Tuesday, November 1, 2011

DeLong On The ECB

J Bradford DeLong on Project Syndicate (excerpt):

The ECB’s Battle against Central Banking

BERKELEY – When the European Central Bank announced its program of government-bond purchases, it let financial markets know that it thoroughly disliked the idea, was not fully committed to it, and would reverse the policy as soon as it could. Indeed, the ECB proclaimed its belief that the stabilization of government-bond prices brought about by such purchases would be only temporary.

It is difficult to think of a more self-defeating way to implement a bond-purchase program. By making it clear from the outset that it did not trust its own policy, the ECB practically guaranteed its failure. If it so evidently lacked confidence in the very bonds that it was buying, why should investors feel any differently?

The ECB continues to believe that financial stability is not part of its core business. As its outgoing president, Jean-Claude Trichet, put it, the ECB has “only one needle on [its] compass, and that is inflation.” The ECB’s refusal to be a lender of last resort forced the creation of a surrogate institution, the European Financial Stability Mechanism. But everyone in the financial markets knows that the EFSF has insufficient firepower to undertake that task – and that it has an unworkable governance structure to boot...

Of all the regulatory and policy making failures over the past three years, I think the ECB is goat no 1. Granted that controlling inflation is correlated with higher long term growth, and that the ECB is being true to its Teutonic roots with its horror of hyperinflation.

Yet the ECB apparently misses the whole point of its anti-inflation mission – you do it not because inflation is bad, but because you’re trying to maximise long term social and economic welfare. Price stability is just the intermediate target, not the end goal. Double digit unemployment, failing national banking systems, and highly indebted public sectors leading to pro-cyclical fiscal austerity– the ECB in defiance of common sense and human decency could have done much, much more to alleviate real human suffering yet continues to stand aside. Therein lies the tragedy of Europe.

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