The ECB’s Battle against Central Banking

[Derechos]

BERKELEY – When the European Central Bank announced its program of government-bond purchases, it let financial markets know that it thoroughly disliked the idea, was not fully committed to it, and would reverse the policy as soon as it could. Indeed, the ECB proclaimed its belief that the stabilization of government-bond prices brought about by such purchases would be only temporary.

It is difficult to think of a more self-defeating way to implement a bond-purchase program. By making it clear from the outset that it did not trust its own policy, the ECB practically guaranteed its failure. If it so evidently lacked confidence in the very bonds that it was buying, why should investors feel any differently?

The ECB continues to believe that financial stability is not part of its core business. As its outgoing president, Jean-Claude Trichet, put it, the ECB has “only one needle on compass, and that is inflation.” The ECB’s refusal to be a lender of last resort forced the creation of a surrogate institution, the European Financial Stability Mechanism. But everyone in the financial markets knows that the EFSF has insufficient firepower to undertake that task – and that it has an unworkable governance structure to boot.

Perhaps the most astonishing thing about the ECB’s monochromatic price-stability mission and utter disregard for financial stability – much less for the welfare of the workers and businesses that make up the economy – is its radical departure from the central-banking tradition. Modern central banking got its start in the collapse of the British canal boom of the early 1820’s. During the financial crisis and recession of 1825-1826, a central bank – the Bank of England – intervened in the interest of financial stability as the irrational exuberance of the boom turned into the remorseful pessimism of the bust.

http://www.project-syndicate.org/commentary/delong119/English

[tama]

1. ECB

is the direct descendant of "Otto", aka old German central bank was called. And German bankers will never get the horror of Weimar hyperinflation and financial instability (that led to the rise of Nazis) from their cognitive systems.

[happyslug]

2. I am tired of that Fallacy, i.e. the High Inflation brought on the Nazis

The actual history is DIFFERENT. Yes, Wiemar Germany had high inflation, but that was over by 1926, while the Nazis were still a small radical right wing party with a demigod speaker as its leader, Nazis were in the German Legislature but way down the list from the major parties of the time period.

The Nazi's raise to power started about 1930, as the Great Depression set in, inflation had been dead for almost five years by then, but you had massive DEFLATION kicking in, as wages and prices DROPPED. It was do to this DEFLATION that the Nazi and Communist parties became the two biggest parties of the German Legislature and the fight was over which party policy as to ending the Deflation would be adopted. The Nazis won and Hitler then implemented deficient spending knowing it would lead to massive inflation (Not the inflation of the early 1920s, but like the Inflation we had under Reagan and Bush I).

Thus it was DEFLATION that brought on the Nazis NOT Inflation and it was the Nazi's embrace of Inflation that brought Germany out of the Great Depression while before the end of the 1930s.

Now the Germany banks know this, but has used the Nazi image as the reason it does not tolerate inflation. The real reason is Germany was to be the Number One exporting Country in the World (and it was till China passed in a few years back). To be the number one exporter, Germany wants a stable currency. Thus the German policy have NOTHING to do with Germany's Nazi past, but everything to do with Germany's exports.

[tama]

3. Thanks for your correction nt