The ECB’s Aimless Big Bazooka


The European Central Bank today pulled out all the stops to boost demand in the Eurozone, expanding its monthly bond purchases by a third to €80 billion, including corporate bonds for the first time and further slashing rates into negative territory.

“This is presumably an example of ‘whatever it takes,’” Stewart Robertson, an economist at Aviva Investors in London, which manages about $378 billion in assets told Bloomberg. “So far so good. Now let’s see if it feeds into the real economy.”

By charging banks to park cash, the ECB hopes to encourage lending.

The problem for banks is that they can’t pass the cost onto retail clients for fear that they’ll withdraw their savings; a crucial source of funding and the bulk of deposits. (Something that has driven much talk about the end of cash…)

As Mark Carney, Governor of the Bank of England, has noted, negative interest rates should be used only in ways that stimulate overall global demand… But achieving such stimulus via negative interest rates may be impossible.

Indeed Adair Turner, the former chairman of the UK’s FSA, argues, the actual and perverse consequence could be higher lending rates, as banks attempt to maintain margins in the face of the running losses they now make on their central bank reserves.

The potential for yet more QE to change behavior in the real economy is equally unclear… This means that nominal demand will rise only if governments deploy fiscal policy to reduce taxes or increase public expenditure – thereby, in Milton Friedman’s phrase, putting new demand directly “into the income stream.”

Mario Draghi meanwhile was blunt just now. Given continued high structural unemployment and low potential output growth in the euro area, the ongoing cyclical recovery should be “supported by effective structural policies”.

Turner notes that “vague references to “structural reform” should ideally be banned, with everyone forced to specify which particular reforms they are talking about” but Draghi was as specific as he could be, given the circumstances:

Actions to raise productivity and improve the business environment, including the provision of an adequate public infrastructure, are vital to increase investment and boost job creation.

One obvious candidate in the UK for sustained infrastructure investment is the electricity sector. As industry mouthpiece Energy UK noted in a useful report late last month (“Pathways for  the GB Electricity Sector to 2030“)

In order to meet binding decarbonisation targets, it is essential government gives industry the necessary policy to achieve these targets…. As our future energy choices change, the country must consider – with every decision we take – how we maintain the delicate balance between security of supply, affordability and decarbonisation.

The energy system is moving to a more decentralised model – with strong roles for wind, solar and storage. This means an important role for policy to continue supporting these technologies until they can stand alone without subsidy….

We are seeing falling costs for electricity storage. It has the potential to revolutionise the way customers take control of their energy use but it will also play a vital role in balancing the system and creating greater flexibility in supply. But again the policy and regulatory framework must be in place to unshackle this technology.

How about policy signals for huge investment in renewables including tidal and R&D ? Why not electric roads everywhere to boot. It’s what Super Mario would want… If that doesn’t work, then maybe it’s time to start up the helicopters…




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