Tag Archives: ECB

Gratis passasjer og Samaritanens dilemma.

To begreper du burde kunne. Den først har du kanskje hørt om, den andre er kanskje mer ukjent som uttrykk. Forståelsen kan du nok resonnere deg fram til. Her er Nick Rowe om ECB:

Could the ECB become the central fiscal authority?, by Nick Rowe: There is only one way to save the Euro now. The ECB acts as lender of last resort to the 17 Eurozone governments. But nobody would want to act as lender of last resort to a deadbeat, and the ECB wouldn't want to act as lender of last resort to a fiscal deadbeat. With the guarantee of unlimited loans from the ECB, the fiscal deadbeat would have every incentive to keep on borrowing and spending unlimited amounts. It's a mix of: the free-rider problem (because they are only one in 17, and even less than that for a small country); and the Samaritan's dilemma (if they know you are going to help them get out of trouble, they are not going to stay out of trouble).

The Eurozone lacks a central fiscal authority to match the central monetary authority. And it seems to lack the ability to create a central fiscal authority in the normal way. Nobody seems to have the power to exert that central fiscal authority, and force the 17 governments to do what they are told.

But the ECB does have that power. It can say to each of the 17 governments: "We will act as your lender of last resort if and only if you do what we say. If you don't do what we say, we will loudly announce that we will no longer act as your lender of last resort, and the bond markets will make mincemeat of your bonds, and there will be runs on all your banks."

In fact, the ECB is the only body that does have that power. I'm not talking about legal power. It's long past that stage of the game. Good central banks ignore all the rules in an emergency (as Brad DeLong tells us the Bank of England did for a century). The ECB has the de facto power to save any or all of the 17 countries. But it won't use that power unconditionally. It has to make the 17 governments do what it tells them to do. It has the power to do that. "Do what we say, or your country is toast".

The normal question in political macroeconomy is whether the monetary authority should have independence from the fiscal authority. It's time, in the Eurozone, to reverse that question. Should the 17 fiscal authorities have independence from the one monetary authority?

Is this democratic? Of course not. Might it happen? I don’t know.

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Sentralbanken har store problemer med å være en………sentralbank?

Paul De Grauwe, University of Leuven og rådgiver til EU president Barrosso skriver i VoxEU om den europeiske sentralbanken og noen av vanskelighetene den har med å være en sentralbank. Starten av tredje paragraf starter med «There is no sillier way to implement a bond purchase programme than the ECB way». Her er De Grauwe:

The Eurozone crisis plays on to a familiar tune. Finance ministers meet on the weekend only for markets to dismiss their efforts the following Monday. This column argues that Europe’s leaders have lost touch, that the ECB has the firepower but is not prepared to use it, and that the outcome of all this is depressingly clear: Defeat by the financial markets.

Imagine an army going to war. It has overwhelming firepower. The generals, however, announce that they actually hate the whole thing and that they will limit the shooting as much as possible. Some of the generals are so upset by the prospect of going to war that they resign from the army. The remaining generals then tell the enemy that the shooting will only be temporary, and that the army will go home as soon as possible. What is the likely outcome of this war? You guessed it. Utter defeat by the enemy.

The ECB has been behaving like the generals. When it announced its programme of government bond buying it made it known to the financial markets (the enemy) that it thoroughly dislikes it and that it will discontinue it as soon as possible. Some members of the Governing Council of the ECB resigned in disgust at the prospect of having to buy bad bonds. Like the army, the ECB has overwhelming (in fact unlimited) firepower but it made it clear that it is not prepared to use the full strength of its money-creating capacity. What is the likely outcome of such a programme? You guessed it. Defeat by the financial markets.

Financial markets knew that the ECB was not fully committed and that it would stop the programme. As a result, they knew that the stabilisation of the price of government bonds would only be temporary and that after the programme is discontinued prices would probably go down again. Few investors wanted to keep these bonds in their portfolios. As a result, government bonds continued to be sold, and the ECB was forced to buy a lot of them.
There is no sillier way to implement a bond purchase programme than the ECB way. By making it clear from the beginning that it does not trust its own programme, the ECB guaranteed its failure. By signalling that it distrusted the bonds it was buying, it also signalled to investors that they should distrust these too.

Surely once the ECB decided to buy government bonds, there was a better way to run the programme. The ECB should have announced that it was fully committed to using all its firepower to buy government bonds and that it would not allow the bond prices to drop below a given level. In doing so, it would create confidence. Investors know that the ECB has superior firepower, and when they get convinced that the ECB will not hesitate to use it, they will be holding on to their bonds. The beauty of this result is that the ECB won’t have to buy many bonds.

Why has the ECB not been willing to use this obvious and cheaper strategy?

Part of the answer has to do with the objections that have been raised against the idea that the central bank should be a lender of last resort in the government bond markets of a monetary union. Some are serious (moral hazard); others are phony (inflation risk). I discussed these in De Grauwe (2011) (see also Wyplosz 2011). My impression, however, is that these objections hide another more fundamental reason. The people sitting around the table in Frankfurt continue to believe that financial stability is not part of their core business, and, to use the words of Trichet, that there is only one needle on the Frankfurt compass and that is inflation. As long as this view prevails the ECB will be reluctant to do the obvious.

The result of this failure of the ECB to be a lender of last resort has been that a surrogate institution, the EFSF/ESM, had to be created that everybody knows will be ineffective. It has insufficient firepower and has an unworkable governance structure where each country keeps its veto power. In times of crisis it will be paralysed. As markets know this, its credibility will be weak.

To hide these shortcomings European leaders are now creating the fiction that by some clever leveraging trick the resources of the EFSF/ESM can be multiplied, allowing the ECB to retire to its Panglossian garden of inflation targeting. European leaders should know, however, that leverage creates risk, very large risks. These appear with full force when liquidity crises erupt. Thus when the leverage trick will be most needed, it will fail as it will show how risky the positions are of those who have guaranteed the leverage construction. Governments which now enjoy AAA creditworthiness will take the full blow of a 100% loss on their equity tranches and will lose their creditworthiness in one blow. The whole risky construction will collapse like other clever financial constructions of the recent past.

Academics have the reputation of living in an ivory tower far away from the realities of the world. My impression is that instead of the academics, it is the European leaders who have been living in an ivory tower. Disconnected from the economic and financial realities, they have created an institution that does not work and will never do so properly. Now they are creating a financial gimmick that, in their fantasies, they expect to solve the funding problems of major Eurozone countries. It is time for the European leaders to step back into the real world.

De Grauwe, P, (2011), The ECB as a lender of last resort, VoxEU.org, 18 August.
Wyplosz, C, (2011), They still don’t get it, VoxEU.org, 25 October.

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Hmm | Hva om FED kunne trykke euro og ECB kunne trykke dollar? Jeg tror hodet mitt akkurat brøt sammen.

Tyler Cowen med en ‘hva om’:

A simple cure for eurozone problems, requiring only one law:

Give the United States Federal Reserve System the power to create euros at will, at its discretion, subject to no outside checks.  This power may last for a specified number of years or who knows, maybe forever.

The Fed’s incentive is not exactly to maximize European social welfare, but it is probably close enough.  The Fed’s incentive is to prevent contagion from spreading to the United States and its banking system.  Toward this end it would create euros and distribute them to various European banking systems, or lend them out, do more swaps, etc.  It would help Europe but in a fairly balanced way, in particular the Fed probably would not “screw over” the major U.S. allies on the Continent, namely France and Germany.

Bernanke has a track record of dealing with severe financial crises, no?  And is he not insulated from the worst of European politicking and gridlock?  Foie gras and feta probably would not sway him, and the EU would have to agree to this only once.  No further plans need be announced and no coalition governments will have further checks.  Stock markets would rise immediately.

Conservatives might not mind if the Fed “wrecked the European economies with inflation.”

This law need not preempt other European initiatives, if those initiatives were to prove desirable.  The ECB would be ceding no powers whatsoever and it would not have to modify its charter.

Forget about the dual mandate, we need Dual Central Banks.

Such a rescue operation is not without historical precedent.

And while we’re at it, let’s give the ECB the power to create dollars! (just kidding folks…or am I?)

(Via Marginal Revolution.)

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Oops | To tunger taler til Reuters og dette blir surt.

Nok en fartsfylt uke i økonomiverden. Det ser ikke ut som vi får et pusterom i umiddelbar framtid.

Vi begynner med den europeiske sentralbanken som sender et relativt sterkt signal til markedet idag (vi kommer tilbake til hvem som er avsender, og hva jeg mener med to tunger). Vel, det er slik aktørene tolker det etter at flere analyser publisert i dag argumenterer for et kutt i ECB renten. For å minne på ECB mandatet:

The primary objective of the ECB’s monetary policy is to maintain price stability. The ECB aims at inflation rates of below, but close to, 2% over the medium term.

Det siste inflasjonsestimatet fra ECB er:

The September 2011 ECB staff macroeconomic projections for the euro area embody these considerations and foresee annual HICP inflation in a range between 2.5% and 2.7% for 2011 and between 1.2% and 2.2% for 2012.

Dette er viktig siden ECB setter renten utelukkende fra et inflasjonsmål. Du ser usikkerheten er stor, en spread på hele 1%-poeng i inflasjonen i 2012.

For analytikerne er ikke dette nok, og mener at det utelukkende inflasjonsmålet ikke gjør jobben og et kutt i ECB renten er meget mulig:
Screen shot 2011 09 26 at 13 34 44
Denne grafen er tatt fra ECB sin månedlig utgave, og burde vært plassert på en annen side enn 37. Dette viser tre-måneders future-rater og forskjellen mellom 9. juni og 7. september er et godt bilde på hva som har skjedd i mellomtiden.

Hva med denne:
Screen shot 2011 09 26 at 13 35 50
På lang sikt skal renten opp igjen, det er selv Europa enig om. Nok om forventninger, hva har ECB gjort hittil:
Screen shot 2011 09 26 at 14 56 53

«The stance of monetary policy remains accommodative and thereby continues to lend considerable support to economic activity and job creation,»

Det sa Jean-Claude Trichet, som går av som ECB sjef neste mnd. forresten, i juli da ECB hevet renten sist. 1,5% er fortsatt meget lavt, og renten er per dags dato hevet to ganger siden 2008. Så hva er det som har satt rentekutt på kartet idag?

Det er tysk businesspessimisme som driver de dårlige nyhetene i Tyskland idag. Kurven for pessimismen ser omtrent ut som Chart 22 over, indeksen nådde sin topp i februar 2011 med 115,4, men nådde det laveste nivået på 15 måneder i den siste undersøkelsen, 107,5. I den anledning sa Klaus Abberger ved IFO Research Institute at ECB bør ta dette på høyeste alvor og vurdere å senke renten «cautiously and slowly.»

Det hjalp ikke at et medlem av ECB tok en «Norges Bank» og uttalte at et rentekutt ikke kunne utelukkes. Ryktet som ble spredt var litt mer konkret enn det, et kutt på 50 basispunkter var sitert flere steder. Styremedlem i ECB, Yves Mersch, driver litt brannslukking idag:

«These wild expectations only show that some people have lost the north,» Mersch told news agency Market News International in an interview conducted on Saturday, asked about interest rates.

Dette kan være et tilfelle av at markedet hører det den vil høre, i det minste overdriver, et rentekutt fra ECB ville være enormt for markedet.

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ECB setter renta opp fra 1% til 1,25%. Relevant lesing følger.

Hattipp til Twenty-Cent Paradigms for denne:

The ECB Tightens: «The European Central Bank just announced an increase its policy interest rate from 1% to 1.25%.  Their decision highlights some current monetary policy dilemmas.

Core versus overall measures of inflation.  As ECB President Jean-Claude Trichet explained:

Euro area annual HICP inflation was 2.6% in March 2011, according to Eurostat’s flash estimate, after 2.4 % in February. The increase in inflation rates in early 2011 largely reflects higher commodity prices. Pressure stemming from the sharp increases in energy and food prices is also discernible in the earlier stages of the production process. It is of paramount importance that the rise in HICP inflation does not lead to second-round effects in price and wage-setting behaviour and thereby give rise to broad-based inflationary pressures over the medium term. Inflation expectations must remain firmly anchored in line with the Governing Council’s aim of maintaining inflation rates below, but close to, 2% over the medium term. 

That is, the recent blip in inflation is largely due to energy prices, but the worry is that this will lead to higher wage demands and ultimately more general price increases.  This would be particularly bad if people began to make plans based on expectations of higher inflation (i.e., expectations became un-‘anchored’).  Those worries are ill-founded, says Paul Krugman:

Overall eurozone numbers look very much like US numbers: a blip in headline inflation due to commodity prices, but low core inflation, and no sign of a wage-price spiral. So the same arguments for continuing easy money at the Fed apply to the ECB. And the ECB is not making sense: it’s raising rates even as its official acknowledge that the rise in headline inflation is likely to be temporary.

Former Fed governor Larry Meyer had a nice op-ed on the subject in the Times last month.

Inflation targeting and ‘credibility.’ A temporary energy-price driven inflation spike may be harder for an inflation-targeting central bank like ECB to brush off.  The goal of inflation targeting is to make monetary policy credible – i.e., to keep inflation expectations anchored – but it only works if the announced target is met.  Gavyn Davies writes:

Of course, when an adverse supply shock hits the economy, there are no easy paths for the central bank to adopt, and the ECB will protest that its mandate requires it to hit its CPI inflation target regardless of the consequences for GDP growth. But it can expect no praise if it pushes the economy back into recession.

The optimum currency area problem.  Or, really, the problem that the euro zone isnt one.  The single currency means a single monetary policy.  That works if the economies of Europe move together, but they arent.  This map of unemployment rates across Europe illustrates the problem:

The lightest yellow shade are countries with unemployment rates below 7% and the darkest red have rates above 13%, including 14.9% in Ireland and 20.5% in Spain.  (A small irony: Eurostat’s nifty map tool makes it very easy to illustrate the fundamental flaw of the euro project).  In the high unemployment countries, it is hard to imagine that workers would be in a strong position to demand higher wages to make up for the increase in energy prices.  But Trichets worry may make more sense in the parts of Europe where labor markets are tighter.  And Trichet can only make one monetary policy.  As Floyd Norris puts it:

‘If you take the euro area as a whole . . .’
So began a response Thursday from Jean-Claude Trichet, the president of the European Central Bank, as he explained the central bank’s decision to raise interest rates in Europe.
If only there were a ‘euro area as a whole.’

This is exacerbated by the fact that several of the smaller eurozone countries are also undergoing sovereign debt crises.  David Beckworth has the appropriate musical reference – it may be the final countdown for Europe:

[T]his move may have begun the countdown to the Eurozone breakup.  It is hard to see how else this can turn out.  The Germans–the folks who really call the shots in Europe–are reluctant to see the needed debt restructuring in the periphery and are equally reluctant to provide bailouts large enough to fix the problem. So far the Germans have been kicking the can down the road on these issues. With ECB monetary policy now tightening they will soon run out of road to kick the can down. 

One irony here is that many of the same sorts of people who have taken to criticizing the Fed for ‘printing money’ are also prone fretting that America is sliding down the slippery slope to ‘European socialism’ (trains and universal healthcare – quelle horreur!).  Next time Ron Paul says we need to return to ‘sound money’, someone needs to tell him to move to Europe!


(Via Twenty-Cent Paradigms.)

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