Why are Jean-Claude Trichet and his merry monetary men (and woman!) still harping on about inflationary dangers, wage rounds and excessive monetary growth, when the US economy might be tumbling headlong into a recession?
This or similar questions I keep hearing by everybody and their grandmother these days, ESPECIALLY from the other side of the Atlantic and/or the Channel. It seems, the Anglo-American world simply does not understand continental monetary policy. Never has - not during the good old days of the German Bundesbank then and not during the modern times of the European Central Bank now. And then as now this has always baffled me.
Let me be the ECB advocate and monetary fundamentalist here, ok?
And before we do anything else, let´s start with the basics - The ECB mandate:
Like with the Bundesbank before, the ECB's primary objective is "to maintain price stability"; only without prejudice to this may it then contemplate its secondary objective, "to support the general economic policies of the Community."
In contrast, the Fed's objective is "to promote effectively the goals of maximum employment, stable prices and moderate long-term interest rates."
You see that we are talking about two very different monetary policy animals here!
In the Eurozone (as well it should be, in my humble opinion!), economic policies and the promotion of growth and employment is left entirely in the hands of politicians, of governments. What monetary policy, i.e. the ECB, is charged to do is only one thing: Guarantee that economic endeavours are not hampered by inflation. As long as the ECB doesn´t jeopardize the price stability goal it may, within its possibilities, SUPPORT economic policy.
So there´s your primary difference for starters!
In addition to that (and quite aside from monetary policy per se), the ECB - like any other central bank - is also lender of the last resort, the bank of bankers and in that function has to guarantee orderly functioning of the respective financial systems (which generally means the domestic money markets). I think we can safely say that, in this recent liquidity crisis, the ECB has certainly been THE central bank that has been extremely quick, efficient and flexible in injecting ample liquidity into its money market to avoid short term funding bottlenecks.
The Fed, as we all know, was rather slow of the mark and not particularly convincing in its operations. But we shan´t go into that here.
There is, of course another, but not to be underestimated difference between the Fed and the ECB - one punters on both sides of the pond often forget:
The Fed is run by investment bankers, the ECB (as the Buba before it) by economists - by and large at least. And economists tend to take a more long-term approach to monetary policy ... the often quoted policy of the steady hand. I´m not saying this is better or worse, ok? But one might argue, which approach is more effective. However, given the fact that rate moves tend to take a long time (anywhere between 6 and 12 months, or even longer) before they hit the so-called REAL economy, I would in principle tend to think that, no matter how quickly you act, you´re almost always behind the curve - withe the steady and with the fast hand!.
But that´s not really what I want to talk about: I want to get to something else. - Financial markets go up, financial markets go down, right? Be it the Fed, BoE, ECB or any other central bank statute I know of - does it say anywhere that monetary policy has to prevent, buffer or slow-down financial market consolidation ?!?!?!
For two years running we have been talking about a need for consolidation in various equity markets. I don´t even want to talk about India or Cina here. Look at Germany - The DAX has been on a bull run for five years and gained a fat 120 percent ... Since early 2006 punters have harped on about the need for a sizable correction, if not serious consolidation. Except for that bump on the road in early 2007 that never happened - until now! Similar the story in most other markets ... So what´t the problem?
Don´t get me wrong! There are PLENTY of problems, more in fact than we all care to admit, but to take a 5 percent drop or some such move as a serious alarm bell and cry for help and further rate cuts by the central banks? Let alone by the ECB? - Come on. You cannot be serious!
And then there is that other part of the equation: I don´t believe that ol´ decoupling story for a minute - that Europe or the rest of the world can decouple from the US, that is - but neither is there any denying the fact that in 2008, the USA is not nearly as important to the global economy as it was 20 years ago during the days of Black Monday.
So where does that leave a European central banker? - With inflation around 3 percent and further potential pressures from wage rounds and prices in the pipeline, monetary growth beyond comfort (in double digits) and a Eurozone economy that is comfortably strong (somewhere between 1.5 and 2.0% this year). Plus, and don´t forget that, with short-term rates that are only 50 basispoints above those in the US NOW, after four super-hasty rate cuts by be Fed!!!!
So for now, stop baying for ECB rate cuts! The ECB has long offered a compromise on a silver platter: There will be no further rate hikes in Euroland (no matter how much the hawks in the council are calling for it!) ... And, in a way, that IS already monetary easing.
And if the rate cuts by the Fed over the past weeks have painfully demonstrated one thing: Once you allow the markets to bully you into policy moves, you will quickly get the distinct feeling of unsuspecting tourists running with the bulls in Pamplona - always breathlessly trying to outrun the stampede!
And that, if nothing else, is what Trichet & Co are trying to avoid. Maybe their heroic efforts NOT to be bullied by the markets will come to naught in the end - very likely actually. But I for one shall salute them for at least trying! Olé!
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