strong position in the game, they effect a questionable sense of moral superiority, when the game was set to their advantage (a la Blissex). Meanwhile millions are suffering thanks to poor investment choices of (mainly) German financiers, who themselves are not suffering for their bad choices, defended by claims of constitutionality etc. As Spain's bond problems show they need a dealer of last resort. No one is asking Germans to be fools, but patient. Or throttle the Eurozone, like they've been doing. Fine. Then the tens of millions may die anyway.
...
written by Calgacus, April 15, 2012 6:08
Blissex: Germans remember what happened politically when inflation targets were raised, perhaps over-remember them, and their neighbors too. No, they have been taught to misremember what happened by professional liars. What led to Hitler was Bruning's austerity, which the ECB is mindlessly copying. Not the inflation of years before, which was largely inevitable considering the German situation. And the "inflation target" idea belongs to the later, modern era of central bank (omni)potency cultism.

Germany is not being treated as a patsy. Proposing fiscal transfers, supporting sovereign bonds in a community of states which have all been underspending for decades, guaranteeing Eurowide full employment, is not treating Germany as a patsy, or harming them, or opposing their interests. Thinking they are (& even Dean's or Krugman's analyses, to a lesser degree, to some degree identifying (quasi)fiscal action & inflation) makes implicit, false neoclassical full employment assumptions, which you frequently fall into. Bringing in England makes no sense. They are not part of the Euro suicide pact, and have opposed, if for the wrong reasons, the tightening of the noose that the maniacs want. It is not a zero sum case of Germans vs others interests. It is a case of Germany supporting suicidally destructive policies, policies that would have been correctly understood as madness decades ago, before the fall of the dark age of (macro)economics. Policies which led to Hitler. Policies that may have a very short term benefit to some elites, but in the long run, if legalistically, systematically adhered to, must progressively destroy all of Europe's economies, ending up with Germany's.

If Germans have an irrational & incorrect feeling that they are being treated as patsies, just leave the Euro, and help themselves and everyone else greatly by doing so. Remaining, continuing to be the base of support of insane, innumerate policies that make everything worse for everyone, including themselves, is the worst of all courses.
...
written by Blissex, April 15, 2012 2:01
«millions are suffering thanks to poor investment choices of (mainly) German financiers, who themselves are not suffering for their bad choices,»

This is the usual revolting idea that it was bad bankers who tricked poor lenders to ruin themselves.

There are plenty of bad bankers, but in the Eurozone story they tricked their own governments (and usually they were encouraged by their own governments).

Because the lenders were not innocent, weak widows and orphans: they were sovereign governments and big state and private companies, assisted by the best consultants and professionals.

The millions who are suffering now should take issue not with the bankers, but with the kleptocratic governments that they elected, for the consequences of their own irresponsible borrowing.
Agreed
written by David, April 15, 2012 4:20
The government needs to own up, very true. And I never said it was the bankers, I said it was financiers. But obviously the governments allowed this to happen. But the Spanish government is not the only one that should suffer. The German political elite should do the right thing and then get voted out for doing such a horrible job. But tying the hands of the ECB is not a realistic solution; may as well kill the Eurozone then, there's no point in it if there is no safety in numbers for all member nations.

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Dean Baker is co-director of the Center for Economic and Policy Research in Washington, D.C. He is the author of several books, his latest being The End of Loser Liberalism: Making Markets Progressive. Read more about Dean.

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