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Stop it with this idea that it is the Central Bank's job to steer the economy. This is all part of the mythology of the Fed, possibly to do with John Volcker's contribution to ending stagflation (by causing a deep and sharp recession) and then the fawning over Alan Greenspan and his "great moderation". The central bank can't fix things, it can just avoid fucking them up.

The problem in Europe is fiscal and the solution has to be fiscal, and there's no chance of a sensible fiscal policy in the Eurozone so all the ECB can do is try not to deepen the recession or cause a financial crisis by excessive tightening.

A society committed to the notion that government is always bad will have bad government. And it doesn't have to be that way. — Paul Krugman

by Migeru (migeru at eurotrib dot com) on Thu Dec 4th, 2014 at 12:38:20 PM EST
As a complete aside, is it just me or it was during democratic terms that the biggest financial follies where done:
Volker opened the way for Reagan by causing a big recession for Carter. Interestingly the biggest structural changes in the US were not done by Reagan/Bushes but by the repeal of Glass-Steagal and financial liberalization and that was during Clinton.

Obama actually seems the best of them (the only structural change that I can see is Obamacare and that one seems a good one, for a change). Though his administration is trying to force a complete TTIP, so let me shut up.

by cagatacos on Thu Dec 4th, 2014 at 06:24:49 PM EST
[ Parent ]
It's possible that there's nothing worse than a Democratic President with a Republican Congress.

A society committed to the notion that government is always bad will have bad government. And it doesn't have to be that way. — Paul Krugman
by Migeru (migeru at eurotrib dot com) on Fri Dec 5th, 2014 at 05:40:25 AM EST
[ Parent ]
Uh, Paul Volcker.

A society committed to the notion that government is always bad will have bad government. And it doesn't have to be that way. — Paul Krugman
by Migeru (migeru at eurotrib dot com) on Thu Dec 4th, 2014 at 06:46:25 PM EST
[ Parent ]
Well, yes. Pretending that the central bank could reach its inflation target plays into that narrative.

On the other hand this diary undermines the standing of ECB through pointing out their failure to reach their target, and undermines inflation fears.

My main problem with ECB is not its interest rates politics (even though the whole NAIRU thing is one big problem), but how it through blackmail has seized power in the Troika countries and is running them into the ground.

Sweden's finest (and perhaps only) collaborative, leftist e-newspaper Synapze.se

by A swedish kind of death on Fri Dec 5th, 2014 at 04:07:41 AM EST
[ Parent ]
My main problem with ECB is not its interest rates politics (even though the whole NAIRU thing is one big problem), but how it through blackmail has seized power in the Troika countries and is running them into the ground.
It's even worse, the European Commission (not the ECB) uses NAWRU
(non-accelerating wage rate of unemployment)
as their policy target. But you know this already:
the unemployment is there intentionally to prevent those employed daring to ask for a raise
. And the political leadership is provided by the Eurogroup and European Council (not the ECB). Though it is unclear to what extent the ECB needed to lie to the Eurogroup back in 2010 about the legality of bond purchases.

A society committed to the notion that government is always bad will have bad government. And it doesn't have to be that way. — Paul Krugman
by Migeru (migeru at eurotrib dot com) on Fri Dec 5th, 2014 at 05:02:15 AM EST
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It's not the ECB's job to steer the economy or take political decisions that should be taken by the EC and the Eurogroup, but Ashoka Mody has a pretty full bill of criticisms of the ECB's performance as a central bank (with the powers it has) on Pieria:

The ECB's balance sheet, if needed

A central bank can undertake two principal actions: actively stimulate the economy and passively promote lending (see Hetzel, 2012, especially chapters 14 and 16 for the theory and application to the Great Recession in the United States). Active monetary stimulus of the economy is normally achieved by reducing its policy interest rate. The market's expectation of how long the policy rate will remain low determines the extent of the decline in long-term interest rates and the consequent increase in investment. When the policy rate falls to zero, the central bank can buy financial assets to directly lower the long-term interest rate, an action often described as "quantitative easing."

In contrast to active monetary stimulus, the central bank can passively provide funds to banks in the hope they will lend more to release credit constraints on economic growth. However, there is no guarantee that the banks will use their easier access to funds for new lending.  

By these conventional categories, the ECB provided no active stimulus. Policy interest rate reductions always lagged behind the fall in activity; indeed, interest rates were raised in 2008 and, more disastrously, in 2011 (Hetzel, 2014). And, the ECB has been virtually absent in the purchase of assets to directly influence long-term rates.  

The ECB did provide banks with additional "liquidity." But, in doing so, it acted in a manner highly unusual for central banks. For an extended period, the ECB's so-called liquidity operations have, in effect, propped up insolvent banks and have thus been a giant exercise in forbearance.

Consider the evidence.

by afew (afew(a in a circle)eurotrib_dot_com) on Fri Dec 5th, 2014 at 11:38:04 AM EST
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The Fed, if not the ECB, also has full powers of regulation of banks, so, via prudential regulation and directives it could prevent the banks from using the freedom they get from QE to invest in stock and commodity markets. They don't do this because their function, especially the New York Fed and the Board of Governors in D.C., is to serve the financial sector by providing a screen of 'independence' and because they place the interests of the financial sector at least an order of magnitude above the interests of the broader economy. This has always been partly baked in the cake, but, with capture of government via financial sector campaign contributions, it has been locked down. As far as I can tell, the ECB does not even have a small fraction of the actual authority that the Fed has over the financial sector.

"It is not necessary to have hope in order to persevere."
by ARGeezer (ARGeezer a in a circle eurotrib daught com) on Mon Dec 8th, 2014 at 12:38:49 AM EST
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