There are plenty of financial proposals for dealing with the corona crisis.
More government debt! Eurobonds! Helicopter money! Eliminate sovereign debt held by the ECB! Create a European investment fund!
One thing that greatly annoys me is that people don’t go into the details.
So if you want to convince me of your financial panacea, show me what it means in practice. Who are the winners and losers? What are the consequences of your plan for households, companies, banks, government finances, inflation, employment?
Eulogy by Aya Sissoko, President of the ECB, 8 January 2076
It is with great sadness that we say farewell to our honorary President and dear friend Christine Lagarde today.
Madame Lagarde will be fondly remembered as the fourth President of the European Central Bank, the predecessor of the Euro Central Bank.
Christine became President during a protracted malaise in the euro area. By throwing off the yoke of false dogma, she revitalized the ECB. Her curiosity, vision and political prowess changed the course of history.
Under her leadership, the ECB showed the world how to handle the climate transition. At the same time, the euro economy grew at a rate previously believed to be impossible.
Ask any of the Seven Bankers, and they will all agree: Christine was the first modern central banker. Her autobiography, published 30 years ago, is still a must-read.
Christine’s career set the gold standard for our profession. Not just for what she did during her presidency, but also for what she didn’t do.
Her resignation in the wake of the Crisis of 2033 was a clear statement against the all-powerful central banker. During her retirement, Christine refrained from commenting on current events.
Christine, Madame Lagarde, you were born Lallouette – the lark – but you will always be The Owl of Frankfurt.
On behalf of the 1.4 billion people who use the euro every day,
These two dilemmas illustrate that central banking is inherently political.
Therefore, economists should calculate the consequences of different monetary policy options. These scenarios will make the politics of the central bank’s actions explicit. For example, I estimated the effect of deeply negative interest rates (a proposal of Miles Kimball) on banks, governments, the ECB and the private sector.
Especially in the euro area, the ECB should take differences in asset mixes between countries into account.
Increased transparency will enable central bankers to defend monetary policy against criticism.
Update 26 January 2020: my arguments are obviously not new, see for example:
most Germans do not know that Germany’s interwar period was shaped by two separate crises, but rather see them as being one and the same.
Looking back into a skewed version of their own history, many Germans conclude that mass unemployment and high inflation are just two sides of the same coin. What makes this worse is that this misconception is especially prevalent among well-educated and politically interested Germans. Hence, the group of people following the ECB’s monetary policy most closely is also the group most likely to draw the wrong lessons from German history. But public thinking about Weimar economic history is not just substantially flawed. We can also show that the skewed memory of the Weimar Republic still affects the way in which at least some Germans think about monetary policy today.
Update 15/02/2020: The following comment on a FT Alphaville article about German financial assets corroborates Redeker et al‘s thesis:
The commenter is probably well-educated, or he wouldn’t read Alphaville. But he makes two mistakes. First of all, the hyperinflation did not occur in the 1930s. Secondly, there is a logical inconsistency. If Germans fear hyperinflation, why do they hold 40% of their assets in currency and deposits? That doesn’t make any sense, as a new hyperinflation would make these assets worthless.
Lobbyists are often mistrusted. Special interest groups use them to influence politicians.
However, what’s the alternative? Policy makers cannot know everything. They need input from industry and non-profit groups. Through personal contacts with officials and by publishing articles, lobbyists can get new ideas on the agenda.
Take the responsibility of central banks in the green transition to phase out carbon-based fuels.
In a recent episode of the Macro Musings podcast, David Beckworth talked to professor and author Laurence M. Ball about his new book The Fed and Lehman Brothers: Setting the Record Straight on a Financial Disaster.
Starting around minute 45 of the podcast, they discuss the role of Henry Paulson, the Secretary of the Treasury. Professor Ball notes that “It was Paulson1who was making the decisions. That’s a little bit odd, because legally, under the Federal Reserve Act, it was the Federal Reserve’s job to decide whether or not they made loans. The Treasury Secretary legally didn’t have any more role than the Secretary of Agriculture or the Governor of Maryland. But Henry Paulson just arrived at the New York Fed and started saying what was gonna happen and people did what he said”.
This doesn’t surprise me one bit. In times of crisis, you cannot avoid politics.
In ‘The next crisis’, the final chapter of Bankers are people, too, I wrote
“It remains to be seen how long regulations will keep risks in check. When a major (shadow) bank fails in spite of all the monitoring and supervision, the value of the institutional framework will become clear. Because of the importance of banking to the economy, I am sure that the highest officials in government will be involved if a too big to fail bank is about to collapse, whether or not that is against the law.”
So much for legal constraints during a major crisis.