ECB watch: Lucas out, (a little bit of) Minsky in
“Theory, which ignores the existence of financial instability, can lead to rules that the authorities should control the growth of the money supply to the well-nigh exclusion of other considerations. Once financial instability is recognized as being at times a significant threat, then such an unconditional posture becomes untenable. Money supply control is at best an conditional desirable policy posture.”
Hyman Minsky
Official European Central Bank philosophy is largely based upon Robert Lucas style ‘rational expectations’ ideas: as long as the central bank is ‘credible’ in its strategy to keep inflation low and stable (i.e. willing to wreck the economy), inflation will be low and stable and the magic of perfect financial markets will ensure financial stability. Which boils down to the idea that an inflation rate “moins de 2%, proche de 2%” (after reading all these speeches from board members I can’t stand the english phrase anymore) is financial stability. Don’t underestimate this idea: it’s one of the main foundations of the design of the Euro. People really had the idea that this would work, even despite the fact that the inflation metric used is rather incomplete (not including house prices or prices of investment goods, for instance). The ECB tries to accomplish this goal by targeting a medium term growth rate of M-3 money of 4,5%.
But things are changing.
* according to this speech by board member Jorg Asmussen the bank does not target the amount of money anymore, but an (average) interest rate on government bonds instead
* and according to thisnew book on monetary statistics (published exactly five years after the start of the Great Financial Crisis…) the ECB really does not believe anymore that low and stable inflation (“moins de 2%, proche de 2%) is enough to guarantee financial stability. The quest for stability is even called a seperate ‘mandate’ which is as important as low and stable inflation (“moins de 2%, proche de 2%”). Great.
Minksy is not yet mentioned and the idea that past policies of the ECB might have stimulated financial turmoil (in the case of the ECB: for instance deliberately not looking at individual countries, house prices and the exponential increase in private debt, though all these data were known or even estimated by the ECB!) is still absent. But there is a clear movement away from Lucas-style economic fairy tales.
Interesting: the book also contains information on real micro foundations for macro statistics (i.e. macro statistics based upon micro data), which is of course an important linguistic break from neo-classical newspeak about these so-called ‘microfoundations’, wich are just assumed macro-indifference curves which just only assumed to behave like micro-economic neo-classical indifference curves but which are not based upon micro data at all.
Note also Mario Draghi’s insistence on global financial statistics…
” as long as the central bank is ‘credible’ in its strategy to keep inflation low and stable (i.e. willing to wreck the economy), inflation will be low and stable and the magic of perfect financial markets will ensure financial stability.”
Why must it be assumed that inflation might be necessary in order that the economy may not be wrecked?
Well, much as I would like to see the light seep into economic policy in the EU I don’t see Jörg Asmussen as the bringer of good news. But ofcourse darkness will not rule forever and there are streaks of light here and there.
The first report of the Macroeconomic Imbalance Procedure was produced earlier this year and private debt is included as a macro-economic imbalance indicator!:
“A high level of private sector debt increases the exposure of the private sector to changes in the business cycle, inflation and interest rates. Moreover, the unwinding of excessively leveraged positions jeopardises growth and financial stability. ”
and further on in the same report:
“Finally, the economic reading of the scoreboard indicators points to the need for further horizontal analysis on the drivers and policy implications of large and sustained current account surpluses, especially in some euro area Member States. In the next months, the Commission will undertake further assessment of the divergence in economic performance across Member States, including exploring trade and financial interlinkages between deficit and surplus countries and examine ways for further re-balancing at the level of the euro area and within the global context.”
Alert Mechanism Report
Report prepared in accordance with Articles 3 and 4 of the Regulation on the prevention and correction of macro-economic imbalances. Brussels, 14.2.2012 COM(2012) 68 final p. 10
http://ec.europa.eu/economy_finance/economic_governance/documents/alert_mechanism_report_2012_en.pdf
That could be interpreted as on the way to something positive and the bureaucrats in brussels may/will probably produce some interesting statistics along the way, but it’s still a far cry from the morals of the economic fairy tales most leading european politicians are telling. Somebody in there may have heard about Hyman Minsky, but they are not going to say it.
henry1941. As long as money exists as debt, the money supply must grow so that interest on the debt is paid. Unless growth in real output at least matches growth in money supply there must be inflation, otherwise there will be a decrease in V which means recession. Of course stagflation is possible. Money flows in and out of the Eurozone complicate the analysis and further confound rational expectations.
@Allen
I am not sure about that. Credit, if not abused, leads to increased production and is no more than a transfer of purchasing power. It is also extinguished when the loan is repaid. Credit used for land purchase has nothing to do with production since it is no more than payment of a ransom fee.
However, perhaps that is why usury was banned in the bible (Leviticus 25). The ban on usury was reasserted in a Papal Encyclical, Vix Pervenit, issued in 1745. They may have been on to something.
It is not necessary to charge interest for credit nor to secure it on the value of land titles. It can be secured on the value of whatever it is the credit has been given for, and bankers can charge for their services on, for instance, a per hour basis.
“It is not necessary to charge interest for credit nor to secure it on the value of land titles.” Is not the rationale for charging interest on a loan in order to retain purchasing power of the savings temporarily loaned – i.e. should be related to expected inflation rate? And, yes, on top of that a service fee and insurance premium according to risk of default.
It may be the rationale, Carol, but there would be no need to retain the purchasing power of the savings temporarily loaned if savings (unused entitlements to credit) were not lent out, and loans (credit used) were – as Henry suggested – extinguished when the credit had served its intended purpose, e.g. kept people fit enough to work or train, or enabled goods to be produced or come into production. The banker’s job is not to acquire other people’s property, it is to enable the nation to add value to its people by its work.