I think we are seeing the limits of what monetary policy, at best, can achieve, and that is not very much when we get to the zero bound.  Somehow the fetich with consumer inflation rates never gets extended to asset price inflation rates.  Why?  Because by definition, asset price inflation benefits those who are rich and already have the assets.  The increases in asset values can then be used to justify rental rate increases on those assets and the transfer of resources from the have-nots to the haves is further accentuated.

In theory the increase in asset prices should then stimulate the building industry and other development processes which create those assets. But in Ireland, at any rate, the banks have been reluctant to pass on those low ECB rates to their customers as they seek to re-build their balance sheets post crash. Low interest rates are also bad for bank profitability, and as Krugman has observed, Central bankers talk a lot to commercial and retail bankers and are thus heavily influenced by their "needs" for high salaries and profitability.

Restrictions on mortgage availability (requiring a first time buyer to provide 20% of the capital) have meant that the main buyers of property have been cash rich wealthy private buyers and international hedge funds who see a killing to be made as the economy recovers.  However those same high asset prices for land and buildings also make it very difficult to justify new productive investments and thus the real economy is slowed down if not stalled altogether.

The German led export growth model of economic growth cannot work for everyone as not everyone can be a net exporter especially now that the "emerging" economies are suffering from a crash in commodity prices.  The only rational alternative is for Governments to increase domestic demand through fiscal expansion, and that is precisely what they will not do - witness Osborne's latest announcement of cuts in UK government expenditure.

So the bottom line is that the ECB can't do very much, and much of what they can do has counter-productive consequences.  However the only reason we are even having this conversation is that the ECB appears to be the only EU institution which is even trying to take some responsibility for ensuring economic recovery.  The Commission is doing nothing of note, while national governments are persuing beggar thy neighbour policies.

So the economic crisis is also a political crisis of EU political authority, democratic legitamacy, and institutional capabilities - all of which the UK government and some semi-facistic allies in eastern Europe are trying to undermine further with its Brexit debate.  It is an open question whether Brexit would not be in the interests of a better functioning EU in the longer term even if it has severe consequences for the UK's main trading partners like Ireland in the short term. Without a functioning EU demos, EU institutions cannot develop in response to the crisis as the UK leads the way on nationalistic disintegration.

Index of Frank's Diaries