Monday, January 27, 2014

The European banker / politician nexus awards itself yet more public money.

The European Central Bank seems to have got a bit tired of buying dodgy periphery sovereign debt, and is now considering buying “packages of bank loans to households and companies” as the Financial Times put it in a front page article entitled “ECB looks at buying bank loans in battle to ward off deflation.” (27th Jan).
While Euro politicians and bankers doubtless think the purpose of the economy is to enable them to line their own pockets, the actual purpose (as explained in introductory economics text books) is to supply consumers with what they want (both as expressed by what they do with their disposable income and the types of public spending they vote for at election time).
Thus given inadequate demand (or a danger of “deflation” to use the FT’s phraseology) the obvious and logical remedy is to give consumers more of the stuff that enables them to purchase what they want: and that stuff is called . . . wait for it . . . . “money”. Plus (assuming the ratio of public to private spending is to remain constant) public spending needs to be increased.
As Warren Mosler correctly points out, it is not the job of central banks to expose themselves to the above sort of risk.
Plus if the ECB does buy the above strange assortment of assets, that nicely illustrates the point I made in this posta few days ago, namely that the more reliance is put on monetary stimulus without a corresponding amount of  fiscal stimulus, the more the state ends up buying an ever larger proportion of private sector assets. And that must at some stage mean the state / central bank buying assets which is has no business buying.

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