>> GROUP: Shadow ECB Council / EZB-Schattenrat  Prof. Richard Werner

Prof. Richard Werner: "To taper" in the context of monetary policy means to diminish the extent of the policy. So first we need to be clear what the policy has been. The ECB has been fuelling asset bubbles through its asset purchases, which have helped the large systemically relevant banks engaged in proprietary speculation or the emerging property bubble in Germany. In addition, the ECB has for a long time been flattening the yield curve, producing a fairly flat or even negative yield curve in some countries, such as in Germany. This is the ideal policy if the goal is to reduce the number of banks that do not mainly earn a living from financial speculation, but from traditional banking in the form of granting credit for investment in the real economy. Such productive banks can only survive with a positive yield curve (which determines their profit margin), the continuation of the flat yield curve policy, combined with the ECB's low short-term interest rate policy, and the ECB's and EU's policy to burden small banks with massive unnecessary red tape. Therefore, the number of productive small banks - the backbone of European economic strength - has been declining rapidly in recent years. That this is not an 'unintended consequence' but expression of a purposeful policy is indicated by ECB head Mario Draghi, who has stated on the record that he wants to reduce the number of banks in the eurozone. He is delivering. The result will be a long-term weakening of the growth potential in eurozone countries, as the demise of small banks also brings with it the demise of a thriving sector of small and medium-sized enterprises.

Since we have established the nature of current ECB policy, we can now turn to the question of whether this policy should be diminished ('tapered'). If the goal is to increase employment, job creation, business investment in the real economy and overall economic growth, not to mention to meet a positive inflation target, then it is high time for the ECB to adopt policies that are actually aimed at this. In that case it is high time to 'taper' the policy of destroying the underlying sources of strength of the European economy.

But there is of course no indication that the ECB policy has ever been aimed at achieving stable and sustainable growth, job creation and stability of employment and stable prices. For instance, the ECB could have prevented the banking crisis from turning into major downturns with large-scale youth unemployment, if it had simply bought the banks' assets from them at face value, at zero cost to the tax payer. This would have avoided the need for the IMF to get involved and 'austerity' being imposed. But such a wise policy could not be expected from the ECB, since it had worked hard from 2004 to 2008 to ensure that banks were encouraged to fuel credit for speculative transactions that do not contribute to GDP (asset transactions are not part of GDP). Since bank lending is new money creation, the ECB during this time oversaw a massive expansion in the money supply used for asset transactions in Ireland, Portugal, Spain and Greece, among other countries, which could only create asset inflation and, a few years later, a massive banking crisis. (One does not have to be a central banker, let alone rocket scientist, to realise that with 30% growth of total bank credit, year after year, way ahead of nominal GDP growth, the money was not going into the real economy, but asset inflation. And all such bank credit-fuelled asset bubbles are followed by banking crises, because the slow-down in credit creation for asset transactions will end the game of musical chairs, ending the asset bubble, and heralding the bankruptcies of the late-coming speculators, who find they had no chair when the music stopped).

Given the low likelihood of the ECB adopting policies aimed at achieving stable and sustainable economic growth and reduced unemployment, governments in the eurozone should do what they can, without the ECB's help, to achieve this. They can stop the issuance of government bonds and instead fund the public sector borrowing requirement by borrowing from banks in their respective countries. This form of 'Enhanced Debt Management' will boost credit creation for GDP transactions and hence achieve a significant recovery in nominal GDP.

Here is a to-do-list for the ECB: http://eprints.soton.ac.uk/341648/1/CBFSD_1-12_Werner_ECB_To-Do-List_30_July_2012.pdf
>> Kontakt    >> Webseite