@ 2018 Annunziata + Desai Advisors, LLC

  • Marco Annunziata

In Defense Of The Dinosaurs

Last Friday, six former European central bankers expressed criticism and concern for current ECB policy with a joint memorandum. The signatories include Otmar Issing, former ECB Board member and Chief Economist; and Helmut Schlesinger, former President of Germany’s Bundesbank. The memorandum notes their position is shared by Jacques De Larosière and Christian Noyer, both former Governors of the Banque de France (De Larosière was also head of the IMF).

The Financial Times (FT) promptly crucified them, calling them “dinosaurs” and “the Bourbons of central banking: they have learnt nothing and forgotten nothing.”

The editorial opens noting that Schlesinger is 95 years old, and concludes with “The memo expresses a generation’s frustration that its ideas lost influence. Today’s Europe — especially its youth — may be fortunate that they did.”

They are wrong because they are old. It’s a rather inelegant and unconvincing argument.

The Memorandum’s names include eminent policymakers who played important roles in the launch and initial success of the euro. What antediluvian ideas are they clinging on to attract such dismissive vitriol?

  • They note that since 2014 the ECB has justified its very loose policy stance with the threat of deflation, while there is no evidence that deflation is a real and present danger. Hard to disagree, as not even the global financial crisis nor the euro debt crisis pushed the euro area into sustained deflation.

  • They warn that compensating for periods of inflation undershoot (below 2%) with periods of inflation overshoot—as recently suggested by ECB President Draghi—would lack credibility and undermine the stability of inflation expectations. This is a valid concern, echoed in a similar debate in the US.

  • They note that more ECB asset purchases are unlikely to help growth, and will mostly help high-debt member countries. Similarly, they argue, extremely low lending rates at this stage simply keep weak, “zombie” companies alive.

  • They point out that persistently negative interest rates have negative repercussions on the financial system and on savers.

A number of sensible economists agree with much of this analysis. In our most recent meeting of the ECB Shadow Council, after a lively debate, we opposed further monetary easing for many of the same considerations. And no, we are not a bunch of nonagenarians…

The FT insists that the primary risk to the euro area economy is overly tight monetary policy. That risk doesn’t keep me up at night: monetary policy remained exceptionally loose even as the euro area grew at an average 2.1% over the last four years (2015-18), well above potential. The FT argues that premature monetary tightening “helped tip the economy into a second recession”, ignoring the fact that the 2012-13 recession was triggered by a sovereign debt crisis—maybe the “dinosaurs” have a point in warning that loose monetary policy abets governments’ desire to rack up more debt?

There is ample room for disagreement on monetary policy—and we do need an honest vigorous debate. Shutting down the debate to impose a looser monetary policy dogma is not helpful. Doing it by attacking the dissenters’ age is inelegant and, let’s face it, thuggish. (Also, if memory serves me well, the FT’s editorial page criticized in ominous tones both the first and second Fed rate hikes post-great recession, calling them historic mistakes; yet the US economy grew, and the unemployment rate has fallen to the lowest rate in half a century. Seems that being dogmatic does not make you infallible.)

Shutting out one side of the discussion paves the way for more extreme versions of the only accepted view: calls for a major fiscal expansion accommodated by monetary policy are gaining strength; Modern Monetary Theory is getting a lot of airtime in the US by arguing that the government does not have a budget constraint, because it can print money. Populists on both sides of the political spectrum, unsurprisingly, love the idea.

What could possibly go wrong?