Thursday, June 4, 2009

Merkel Goes After ECB

In an unexpected turn, German Chancellor Merkel starts throwing cheap shots at the ECB, Fed.

I say "unexpected" because most people can't figure out why Merkel would target the central bank as the cause of Germany's economic problems. But in fact I wrote about this very thing back in January,

Germany has a general election later on this year. I fully expect that at some point, the issue of Germany's ties with the rest of Europe will become front and centre. The euro cannot survive without Germany's support.

Merkel is going after the ECB as a conduit to the European Union as a whole. She senses the populist anger that is rising against European integration. She sees the imminent collapse of Eastern Europe as an endless source of headaches and does not want to deal with them during an election campaign. Knowing how the German population would react to German funds flowing to the ECB and then off to places like Latvia, Merkel has decided to preemptively avert what could be a political disaster.

From the article:

Unconventional monetary policies being pursued by the world’s main central banks could aggravate rather than ease the economic crisis, Angela Merkel, Germany’s chancellor, suggested on Tuesday.

Her surprisingly strong attack on the US Federal Reserve, the Bank of England and the European Central Bank was remarkable coming from a leader who had so far scrupulously adhered to her country’s tradition of never commenting on monetary policy.

Angela Merkel, the German chancellor, has criticised the world’s main central banks in surprisingly strong terms, suggesting that their unconventional monetary policies could fuel rather than defuse the economic crisis

“What other central banks have been doing must be reversed. I am very sceptical about the extent of the Fed’s actions and the way the Bank of England has carved its own little line in Europe,” she told a conference in Berlin.

“Even the European Central Bank has somewhat bowed to international pressure with its purchase of covered bonds.”

She added: “We must return to independent and sensible monetary policies, otherwise we will be back to where we are now in 10 years’ time.”

Ms Merkel’s decision to ignore one of the cardinal rules of German politics – an unwritten ban on commenting on monetary policy out of respect for central bank independence – suggested Berlin is far more concerned about the ECB’s approach than has so far been apparent.

Meanwhile, Berlin is anxious that central banks will struggle to re-absorb the vast amount of liquidity they are pouring into the markets and fears the long-term inflationary potential of hyper-loose monetary policies.
(emphasis mine)

It should be clear that no further bailout money will be flowing from Germany this summer. Anyone want to bet that the French and others will continue along without them? Or will they interpret this as a snub and revert to what Europe has been historically good at: protectionism and infighting?

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mannfm11 said...

I just read some of that myself. I would suspect Merkel see this for what it is, fraud. Doug Noland says the US is most likely going to have total bankruptcy out of Bernanke's actions, as nothing has occurred to fix the problem. My take is that they are betting on an empty bottle, expecting lots of good beer instead. I believe all this money is going for speculation and the real demand that needs to materialize cannot happen in this broken credit structure. This is the worst kind of monetary expansion, that which goes directly into speculation.

Matt Stiles said...

I agree. You can see where the money is flowing - into the riskiest of assets. It is Keynesianism on steroids. Not even Keynes himself would have approved.

But everything is being done to prove that it is not just the amount money/credit in the system that determines our standard of living, it is how capital is allocated that matters. Bernanke has gone to an absolute extreme with the belief in this fallacy. Its failure will be the deathblow to a dying ideology.

Anonymous said...

Yeah, well, let's not get started on Keynes. What can you expect from a man who stated that spending on items like pyramid building could help build a nation's properity?

Davidoff said...

This didn't happen because of Keynes, it happened because of Milton Friedman and the other deregulating crooks.

Roger Jarema said...

The euro has been very strong recently. Is this due to the reluctance of QE (hence less printing -- value of money is "preserved" more than USD) or is it just the speculative juice is still strongly in place?

Looking at GBP (strong, too), and the generalized weakness of "safe haven" assets (govt bonds, the yen) the latter makes a stronger case.

To great extents, what happens now resembles last year. Similarities on recent events to last year (before the waterfall bombs):
1. Oil price disconnects w/ its fundamentals (at absurdly stratospheric levels)
2. Anti-dollar sentiment at all time highs.
3. Mania on Asia, with the usual suspect - Chindia - as the prime driver of global economy.
4. Rally on virtually all risk assets & sinking of virtually all "safe" assets
5. Increasing gold/silver ratio, rising gold. Hoye's take: a sign of a "credit event" waiting to blow-up.

I think the Asian mania deserves special attention here. Does it really have sound basis? Opinions are warmly welcome.

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