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Once again the ECB disappoints

by rz Thu Dec 4th, 2014 at 09:18:44 AM EST

From the Guardian live stream I found this:

[The ECB] has cut its inflation forecasts in 2014 to just 0.5%, from 0.6%.

The figure for 2015 has been slashed to just 0.7%, from 1.1%. In 2016, it rises to 1.3%, down from 1.4% in the previous staff forecasts.

Think about this: By its own forcast, the ECB will now miss its target for at least four years in row. And this while Eurozone unemployment is at 12%.

Even better:


Draghi says the ECB's growth and inflation forecasts have been revised down substantially; and he admits that these forecasts do not include the latest slump in oil prices.

So probably inflation will be even lower, then the already terrible forecast predicts.

This is obviously fully in line with the overall behavior of the ECB. At the beginning of the year, when inflation was at 0.8% what did the ECB do: nothing! It took another 8 month or so, until the ECB started a program to extend its balance sheet.

And why: Because inflation expectations are well anchored. Already this was quite strange: The ECB has a Mandate to keep inflation at 2%, not 'inflation' expectations. Now, you could argue that inflation exceptions at 2% guarantee that in 'the medium term' inflation will run at 2%.

But how are you going to keep inflation exceptions  anchored if, by your own forecast, you are going to miss the inflation target for 4 years in a row (this was already the case in the beginning of the year). And on top of this the ECB is in now way committed to overshooting. Such a asymmetric target guarantees inflation below the mandated 2%.

How is that not an issue yet! Are all Europeans so scared of inflation that nobody notices that the ECB is not doing its job?


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Draghi is asked about the rise of popularity of Syriza in Greece, and Podemos in Spain.

He says he's not sure exactly what these parties want from the ECB.

Well, here Draghi has it exaclty right! Maybe they should start to formulate what they think the ECB should do.

by rz on Thu Dec 4th, 2014 at 09:59:50 AM EST
Massive buy-up and forgiveness of sovereign debt would be a good starting point. Is that really not in the Syriza program?

It is rightly acknowledged that people of faith have no monopoly of virtue - Queen Elizabeth II
by eurogreen on Thu Dec 4th, 2014 at 10:12:49 AM EST
[ Parent ]
A central bank is not a political function...

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 10:25:51 AM EST
[ Parent ]
Let me translate that:

There are some (very important) political decisions that we want citizens to be cut off from. We then declare them "technical": being in the central bank, the TTIP, what we eat, etc. This is in essence the idea of a technocracy - use a pseudo-scientific but really authoritarian argument to remove some decisions from the public debate. They are "technical decisions": nothing to see or think about, move on. Leave it to the "experts".

Incidentally some people have a problem in principle with this. Others just fumble because it is not their "technocracy", as they also know "better" and want equally remove some of these discussions from the public sphere (but in another direction).

It is actually depressing that so many people dislike the current affairs not because they are an attack on democracy but because they follow a line that they do not like (but they would be fine with a different variant of technocracy).

What Podemos or Syriza are doing is reframing this as a political problem, not a technical problem. And rightfully so. Of course one has to wonder that if Podemos or Syriza were themselves power they would not do the same thing (but in a different direction - it is not that the hard-left is a paradigm of respect for liberal-democratic values...), though that is not a real concern as of now.

by cagatacos on Thu Dec 4th, 2014 at 06:18:46 PM EST
[ Parent ]
The problem is that "liberal-democratic values" has always been a smoke screen. Since the 19th century the "liberal" agenda has always been about wresting control over policy from landed elites in favor of business interests and the 'democratic' part was very much an ideal, rather than a practicality. The widening of the voting franchise progressed in lock step with the confidence of the elites that they could 'manage' the 'democracy' that emerged in their own interests and they have been remarkably successful in that endeavor.

Now that there is no real internal or external opposition to their rule it has devolved into governmental capture by elites and the implementation of their program of looting. "Liberal-democratic values" are increasingly a joke played on the 99% - who are just starting to catch on, very belatedly.

"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 12:27:02 AM EST
[ Parent ]
Draghi : we overestimated inflation for 2014, our current estimate for 2015 (0.7%) does NOT take into account the slide in oil prices, so it's urgent to do nothing until we have evaluated the supplementary impact.

Positive : QE will be possible in Q1 2015, and does not require unanimity of governors.

Negative : While comprehensively betraying their mandate on inflation, the ECB hectors nations to "reform" - NOT their mandate.

It is rightly acknowledged that people of faith have no monopoly of virtue - Queen Elizabeth II

by eurogreen on Thu Dec 4th, 2014 at 10:11:20 AM EST
Negative : While comprehensively betraying their mandate on inflation, the ECB hectors nations to "reform" - NOT their mandate.
Proof positive that Draghi is not a "politician" but a "financier".

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 10:31:32 AM EST
[ Parent ]
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
[ Parent ]
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
[ Parent ]
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
[ Parent ]


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