What is the ECB Doing?
I started thinking about that question weeks ago.
I have a set of answers and even started writing this post before DiMartino brought it to the forefront.
There are only two answers. One of them is very unsettling.
Select date
What the Hell is the ECB Doing?
by Mish Shedlock, The Maven:
- Ignorance
- On Purpose
Occam’s Razor
Occam’s razor is a principle from philosophy. Suppose there exists two explanations for an occurrence. In this case the one that requires the least amount of assumptions is usually correct. Another way of saying it is that the more assumptions you have to make, the more unlikely an explanation.
Occam’s Razor typically eliminates most conspiracy theories. It’s not that conspiracies don’t happen, but that simpler solutions are far more likely.
My corollary to the theory is very easy to understand: If stupidity is one of the possible answers, it is the most likely answer.
I am a normally a big fan of Occam’s Razor.
But this is so bizarre that I have my doubts.
Importantly, this may not be a conspiracy at all. Mario Draghi can easily be acting alone.
My Lead Question
How stupid can things get before one starts believing something else is in play?
I had already been thinking about that question when not only did ECB president Mario Draghi further push interest rates into negative territory but he also said it was a good idea for the ECB to think about MMT.
Shocking ECB Dissent
Dissent at the Fed happens all the time. It is rare at the ECB. The ECB builds a consensus and it is typically unanimous.
Question on Deutsche Bank and Commerzbank
How is it that Draghi cannot see the damage negative interest rates do to German banks?
Both Deutsche Bank and Commerzbank have complained about negative interest rates.
Deutsche Bank Monthly
Commerzbank Monthly Chart
In Search of the Effective Lower Bound
I discussed negative interest rates on September 25 In Search of the Effective Lower Bound
The concept behind ELF is that at some point further reductions in interest rates hurt the intent.
But what is the intent?
That is one of the new questions I have been thinking about.
And why can’t Draghi see that negative rates helped neither the Eurozone, nor Japan?
Alternatively, Draghi can see that negative rates hurt but he either doesn’t care or actually wants that outcome.
Counterproductive Policy
On September 10, Eric Dor, Director of Economic Studies at the IESEG School of Management in Paris emailed an article with some interesting charts regarding the Counterproductive Interest Rate Policy of the ECB.
I discussed Dor’s article in Questioning Lagarde as Gross Interest Income in Germany Heads Towards Zero
Email from Lacy Hunt
Shortly after posting Dor’s take, Lacy Hunt at Hoisington Management, pinged me with these comments.
“Dor’s article is outstanding. This is consistent with the great theoretical economics of the late Stanford economist Ronald McKinnon who argued that even before interest rates fall below zero, the counterproductive feedback loops outweigh the benefits of the lower rates even if the interest rates are lower in real as well as nominal terms. If you are not familiar with McKinnon’s economics, I strongly urge you to do so.”
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