The case seems heard: the market decline is explained by the generosity of central banks. This interpretation, however, forget why this very accommodative monetary policy has become inevitable …
The financial crisis is back. Nearly eight and a half year after the first tremors of the subprime crisis, global stock markets plunge again, banks’ health is of concern, the real economy concerned. For most observers, the case is heard: this new gas blast has any designated culprit, central banks and their accommodative policies, “Quantitative Easing”. We are assured that, by pouring billions of dollars, euros, pounds and hundreds of billion yen fueled a bubble in the markets, which today broke out. It is they who, by imposing negative rates weigh on bank results.
This explanation is not entirely wrong. The quantitative easing policies of the Fed, the Bank of England, the Bank of Japan and the ECB have certainly poured huge amounts of liquidity into the markets. Their distribution in the real economy has been slower, or even reduced. They therefore supplied a powerful current that Chinese buyer difficulties and slowing European growth has slowed sharply. Where this correction which actually began in August, when the first “devaluation” of the Chinese yuan.
The two errors 2008 and 2010
But this explanation is partial. This new shock, remember, is only the continuation of the great 2007 crisis – crisis of deregulation – up to completion. A crisis that has seen two revivals: the bankruptcy of Lehman Brothers September 15, 2008 that led the financial system to the brink of the abyss and the “rescue” of late and inefficient Greece May 10, 2010 that plunged the eurozone economic turmoil in which it is only just out. In both cases, the error came mostly unconscious governments, eager to manage the short term (one remembers obsession, through spring 2010, Angela Merkel in regional elections in North Rhine Westphalia) and locked up in economic certainties based on market efficiency.
In 2008, the United States and wanted to “make an example” with Lehman Brothers and show that the state would not come to the aid of those who took excessive risks. The market played its role “purifier. “In 2010, EU leaders have applied the Ricardian theory had to quickly restore the public accounts of the states affected by the crisis to restore market confidence and economic agents. It was also “punish” those who had spent too making them feel the consequences of the imbalances they were supposed to be created. In both cases, these decisions were immeasurable disasters and central banks intervened then as “safety nets”, saving what could be. The ECB was, however, the less determined to act. We remember that Jean-Claude Trichet has risen twice in crisis rates in July 2008 and in July 2011, and it was not until Mario Draghi and the summer of 2012 to see firm action against the institution the European crisis. It is not without reason that the ECB was the last to embark on QE. And it is not without reason that the euro area has been the hardest hit by the crisis since 2007 …
The mistake of European authorities
Central banks therefore firefighters and no doubt they are sloughed partly arsonists, but why this change did take place? Because they failed to actually revive growth prospects, therefore inflation. But this failure is not as central banks, it is also that of the governments that have rested solely on monetary policy to do the work of recovery of these perspectives, while they, on the contrary, drew in the reverse. The example of the euro area is, from this point of view, very telling. Between 2010 and 2014, governments and European authorities, including the ECB, have led and led to a policy focused on fiscal consolidation and “structural reforms” aimed especially at reducing labor costs. A clearly deflationary policies that ruined the European growth potential and destroys confidence in the future it must establish. Therefore, the low inflation moved permanently.
Since October 2013, the annual core inflation, excluding food and energy, is passed once over 1%, it was 1.1% in October 2015. In these conditions, expectations of inflation fell and when inflation expectations recede, the incentive to invest is zero. However, the euro area will experience real recovery without recovery in investment.
The global effects of European policy
Moreover, this European deflationary policy has had other repercussions. Reducing European growth sustainably, it weighed on exports of several countries, such as China. The second largest economy in the world then attempted to contain, for political reasons, its production levels while accelerating its turnaround towards economy less dependent on the outside and more domestic demand. These two movements have led to a Chinese industrial overproduction and an explosion of debt in the Middle Kingdom in 2012. But when the Chinese economy has committed his inevitable adjustment, growth has slowed, resulting in lower commodity prices (already committed by the decline of European growth) and a decrease in Chinese demand for imports. Hence two consequences for the euro area: a further decline in inflation and a slowdown in economic prospects. For Germany, for example, the Chamber of Commerce has just revised 1.3% (against 1.7% for the government) the growth outlook for 2015.
The warning Mario Draghi
In these circumstances, central banks acted again (except the Fed seems nevertheless reverse its tightening policy). But this policy can not replace the lack of perspectives for economic agents. It can help demand, not create it. However, it had to create. When Mario Draghi ECB planned to launch into the deep end of QE, August 22, 2014, in Jackson Hole, he said he would do so only if it helped, that if, in addition to the ECB, there was a growth policy in the euro zone, comprising a true recovery. The idea was simple: increasing the demand, states have stimulated demand and created opportunities for the funds released by the QE. Much liquidity that would not have served, then feeding speculative bubbles. But he got a late inadmissibility. Wolfgang Schäuble, at the time, had assured they had “misunderstood Draghi. “Close the ban. To satisfy the crowds, it had launched a “Juncker plan”, as the “growth pact” Francois Hollande in 2012, has been lost in the sands of Brussels. And QE has actually fueled the bubble too …
What the accommodative monetary policy helped to avoid
However, it should not be forgotten that central banks have prevented the establishment of a deflationary cycle. QE would have made a point in 2015 inflation in the eurozone. Without it, inflation was -0.8%, which would have triggered certainly a deflationary spiral where not only the investment would be stopped, but where wages and employment should have s ‘adjust. Such a spiral is one of the worst economic dangers which it is very difficult to extricate the Japanese cases continues to prove it. But it is too often underestimated by supporters of the “creative destruction” to Schumpeter. The action of the ECB in 2014-2015 was therefore essential, as in 2008 and 2012.
But, like any medicine, it has side effects. An accompanying determined action by States or the EU could reduce these effects by allowing better transmission to the real economy. the facade was preferred to do nothing to save a budget reduction policy supposedly effective but that absolutely prove useless in case of recession. Even worse, long, states – particularly France – have relied on the only central bank action to bring back growth, not taking seriously the warnings of Mario Draghi of the inability of monetary policy to create growth.
The responsibility of central banks is therefore that a lamplighter. The real culprits, it is the States and European authorities who have led a deflationary policy and refused any real active stimulus policy. Central banks, the ECB in particular, content with the means available to them the fire they have not lit or maintained. This action produces passivity and ideological blindness of States, had a setback. Today we suffer the consequences. But in reality, central banks were the only ones to really show courage, initiative and innovation to deal with a single scale crisis.
Accusing the central banks, so it is wrong in fact responsible. It is also argued that the market would have without their efforts, achieved a less painful adjustment, so that the experiences of 2008 and 2010 prove otherwise. It is to pay lip. And the European economy – and the world – has paid too long words. Global economy thirsts for real inflation that only a policy to boost investment and will bring wages .