Bini Smaghi Pleads For More Money Printing By The ECB

When One Central Bank Slows its Destructive Policies, Another Must Step Into the Breach …

We could call this the summary of Lorenzo Bini Smaghi’s views, who frets in a recent FT editorial about the effects the Fed’s decision to ‘taper’ its ‘QE’ operations may have on the moribund euro area economy.

In about two thirds of the editorial, Bini Smaghi lists the ways in which a slowdown in monetary largesse across the pond might impact financial markets in Europe. There is nothing wrong with this analysis, in fact, a similar impact will likely also be felt in the US and elsewhere. After burdening the economy with the biggest money printing and deficit spending orgy in post WW2 history, we must expect all the economic errors these policies have induced to become visible as soon as the inflationary policy is actually slowed down sufficiently.

However, the problem is that Bini Smaghi thinks that therefore, we need more of the same, only this time, the ECB is supposed to take upon itself the role of chief money printer. Naturally, there is not a single word about the causes of the last crisis, which was caused by a boom triggered by the very same loose monetary policies Smaghi once again supports. Smaghi not only thinks the ECB should print money in reaction to the turbulence the Fed’s tapering may cause, but it should do so “preemptively”.

An excerpt:

“The only way to avoid such a scenario is for the ECB to counteract the restrictive effects produced by the combination of a US monetary tightening and renewed market turbulence. The measures announced so far do not seem to be sufficient, as their effectiveness largely relies on the prevailing demand for bank financing coming from European companies, which currently seem to have little incentive to invest and still need to deleverage. The ECB’s balance sheet might thus continue to shrink, while the economic recovery slows down. Forward guidance, which aims primarily at short-term policy rates, may lose credibility as it is unable to prevent the rise in long-term rates.”

In other words, wise bureaucrats who somehow know more than all those dumb businessmen insistent on deleveraging, should force monetary expansion down the market’s throat. Smaghi continues by elucidating the technicalities of his idea (regardless of these technicalities, it is of course the same hoary inflationism advocated by all etatistes):

“The only alternative is to step up the action aimed at further easing monetary policy. This can be done either in a pre-emptive or in a reactive way. If the ECB acts pre-emptively, by increasing the size of its balance sheet, and thus of the money supply, before tensions arise in financial markets, it can rely on a broader set of instruments and is less likely to be constrained on the type of assets to be purchased. Under these circumstances, markets will be affected more by the liquidity injected in the system than by the type of assets purchased by the central bank.”