They’re At It Again

For sheer entertainment value you might want to read Jeffrey Snider’s scathing critique at RealClearMarkets of:

• The European Central Bank
• Swiss banks
• European bankers, generally
• American banks and bankers
• Phil Gramm
• Gramm-Leach-Bliley (the law that repealed Glass-Steagall)

His basic points are a) the Europeans are responsible for the boom and bust cycles we’ve experienced for the last 20 years and b) the financial economy is no substitute for the real economy, something with which I agree.

Here’s the conclusion of his post:

The end result of such highly destabilized systems is that they tend to consume themselves and fail. But central banks and economists operate under the assumption of discrete events unrelated by longer terms. In other words, the ECB somehow views the problem of today as of today rather than being seen, properly, as the practical outcome of many years of corrupting and artificial work. Indeed, these same people seem to believe that low interest rates, even as negative as they possibly can stretch, are somehow a positive factor for economic function when it is the opposite. Ultra-low interest rates are indicative of total economic disarray not “stimulus”, and the further they depress across global yield curves the further from true economic salvation we all travel. Time value is supposed to be meaningful, but the seeds of the ultimate obliteration of time value were sown in the late 1990’s concurrent to elected governments enthusiastically welcoming the first of the serial bubbles.

As far as the ECB’s decision to launch its own program of quantitative easing, I don’t think I can say it any better than Jeremy Warner at The Telegraph:

Belief that the fast devaluing euro will provide both a life-saving boost to European exports and a surge in free spending tourism is similarly just wishful thinking. External demand will not solve Europe’s economic ills, nor will a few more American tourists. And it’s most unlikely that more Germans will holiday in Greece, Spain and Italy this year simply because of the weak euro. They share the same currency these days, or did no one notice. This is rather the nature of the problem. The market-based adjustment mechanism that free-floating currencies provide has been lobotomised in Europe in the name of sovereign integration.
The trouble is that having decided on a common currency, Europe has failed to develop the collective approach to fiscal policy needed to make it work. Crisis has been almost deliberately courted in the hope of driving structural and fiscal reform, but it has only succeeded in giving voice to radical populists, from Greece’s Syriza to Spain’s Podemos. Not since the break up of Yugoslavia has Europe looked so dangerously unstable.
Into this quagmire stumbles the European Central Bank, with a belated copycat version of what’s already been tried in the US, Britain and Japan. There’s no one else to step up to the plate, so we can only wish Mr Draghi luck. He must surely know, however, that it scarcely amounts to a solution.

As long as Germans remain convinced that the reason for Germany’s prosperity is the hard work and thrift of Germans and the reason for Greece, Portugal, etc.’s economic woes is that they’re all lazy spendthrifts, a mainstay of German politics and economic thought, Europe’s economic problems will not be solved. It’s a problem we solved long ago so that New York State could use the same currency as Mississippi and it requires New Yorkers supporting Mississippi’s economy.