German judges versus the ECB

The German Federal Constitutional Court (Bundesverfassungsgericht) made a decision concerning the ECB’s QE program1.

This article explains how the ECB can defend itself.

But I want to play devil’s advocate, and defend the German judges.

Despite buying thousands of billions of euros worth of bonds, the ECB has undershot its inflation target for years. The Court has a point that buying vast amounts of sovereign debt doesn’t seem proportional to this disappointing outcome.

In fact, the ECB could achieve its primary objective of price stability with a much smaller balance sheet. For example by dual interest rates. Or by helicopter money.

Second, the Court could prohibit the Bundesbank from participating in QE. But buying German bonds was not needed for monetary policy anyway! It was a political decision to buy bonds proportional to the national capital key in the ECB.

Finally, the decision of the Court should force European politicians to fix this mess. Maybe the ECB should have a dual mandate like the Fed has, so inflation and employment carry the same weight in monetary policy decisions. Or they could change the structure of the Eurosystem. Do we still need 19 national central banks when we have the ECB? Sounds like a make-work scheme to me…

Fiscal burden sharing between EU member states is not the solution to the corona crisis. The ECB needs to do its job.

Fiscal burden sharing poisons Europe

Who should pay for the corona crisis in the EU?

Philipp Heimberger discusses the possibility of a European recovery fund, funded by a common debt instrument.

On the Macro Musings podcast, Ashoka Mody says1 countries like Italy need fiscal transfers from other member states.

But fiscal burden sharing is a toxic idea, as Dutch finance minister Wopke Hoekstra demonstrated.

What’s the real problem?

Italy is 135% of GDP. Spain and France are 100% of GDP, so three of the big Eurozone countries are not going to be able to do fiscal stimulus of 5, 7, 10% of GDP, which is basically what is going to be needed for this crisis. We’re going to need enormous amount of fiscal stimulus. Maybe Germany will do that. In the US, with this two trillion, they’re already at about 9% of GDP, and I expect that it will go up even more, for a number of reasons, but Italy cannot do anything close to that, or Spain cannot do anything close to that.

Ashoka Mody

Clearly, the problem is not the level of debt. The U.S. has a higher debt to GDP ratio than France and Spain.

The problem is the refusal of the ECB to close the sovereign spreads. As I write this, the German 10 year bond yield is -0.461. The Italian 10 year bond yield is 2.182.

How do we get out of this mess?

Every country should do whatever it takes to save its economy. Bail out businesses, pay unemployment benefits.

The expenditures can be funded by bonds. The ECB should keep the spreads low. That means buying whatever it takes.

Secondly, the ECB is once again neglecting its primary objective. Oil prices and unemployment point to low nominal aggregate demand. Without income support to households, it’s unclear how the ECB can achieve its inflation target.

So the ECB needs to do helicopter money drops, as suggested by Eric Lonergan, Frances Coppola, Positive Money Europe, and me.

But what does the ECB do? The Governing Council has never even discussed helicopter money, let alone planned to implement it!

This is not just incompetence, this is financial terrorism.

Frankfurt delenda est.

Helicopter money as a weapon in the war against the coronavirus crisis

This post was originally intended to be published elsewhere, but ultimately wasn’t. Note that this article is only about helicopter money. However, governments and central banks urgently need to do much more. The state should bail out all businesses. Businesses should hold on to their employees even if they cannot work so the economy can have a V-shaped recovery. The government should pay the workers. I also have other proposals for the ECB, see here and here.

Continue reading “Helicopter money as a weapon in the war against the coronavirus crisis”

How the ECB can stop the coronavirus crisis overnight

I haven’t posted on the blog in a while, but I’m very active on Twitter.

Here’s my 3 point plan for the ECB:

(1) The ECB should issue bonds, which are risk free (the ECB cannot default on euro liabilities). It should buy every sovereign bond trading at a yield of 40 basis points or more above the yield on the ECB bonds.

(2) The ECB should set the interest rate on TLTROs at -5% until six months after the coronavirus public health crisis is over.

(3) The ECB should do helicopter money as soon as businesses are operational again, because the outlook for price stability is bleak.

This is not a drill

The ECB, government leaders and the banking sector must act immediately to stop the financial panic caused by the coronavirus.

A recession can still be avoided.

Banks should provide bridge loans to businesses suffering from the corona shock.

The ECB should do a TLTRO-like operation, providing cheap funding proportional to banks’ SME/corporate credit portfolios. Make the terms of the ECB loans conditional on coronavirus metrics. For example: banks should repay 4 months after the last new COVID-19 case is detected in the EU.

If Europe’s leaders fail to act decisively, the financial costs will snowball.

Larry Summers is a VSCO girl. On central banks, fiscal stimulus, and why you should read Eric Lonergan

In case you’re not familiar with teen culture, VSCO girl is a fashion trend.

Surely, the Very Serious People who think about central banks are not susceptible to such fads, right?

I regret to inform you that the Very Serious economists and central bankers are just as prone to trends as teens on TikTok.

Continue reading “Larry Summers is a VSCO girl. On central banks, fiscal stimulus, and why you should read Eric Lonergan”

The Owl of Frankfurt: Lagarde discovers her powers

Big shoes to fill

Christine Lagarde took over the ECB from Mario Draghi in 2019. Draghi was widely respected as the man who saved the euro. He promised to do ‘whatever it takes’ when prices for bonds of large euro countries were unsustainably low. Furthermore, Draghi introduced monetary policy tools that were considered radical at the time, such as quantitative easing (buying bonds) and targeted refinancing operations (lending to banks).

Critics suspected that Lagarde would be no match for her predecessor. Indeed, Draghi was an economist and former banker. By contrast, Lagarde was ‘merely’ a lawyer and politician.

Maybe that is why her opponents would systematically underestimate Lagarde. Time and again during her presidency, she followed the same strategy. Instead of trying to come up with new ideas herself, she listened to all options. Not just those of an inner circle of old central bankers and professors, but especially the alternatives suggested by junior staff and independent thinkers. Once Lagarde made up her mind on the right course to follow, she used her political skills to win the day.

The 2020 review

But let’s return to the start. Although Draghi’s ECB had performed better than under the disastrous Trichet, all was not well. Unemployment in the euro area was high. The ECB’s interest rates were negative. Inflation in the euro area was below the two percent target. The contemporary consensus said that the central bank was out of ammo.

It was in this context that Lagarde launched a monetary policy review. She wanted to know how the ECB could boost economic growth and fight climate change.

The policy review set in motion the bureaucratic cogs of the ECB. Meanwhile, Lagarde was subtly consolidating her power. She kept a tight grip on meetings and did not tolerate leaks. She also improved communication with national leaders and the European Parliament.

But most importantly, Lagarde read the Internet. And what she read did not make her happy. Lagarde’s advisors had assured her that the ECB’s hands were tied. They claimed that the institution was powerless in the current macroeconomic environment and that fiscal stimulus was needed.

But online, she discovered that central banks had historically used instruments that none of the very serious people were talking about. It was as if everybody suffered from amnesia.

In the spring of 2020, Lagarde held a secret meeting with three outsiders. The quartet of conspirators hatched a plan…

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Next episode: the conference of the long knives

First episode: Paris, 2076

The Owl of Frankfurt: Paris, 2076

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.

Owl of Athens on Charon’s piece

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,

Bon voyage!

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Next episode: Lagarde discovers her powers