Wolfgang Muenchau conflates a lot of issues in his piece on how the German threatens European stability. He could not quite make up his mind on whether he should side with the plight of insurance companies, pensioners and savers who are badly hurt by the negative interest rate policy of the European Central Bank or stay seduced by the ‘bold monetary policy experiment’ of the ECB. Siding with the former would have meant siding with the German Finance Minister whom many journalists cannot stand. I am not quite sure why.
Wolfgang Schaeuble had criticised Mario Draghi, the Italian President (ex-Goldman Sachs) of the European Central Bank for his monetary policies, assigning it half the weight for the rise in popularity of far-right parties. He has a point. I have said pretty much the same thing when analysing the rise of Donald Trump. Failed policies and the failure to own up to them are behind popular disillusionment with the system that is channelled towards candidates like Trump (or, Sanders).
My suspicion or hunch as to why many journalists (like Martin Sandbu, for example) support unconventional monetary policies is not so much out of loyalty to their Keynesian training and instincts as out of a false sense of bravado of supporting an ‘underdog’. They think it is rather brave of them to support the ‘unpopular’ and harried central bankers gamely trying to save the world from collapse. The only difference is that the central bankers are pushing the world exactly towards that – intended or not – and the cheerleaders are oblivious of the danger.
The threat to European (and global) stability comes from monetary policies pursued by ECB and other central banks and not from the German model. This is the comment I left online, below the article, in FT:
It is a very clever piece because it unnecessarily conflates two issues and hides its conflation rather well. An insurance sector that promises a return of 1.25% a year has not made any extravagant promise. It is a fact that ECB policies throw the arrangements of pension and insurance companies and savers out of balance. Larry Fink of Blackrock has commented upon it too, in his letter to shareholders.
It is a legitimate criticism of extraordinary monetary policies which have nothing to show, in return, for all its ‘bold experimentation’. The only excuse it has is that things could have been worse without them. A counterfactual scenario that is impossible to prove or disprove. It is on such impossible claims that the brilliant omniscience of our central bankers rests.
Wolfgang Muenchau conflates that issue with the issue of the reform of German savings and credit institutions. Even if they had been reformed, they would still face the issue of paying an interest rate that is at least zero with the negative rate that they receive from the European Central Bank.
Second, there is neither theoretical nor empirical proof that corporate bond markets do a better allocation of credit than savings and credit institutions and banks. We witnessed the marvels of the credit market in the run-up to the 2008 crisis. Now, we experience the genius of the stock market when stocks rise on the back of beating ‘beaten down’ expectations -a con game that even 5-year olds would see through.
Most of the comments on the article that I have read appear to have been captured by the distaste for German austerity prescriptions and its ‘big brother’ attitude in the European Commission, resulting in an objective analysis of the article being the biggest casualty in the process.