Lambert here: “[U]nder the pressure of events, the public sector is taking an ever-larger role in shielding private participants from economic hardships.” Delicately put! One might wonder who, exactly, those “private participants” are….
By Francesco Papadia, chair of the Selection Panel of the Hellenic Financial Stability Fund (HFSF). He was, between 1998 and 2012, Director General for Market Operations at the European Central Bank. Originally published at Bruegel.
While headline inflation in the euro area is moving in the right direction, core inflation remains stubbornly high, close to 6%. Unemployment is historically low, but growth prospects are mixed. Financial stability is considered at risk, especially because of possible tensions around Italian bond yields. In this context, the International Monetary Fund in April summarised a recurrent narrative, writing that Europe must strike a balance between “sustaining the recovery, defeating inflation and safeguarding financial stability”.
In handling this trilemma, much of the focus is on central bank policies. Measures taken by central banks are considered critical for the economies in which they work. The importance of the trilemma and of central bank policies should not be underestimated, but both issues should be put in context.
Central banks must of course find the right balance between competing objectives. The primary objective of price stability does not mean they can forget about financial stability and the risk of bearing down too hard on economic activity. But this balancing act is the essence of central banking, and conditions could easily be more difficult than they are now.
The current situation is not one of stagflation, which would create an acute dilemma between fighting inflation or the recession: unemployment is very low and economic activity prospects are uncertain but not unequivocally negative. Financial stability must be preserved, but so far the situation is not worrying, in terms either of stress in the financial system, or of the spreads between the yields of peripheral and core countries. The European Central Bank can dedicate itself to the objective of regaining price stability with the reasonable expectation that it can do so without causing financial instability or too much damage to economic activity and employment.
The assessment that central bank policies are of critical importance also needs qualification. Only for inflation is central bank action decisive. The possible fragmentation of global trade and production, poor demographics, immigration tensions, climate risks and geopolitical developments and crises, are graver problems to be dealt with and solutions to them will be achievable, if at all, only over the longer term. In any case, it is not central banks that have the primary responsibility for dealing with these longer-term problems.
The fact that the ECB and the Fed have been able to maintain their focus on inflation and could thus further increase rates confirms the reading that possible damages to economic activity and unemployment, as well as risks to financial stability, have to be considered but are not overwhelming. This attitude reinforces the market view that central banks are serious about bringing inflation back towards 2%, even if their success is far from assured.
Adding to a favourable reading, at least relative to the prevailing narrative, of the situation facing central banks is their reactivation of dollar swaps, complementing what they are doing domestically. Swaps allow central banks in selected economies to ‘print dollars’, in the sense that they can influence the Fed’s balance sheet, with the Fed’s consent of course. So, the tool is potent, and its mere existence can have beneficial effects, even if it is not used.
All this does not mean that there have not been problems in the policy response of central banks to the latest crises. The main issue for central banks is part of a more general problem: under the pressure of events, the public sector is taking an ever-larger role in shielding private participants from economic hardships.
With the global financial crisis, COVID-19 and Russia’s invasion of Ukraine, this was justified from a short-term perspective. But the medium and long-term negative consequences must be controlled. A difficult balance must be maintained between providing immediate help while minimising its moral hazard consequences. Relatedly, the bank resolution framework created after the Great Financial Crisis – envisaging bailing in of private investors – is proving difficult to implement. It is unclear whether the answer is better implementation of the bailing-in solution or a return to the old bail-out approach. The former may be preferable, but practical difficulties dog its implementation.
In conclusion, the task of central banks is difficult, but the balancing act between regaining price stability while avoiding financial instability and excessive damage to economic activity and employment could be more demanding – as it has been in the past. The real difficulty currently is economic uncertainty. Fundamental economic relationships, such as that between unemployment and inflation, have become muddier, making decisions much more difficult to take. This, rather than dealing with the trilemma, is the most difficult challenge.
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Meh. As long as these fools continue to believe that monetary policy in general and central banks in particular can do everything that is claimed on their behalf the crises and victims will just continue to pile up decade after decade.
Fiscal policy dominance is long overdue.
“…The possible fragmentation of global trade and production, poor demographics, immigration tensions, climate risks and geopolitical developments and crises, are graver problems to be dealt with and solutions to them will be achievable, if at all, only over the longer term. In any case, it is not central banks that have the primary responsibility for dealing with these longer-term problems…”
(my note: issues that are the main priority of globalists and owners of capital)
“…The main issue for central banks is part of a more general problem: under the pressure of events, the public sector is taking an ever-larger role in shielding private participants from economic hardships.
With the global financial crisis, COVID-19 and Russia’s invasion of Ukraine, this was justified from a short-term perspective. But the medium and long-term negative consequences must be controlled. A difficult balance must be maintained between providing immediate help while minimising its moral hazard consequences…”
I don’t think the global financial crisis, Covid-19, and the Ukraine/NATO war with Russia are short-term problems.
It can be seen the war is a drawn out weapons dealing bonanza.
With Covid-19, the long-term consequences of the bungling with policy and mockery of the concept of airborne diseases, so well-covered in NC, the jury is still out on the nature of the greatest moral hazard from it. I think the moral hazard and degenercy is the belief that the wealth of oligarchs is worth millions of lives, not giving money to non-wealthy people.
But I can’t help but wonder if globalist musings like this one would have a totally different view of continuing benefits in realtion to Covid if it had brought to fruition the draconian controls that are the dreams of organizations like the WEF.
The GFC? Not a short-term problem either. It was not “solved.”
The moral hazard: thinking the establisment has solved or will be able to any major problems.
It is “funny” how economists always talks about long and short term, yet these concepts are never quantified.
Almost like anything they hope the market fairy will take care off is long term. While anything that is negatively affecting the bottom line of their paymasters are short term and need an intervention ASAP.
Never mind that hiking interests is their only real knob they have to fiddle with, and that is completely useless, possibly even counterproductive, to do during a supply side failure.
So, wrapping it up… “The real difficulty currently is economic uncertainty. Fundamental economic relationships, such as that between unemployment and inflation, have become muddier, making decisions much more difficult to take.”
Thanks, pal, for telling us that CBs are absolutely clueless. We knew that. Wake me up when you have some idea of their real agenda.
I am reading Clara Mattei’s ‘The Capital Order’. The agenda, today is, as it has been for 100 years, to maintain the capital order – not to ‘stabilize’ it – but to maintain it. Recessions, even depressions and huge unemployment, are acceptable as long as the order prevails. Those at the top must stay there.
The full title of her book is, ‘The Capital Order – How Economists Invented Austerity And Paved The Way To Fascism’.
>”The real difficulty currently is economic uncertainty.”
This is a monumentally foolish statement. But typical of heads of central banks and their operatives, because it allows them an easy out for their blunderings. 𝘖𝘶𝘳 𝘱𝘰𝘭𝘪𝘤𝘪𝘦𝘴 𝘸𝘦𝘳𝘦 𝘤𝘰𝘳𝘳𝘦𝘤𝘵 𝘣𝘶𝘵 𝘵𝘩𝘦𝘯, 𝘨𝘰𝘴𝘩 𝘥𝘢𝘳𝘯, 𝘸𝘦 𝘨𝘰𝘵 𝘣𝘭𝘪𝘯𝘥-𝘴𝘪𝘥𝘦𝘥 𝘣𝘺 𝘵𝘩𝘢𝘵 𝘥𝘢𝘮𝘯𝘦𝘥 𝘦𝘤𝘰𝘯𝘰𝘮𝘪𝘤 𝘶𝘯𝘤𝘦𝘳𝘵𝘢𝘪𝘯𝘵𝘺.
If one is looking for certainty, stay at home and do nothing. That is about as close as one will come to it, and even that will have its small, unpredictable risks. I rephrase the author’s statement in layman’s terms in order to highlight how nonsensical it is:
𝘛𝘩𝘦 𝘳𝘦𝘢𝘭 𝘥𝘪𝘧𝘧𝘪𝘤𝘶𝘭𝘵𝘺 𝘪𝘯 𝘭𝘪𝘧𝘦 𝘪𝘴 𝘦𝘹𝘪𝘴𝘵𝘦𝘯𝘵𝘪𝘢𝘭 𝘶𝘯𝘤𝘦𝘳𝘵𝘢𝘪𝘯𝘵𝘺. 𝘐𝘧 𝘪𝘵 𝘸𝘦𝘳𝘦𝘯’𝘵 𝘧𝘰𝘳 𝘵𝘩𝘢𝘵 𝘢𝘭𝘭 𝘮𝘺 𝘱𝘭𝘢𝘯𝘴 𝘸𝘰𝘶𝘭𝘥 𝘸𝘰𝘳𝘬 𝘰𝘶𝘵 𝘱𝘦𝘳𝘧𝘦𝘤𝘵𝘭𝘺.
Looking for certainty is a fool’s errand—in life or in economics. It does not exist.
That is certainly the truth! This falls in line with the recent blurb about the need for public-private enterprise. Private capital has more money than public capital. The only thing missing for the privateers is a mint without a middleman. So swaps to the rescue for all maybe. If swaps are so efficient between CBs, why not do a swap thing with big private “investors”- just to preclude instability while holding interest rates absurdly high – because liquidity for all is lunacy. There’s logic to it. Imo the only thing that matters is how the capital is spent. We’ve got a million good environmental and social enterprises to spend it on. But a little more honesty would be good. Financial authorities, legislatures and central banks should pass the laws to prevent poverty and inequality based openly on the fact that private money and expertise is being guaranteed by the public. Rights and obligations go hand in hand. If we openly legislate public support for private enterprise we must also legislate the obligations carried by those privateers.
It’s true that uncertainty is a fact of life, but when systems are breaking down, uncertainty increases dramatically and models break down. That’s what we’re seeing with lights flashing red for the climate, for the economy and for social problems. Things move from being hard to predict accurately to impossible. Passing tipping points makes what were considered tail risks into realities. Until there’s a better understanding of what changes are happening as systems adjust and realign, staying home and doing nothing may be the best option.
How very true.
Taking that notion one step further, since neoliberalism’s assumptions are based entirely on profit over all other measurements, and instability provides opportunity, chaos should increase.
Things will proceed accordingly in a vicious cycle until only the merchants of death and banksters are making a profit.
It is a full return to feudalism.
Economics is the “science” (with a few notable exception, most of them having been featured here on NC at some point or other) of taking a graph curve and plotting it into infinity…
https://www.wsj.com/podcasts/the-journal/why-some-companies-keep-getting-away-with-higher-prices/41EDFDF3-CBF0-44D0-BF77-A7B8B7ADAC00
A nice piece on the difficulty in fighting inflation. It’s reasonably nuanced.
“But the medium and long-term negative consequences must be controlled. A difficult balance must be maintained between providing immediate help while minimising its moral hazard consequences.”
The Fed is a wounded animal. Having abused their independence with unprecedented monetary expansion producing a decade of yield seeking speculation that’s not unwinding well, they look to rising interest rates to throw the economy into a recession to reduce inflation.
Perhaps because the ratio of their liabilities to real and nominal GDP are at levels never before seen or we are living through a period of complacency in overpaying for everything, there is a very real chance there will be no victory over inflation. The main reason for that is restoring public confidence in monetary restraint and systemic policy will never be achieved as long as the pain to do so is continuously avoided through a too big to fail crutch they continue to cling to.
In other words, the conditions to quickly resolve inflation would be as unfavorable to the financial markets as not solving it at all. And I think that is where we are.
This post seems to fixate on monetary policy and the actions of Central Banks. This is consistent with the main slant of the blog post on the IMF site. The 41 page report on the regional economic outlook focuses somewhat less on purely monetary policies ongoing in Europe. In a quick look over all three of these sources I did not spot any mention of the impacts of the u.s. Fed’s monetary policies on the monetary policies of Europe.
After listening to the analysis by Michael Hudson et al. at “Ukraine’s Neoliberalism on Steroids, Europe’s Economic Suicide” https://www.nakedcapitalism.com/2023/05/ukraines-neoliberalism-on-steroids-europes-economic-suicide.html — and looking over the IMF regional economic outlook report I could only wonder at the chasmous gulf between the two views of Europe. On closer reading the IMF report seemed as incredible farce or simply demented ravings.
Here are a few quotes from the report to support this assessment:
“Europe is facing the difficult task of bringing down inflation, sustaining economic growth, and maintaining financial stability, as the economy adjusts to the consequences of the energy crisis triggered by Russia’s invasion of Ukraine and the aftermath of the COVID-19 pandemic …”
[Russia’s invasion — followed by destruction of the gas pipeline, and u.s. lead ‘trade embargoes’!]
“Energy relief measures also supported activity.”
[A mild winter and substantial subsidies to citizens and businesses.]
“Tight labor markets and a buildup of wage pressures have fueled core inflation.”
“…many European economies are operating at close to or above full capacity.”
[Wow! That old chestnut! Europe is flooded with emigrants from the Ukraine, Turkey, and the Middle East, and labor markets are tight even as many large Corporations are shutting down their operations, laying off workers and moving far far away — but there is a tight labor market?????]
“…difficult task of bringing down inflation, sustaining economic growth, and maintaining financial stability…”
[this seems like comic hyperbole after the analysis of the European economic situation by Hudson et al.]
“High and potentially more persistent than expected underlying inflation calls for tight monetary policy until core inflation is unambiguously on a path back to central bank inflation targets. This approach helps mitigate second-round effects and keeps inflation expectations well anchored in the face of building wage pressures…”
[The price for a key resource — energy — has undergone a substantial step increase. The u.s. Fed has driven up their interest rates. Businesses are leaving Europe. Emigrants are streaming in. — And the IMF is worried about building wage pressures?]
Raising labor supply and improving the matching between workers and vacancies could help ease labor market tensions amid demographic pressures.
[Gosh! That sounds familiar. Maybe more people should learn to program or go back for college degrees?]
But fear not! Page 26 of the IMF report: “Box 5. What Does the Taylor Rule Say about the Stance of Monetary Policy across Europe?” includes equations that should
“inform the optimal monetary policy path.”
Sadly, economic black humor has a long way to go before it is ready for prime time.
one of the only discernable talents these central bankers and those who aspire to be their minions have is the ability to write and talk in absolutely nonsensical jargon. The demonstrated ability to pretend to talk about anything, yet never really say anything. To even describe black as white, while alluding to some magical principles and “the data”…. which shows this clearly to be true.
In their minds, I’m guessing they know they are frauds… but they believe in their superstitions, and the voodoo they do. They have been groomed to never look down at the little people, and never pay attention to reality.
Funny how this “skill” is a right of passage for all the “good” jobs.
You want to be clueless?, you want to screw up everything you touch?, You want to be able always blame all the bad outcomes around you as “uncertainty”…..you want absolute protection from liability and responsibility…… and get paid more than everyone else….. nice house(s),cars,vacations,kids paid college tuition, and more….. just learn the jargon of nonsense…. i This seems to be their only skill. Coupled with a pathological inability to feel guilty about anything.
I guess only “nice” psychopaths need apply.