Saturday, 7 June 2014

ECB string-pushing

In my recent commentary on the ECB's deflation-fighting measures, I wrote:
There's no way to push money into the economy unless businesses and consumers are ready to borrow it to invest and spend.
This is a classical argument from Keynesian macroeconomics, usually associated with the phrase "pushing on a string."  Draghi actually got asked about this issue in his press conference yesterday in the context of a new plan to funnel ECB money through banks to real sector businesses:
Question: I think most would agree that the European Central Bank has been very good in providing the Eurozone financial system with cheap and plentiful supply of liquidity. So what is it exactly about this targeted LTRO that makes you think that you'll get a lot of demand from the banks for the liquidity you're putting on offer here given that we have seen a reduction in excess liquidity [ie, banks are paying down loans to the ECB rather than lending out money]. ...
Draghi: ... Now what is in this LTRO, in this TLTRO that makes it different? Several things; The cost, obviously it's very low. The term maturity is four years. And the determination that this money not be spent on sovereigns and on sectors that are already experiencing or are just coming out of a bubbly-ish situation. So that's what is in it.
I find this more than a bit thin. It's not as if it's plausible that banks had been looking at potential sources of funds for their lending and saying, well, this money is just too expensive or too likely dry up. As Adair Turner puts it
The ECB’s latest Monthly Bulletin ... [cites] multiple indicators of improved credit availability and pricing. Nonetheless, the rate of decline in private-sector loans has accelerated over the last year – from -0.6% to -2% – and low demand is acknowledged to be the main driver of depressed credit growth. Simultaneous private deleveraging and fiscal consolidation are restricting eurozone growth far more than remaining restrictions on credit supply.
Simon Wren-Lewis and Francesco Saraceno also make the point that stimulative fiscal policy is needed.

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