Monetary Fallacy? Deep Divisions Emerge over ECB Quantitative Easing Plans – part 1

Written on November 5th, 2014 in politics Comments Off

Published on Spiegel Online International, by Anne Seith, Nov 3, 2014 (Photo Gallery – A Growing Rift Between Central Bankers – translated from the German by Christopher Sultan).

To prevent dangerous deflation, the ECB is discussing a massive program to purchase government bonds. watchdogs are divided over the measure, with some alleging that central bankers are being held hostage by politicians … //

… A Heated Dispute:

  • Ironically, his boss, Bundesbank President Jens Weidmann, is opposed to most of these costly programs. They’re the reason he and ECB President Mario Draghi are now completely at odds. Even with the latest approved measures not even implemented in full yet, experts at the ECB headquarters a few kilometers away are already devising the next monetary policy experiment: a large-scale bond buying program known among central bankers as quantitative easing.
  • The aim of the program is to push up the rate of inflation, which, at 0.4 percent, is currently well below the target rate of close to 2 percent. Central bankers will discuss the problem again this week.
  • It is a fundamental dispute that is becoming increasingly heated. Some view bond purchases as unavoidable, as the euro zone could otherwise slide into dangerous deflation, in which prices steadily decline and both households and businesses cut back their spending. Others warn against a violation of the ECB principle, which prohibits funding government debt by printing money.
  • Is it important that the ECB adhere to tried-and-true principles in the crisis, as Weidmann argues? Or can it resort to unusual measures in an emergency situation, as Draghi is demanding?

A Mixed Record in Japan and the US:

  • The key issues are the wording of the European treaties, the deep divide in the ECB Governing Council and, not least, the question of what monetary policy can achieve in a crisis. Is a massive bond-buying program the right tool to inject new vitality into the economy? Or does it turn central bankers into the accomplices of politicians unwilling to institute reforms?
  • The question has been on the minds of monetary watchdogs and politicians since the 1990s, when a German economist working in Tokyo invented the term “quantitative easing.” Its purpose was to help former economic miracle Japan pull itself out of crisis after a market crash.
  • The core idea behind the concept is still the same today: When a central bank has used up its classic toolbox and has reduced the prime rate to almost zero, it has to resort to other methods to stimulate the economy. To inject more money into the economy, it can buy debt from banks or bonds from companies and the government.
  • The Bank of Japan finally began to implement the concept, between 2001 and 2006, but the country sank into years of deflation nonetheless. After the financial crisis erupted, central bankers in Tokyo tried a second time to acquire government bonds on a large scale, in the hope that earlier programs had simply not been sufficiently forceful. Between 2011 and 2012, the central bank launched emergency bond-buying programs worth €900 billion ($1.125 trillion). Finally, in 2013, the new prime minister, Shinzo Abe, opened up the money supply completely when he had the central bank announce a virtually unlimited bond buying program.

A Higher Debt-to-GDP Ratio than Greece: … //

… Strong Side Effects: … //

(full text).

Part 2: Growing Pressure for ECB President to Act.

Banking Related Links:

Other Links:

Independence appeal: Catalonia asks court to allow referendum blocked by Madrid, on Russia Today RT, Nov 4, 2014;

Anonymous Now: Million Mask March descends on London, on Russia Today RT, Nov 4, 2014;

Thank you, Aussies – gaffe & Wurst serenades: Ban Ki-moon in Austria, on Russia Today RT, Nov 4, 2014;

SOS Alternatives to Capitalism – a discussion with Richard Swift, on The Bullet, Socialist Project’s E-Bulletin No. 1051, Nov 4, 2014;

Empire or Republic: Imperial Wars and Domestic Epidemics – You Can’t Have Wars and Public Health, on The People’s Voice.org, by James Petras, Nov 3, 2014;

Feminism – The Men Arrive, on ZNet (first on TomDispatch), by Rebecca Solnit, Nov 3, 2014;

The November Election Marxist IQ by Norman Markowitz, on Political Affairs pa, Nov 3, 2014;

Personal Income Rises Again in September, on 24/7 Wall Street, by Chris Lang, Oct 31, 2014;

Untranslatable Words From Around The World, on Babbel.com;

… and this:

Ave Maria:

… und noch dies:

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