On the monetary policy prescriptions of Bundesbank president, Jens Weidmann

2013-01-03

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Jens Weidmann, president of the German Bundesbank Picture credit: Wikipedia

To those familiar with the politics underpinning the creation of the Economic and Monetary Union, it is well known that the European Central Bank was modeled according to the German Central Bank, the Deutsche Bundesbank, both in its unassailable institutional independence and its relatively limited mandate of not delving into the fiscal front, by focusing exclusively on inflation targeting (for the ECB the target is ‘below but close to 2%’). The Bundesbank is an incredibly powerful and esteemed institution in Germany, one that most probably, if not definitely, influences the German government in ways which may not be visible to an inattentive eye, and thus it has an indirect impact on the lives of millions of citizens across the euro area. In addition, given the present architecture of the Eurosystem and the ECB’s internal decision-making bodies where the Bundesbank has a rather influential role, it is of my opinion that its statements on what monetary policy is or ought to be, should not be disregarded, but should instead be subjected to analysis, at least for the sake of raising awareness. As such I find the last interview of the Bundesbank’s president, Mr. Jens Weidmann, for the Frankfurter Allgemeine Sonntagszeitung (30-12-2012) to be of great interest, especially for assessing the quality of the debates and controversies on monetary affairs and, by extent, on the broader political economy of the Eurozone.

To proceed I shall quote and then discuss three important remarks of Mr. Weidmann, in light of events that have already taken place during the eurocrisis as well as the latest decisions of the European Council for the completion of the EMU and for the establishment of the Single Supervisory Mechanism. In highlighting certain aspects of his interview I am not implying that the rest of his remarks are insignificant nor that I necessarily disagree with his position. Instead I do recommend that in addition to my present commentary you spare some more of your valuable time reading his full interview.

On to the first point (all quotes are from this interview which can be found on the Bundesbank’s website and which has been translated into English by their own personnel):

Question: The concept of “monetary financing of governments” is controversial.

Answer: I believe that we, as a central bank, should not enter an area which could possibly be regarded as monetary financing of governments. Once people begin to fear that we are printing money to fund budget deficits, our credibility as a guardian of monetary stability will quickly go out the window.

Financing governments via the inflationary power of the printing press is an unwise policy; one that engenders perverse incentives and rent-seeking mentalities for politicians and, consequently, for the state’s cronies. Nevertheless I believe that we already have enough experience from the eurocrisis to realize that this kind of discussion is mostly academic. The plain fact is that the ECB’s operations in the secondary markets in conjunction with the reinforcement of the capital adequacy criteria for European banks (soon to be followed up by the mighty macro-prudential powers of the ECB), have in effect succeeded in indirectly financing governments. The Securities Markets Programme (SMP), the Long Term Refinancing Operations (LTRO) and lastly the Outright Monetary Transactions (OMT) were all concocted for the sole purpose of financing budget deficits, litanies to the contrary notwithstanding. Whether this has been and will be achieved indirectly via financial intermediaries so that people are kept with the illusion that their cherished central bankers are the guardians of ‘sound money’, does not alter the fact that monetary policy has at times been used as a substitute for fiscal measures.

Moreover while I repeat that I am against debt monetization, as in terms of principle I am closer to the Hayekean theme on the denationalization of money, I nonetheless find that this shrewd method that European policymakers have adopted, of indirectly financing governments, is actually, though perhaps unwittingly, a means of providing sweetheart handouts to entrenched mega-banks. Euro policymakers are getting private banks to do their job, so as to avoid the opprobrium that would, logically or supposedly, arise if they were to violate some rigid rule or mandate on these issues. This however, scrupulous as it undoubtedly is, is in effect a kind of corporatism, since these private corporations will not just deliver the money for free, but will seize the opportunity to make some easy profit on the side out of the money bonanza and the unwillingness of politicians and technocrats to acknowledge their egregious errors and revise their ways accordingly.

Second point on Mr. Weidmann’s interview:

Would the euro have suffered any damage if the ECB had done nothing?

I don’t think so: policymakers would have then had to take action. I am well aware that these are difficult decisions for policymakers. But it is, after all, the job of policymakers, and not the central bank, to decide on redistributing solvency risks in Europe. By taking action, the central bank takes pressure off policymakers – a risky move.

My impression is that Mr. Weidmann is making a very brave assumption on this one. His argument is that in the absence of ECB action governments would have no other alternative but to proceed with austerity. Even if for argument’s sake we were to agree that the otherwise manifestly ineffective and unjust combination of tax hikes, welfare state deconstruction and bailouts to failed banks or governments, aka austerity, was the right way forward, it would still not justify the degree of confidence projected by Mr. Weidmann. For even if there were no disagreements between member states on what measures to be adopted, it would still be wishful thinking to assert that under the ostensible magic of extreme market duress politicians would have acted in the most rational (‘rational’) and optimal of ways. In fact it would be safer to assume that in the vacuum of the ECB’s inaction, the anti-euro, anti-austerity parties would have appeared much more persuasive in their rhetoric of the disintegration of the euro and of reconstituting national currencies, on the grounds that they would then have a central bank ‘caring’ for their country, instead of some ‘indifferent’ ECB.

The fact that the ECB acted does not mean that it did the right thing or that its policies improved the situation, even if they did. The point is that economic actors and citizens in general, operate in accordance with their “expectations”, their “psychology”, among others; and because in the present case these are anchored on the presumption of central bank activism, of it being the ultimate backstop, the lack of such action would on its own account be a sign of incompetence, fostering uncertainty and a profound uneasiness over the future of the euro tantamount to that of passengers on a plane without a pilot. I repeat this is an issue of perception, not of economic fundamentals.

If the ECB had not acted on the cases where it was expected to, then it would have exacerbated the crisis rather than provide those idyllic conditions for the implementation of the kind of fiscal policy Mr. Weidmann would endorse. The fact that the OMT programme, which in my opinion is not as omnipotent as some ECB cheerleaders suggest, has succeeded in temporarily removing all convertibility risks, i.e. concerns for euro exits, even though it has not been used yet, is a clear sign of how important expectations or the common sense of security are. The particulars aside, I am of the opinion that to ignore the significance of emotional factors in daily economics, is to reduce human beings to mindless automatons and a fortiriori to fallaciously postulate the actual existence of that magnificent phantom of the omniscient homo economicus, which has been plaguing economic reasoning at least ever since the Enlightenment Age.

On to the third and final point:

Interest rates on safe investments are already less than the rate of inflation. That is a creeping destruction of wealth, known as financial repression.

I would not refer to the current negative real interest rates as financial repression just yet. Only when the state begins to influence savers’ investment decisions and engages in coercion would I see such a situation as existing. However, negative real interest rates are a consequence of expansionary monetary policy in the crisis which is felt immediately by savers.

Whether Mr. Weidmann would like to call it financial repression or not is mostly a matter of perspective or of willingness to test the limits of euphemistic palaver. In my opinion we do have financial repression on a monumental scale and I would say that apart from what is now happening on the regulatory framework, it is in great part related to the Basel Accords (I recommend Emmanuel Schizas’ analysis on this). As mentioned above the various programmes of the ECB in conjunction with the new rules on capital adequacy effectively channeled funds into state coffers. Besides when all major central banks across the globe are engaging in aggressive monetary easing in an effort to siphon ever-more credit to the otherwise bankrupt sovereigns as well as to preserve the corporate-capitalist status quo, it is rather Orwellian to say that no repression whatsoever occurs. With the iron fists of central bankers manipulating the major economies of the globe it is quite obvious that the market is not “free” in any sense of the term, but that it is heavily distorted in each and every of its parts; and to a great extent this is done to reinforce the symbiotic relationship between states and banks.

As a conclusion I would like to point out that most political controversies in Europe have been dominated by arguments stemming from unexamined shibboleths and deep misunderstandings, while missing the broader picture as well as the specifics of each and every case. It is unfortunate that we came into this crisis with a profound unwillingness to adapt to the rising challenges, but instead we obstinately clung on to dogmas that guided our lives in ages past. We assumed that the change brought upon by this crisis was merely superficial and as such we were not willing to admit that many of our cherished principles were in desperate need of reconsideration. The policy failures resulting from this lack of alertness, from this staunch refusal to be versatile, are already well known to all of us and yet instead of witnessing some effort, even a timid one, to think in alternative ways, we see that integration and European politics in general are still predicated on most of the presumptuous notions that stood as inviolable ‘truths’ in the pre-crisis era.

Towards that end I am of the opinion that Mr. Weidmann, while certainly a very adept central banker, has not been willing to question, even for a moment, the tenets of his institution. He has therefore made his own contribution, though perhaps a minor one, to the preservation of the ideocentric elements that mobilized European integration in recent years, which have been proven to be inadequate in improving the lives of people residing in Europe and which shall bestow upon us a technocratic order that we will have a hard time reforming or rather abolishing.