Thursday, November 21, 2013

Krugman, Weidmann And Why It Is Actually Worse

Krugman isn't happy that Weidmann is against further ECB measures without offering any justification. But it is actually worse than Krugman thinks.

He wrote:
First, take the aggregate view. The euro area as a whole has record high unemployment and record low inflation. By any normal standards, this says that monetary policy is too tight. Yes, there’s a problem getting traction, because the ECB is close to the zero lower bound — but that’s a problem of implementation. On what possible grounds could you argue that printing money is not at least a partial solution to the crisis?
We'll get to that question later but first: Weidmann - in a strange understanding of Central Bank independence - also likes to offer fiscal policy advice on a regular basis. This week, the Bundesbank decided to speak out against a minimum wage in Germany. I did not see "interfering with coalition talks" the last time I checked the tasks assigned to the Bundesbank. There is also no "giving-advice-seemingly-based-on-party-association" section in the "Law about the German Bundesbank". Before Weidmann was appointed Bundesbank president in 2011, it was actually his job to advise Merkel. There was some discomfort because the opposition feared that such an appointment might put the Bundesbank's independence in danger, but this criticism wasn't really heard because his first thesis adviser Prof. Roland Vaubel, who is now a member of the eurosceptical AfD, said at that time:
I fear that he will fall down on the job.
Weidmann finished his thesis Bonn under Prof. Neumann, who said in August 2013 that he is proud of him and also that(my translation) "the interest rates are too low. The ECB has to and will do something. The Germans urgently needed(sic) higher interest rates." Well, guess what, the ECB did something and lowered the fixed rate to 0.25 percent. It is hard to tell which one of the two is the worse eco.. has a better understanding of Weidmann's competence.

Therefore, back to the present. Since, Weidmann likes giving fiscal advice we have a pretty complete picture of of his economic world view. We know he is against any and all possible monetary measures, like lowering the fixed rate when inflation is significantly below target and he is against the OMT program. Unlike today, he actually offered an explanation for his stance on monetary policy a few months ago: he wants to keep the "reform pressure" high. Yes it is OK in Weidmann's understanding that the ECB influences fiscal policy through "reform pressure". So, I guess it is fine if democratically elected officials are forced into a harmful policy, but any action which is designed to solve the crisis... time to cry about the fear of losing central bank independence in front of the German Constitutional Court (one of his arguments against the OMT? a possible reduction of the reform efforts).

But, what is his fiscal policy advice?

In any event, it would be unwise from a fiscal policy perspective to channel these interest rate savings and the current favourable conditions for public finances directly into additional expenditure.

Rather, the fiscal policy leeway should be used to speed up the consolidation of public finances, not least to achieve a sufficient safety margin with respect to the strict national budget rules.
This was actually a speech in German and he also said that fiscal policy should be like a box of chocolates "[v]orausschauendes Handeln [..] im Stra├čenverkehr" "anticipatory driving" by starring at preparing for demographic change. So this had to be mistranslated into "forward-thinking"(by the Bundesbank itself), because it is true fiscal policy makers just like a driver should anticipate that problems that might come from any direction(like a possible secession of Catalonia, or a trade surplus which causes underinvestment in Germany, and demography); but just looking forward at demographic change isn't enough. So, not only is he against doing his job of keeping the inflation close to but below two percent because he wants to cause damage "reform pressure", and his fiscal advice isn't sound, but he is also most likely a bad driver (if he heeds his own advice of only looking at one specific point in the distance, that is).

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