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?
Economists are fond of analogies to describe technical ideas.
Most of those analogies are confusing and/or useless. As I wrote in the introduction of Bankers are people, too:
Economists and journalists writing for lay audiences tend to use metaphors when explaining financial concepts. For example: ‘Cheap credit is like heroin. It’s addictive, and the economy can overdose from it.’ That may sound nice, but what does it even mean?
My first reaction was: probably not, because the ECB already evaluates its past performance. However, after more thought, I have changed my mind. This post examines some recent failures of central banks; how an IEO could improve monetary policy going forward1; and what it would take for the IEO to be an effective department rather than a paper tiger. Continue reading “Should central banks have an Independent Evaluation Office?”
Or to be more precise, debate about the financial institutional framework edition.
How should banks be regulated? Ten years ago, this question would have only interested a few specialists. Discussions about bank supervision and the role of the central bank were way too boring for the general public1. Besides, bankers surely knew what they were doing?
The global financial crisis and its aftermath changed this complacent attitude. The existing rules did not prevent the worse financial crisis since the 1930s. Governments had to bail out banks at a moment’s notice. Politicians took drastic decisions during the panic of September 2008. While those actions were taken with little democratic oversight, national leaders2 were the only agents willing and able to stop the collapse.