Saturday, October 12, 2013

Savings Banks' Head Georg Fahrenschon Says Something About Low Interest Rates

Don't like the headline? Well, i don't like Mr. Fahrenschon's supposed insight. He was a CSU politician and Bavarian finance finance minister during 2007-2011; and therefore possibly one of the responsible parties in the BayernLB and the related Hypo Group Alpe Adria disaster, which has cost billions both for Bavaria and the savings banks he is now leading.

So what is the something that he has to say on low interest rates, according to Bloomberg?
No one should believe that supposedly soft instruments such as a very low interest rates are risk-free and don’t come at significant costs. [..] One can’t fight the problem of too high debt with even more cheap money.
He also called the current rates artificially low. I don't even know what that is supposed to mean. Well, Mr. Fahrenschon, who studied macro economics, is probably not aware of the fact that the ECB is supposed to keep the inflation close to but below two percent. So let's look at inflation because we just got the number for September on Friday. 1.5 percent in Germany is not close to two percent. Inflation for the whole euro area was 1.1 percent (pdf). Other central banks like the Fed are also supposed to look at unemployment, which stood at an unbearable 12 percent (pdf) in the euro area.

This is a massive problem in Germany. The universities seem to teach something, but the economists that come out in the end don't even know the basics of monetary policy. It is not just the CSU politicians; former federal finance minister Peer Steinbr├╝ck also complained about low interest rates on the basis that German savers are losing money if they are stupid. It actually seems to be consensus in Germany that the ECB policy is only helping the other countries and in Germany it is damaging the poor savers.

Something has to change, because this just cannot happen in any other field of study. This is like a physicist who has never heard of Einstein. It is really mind boggling that some economists call for higher interest rates in a climate of falling inflation and high unemployment.

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