Not Quite Right in the Head?
The belief that the market economy requires “steering†by altruistic central bankers, who make decisions influencing the entire economy based on their personal epiphanies, has rarely been more pronounced than today. Most probably it has actually never been stronger. It is both highly amusing and disconcerting that so many economists who would probably almost to a man agree that it would be a very bad idea if the government were to e.g. take over the computer industry and begin designing PCs and smart phones by committee, think that government bureaucrats should determine the height of interest rates and the size of the money supply.
Photo credit: Michael Probst
We know of course that central banks are the major income source for many of today’s macro-economists, so it is in their own interest not to make any impolitic noises about these central planning institutions and their activities. Besides, most Western economists have not exactly covered themselves with glory back when the old Soviet Union still existed. Even in the late 1980s, Über-Keynesian Alan Blinder for instance still remarked that the question was not whether we should follow its example and adopt socialism, but rather how much of it we should adopt.
The recent ECB announcement detailing its new “QE†program once again confirms though that there is nothing even remotely “scientific†about what these planners are doing. Common sense doesn’t seem to play any discernible role either. Below are the 10-year government bond yields of Italy and Spain. These are actually among the higher bond yields in Europe right now.
Italy’s 10 year government bond yield is now below 1.3% – click to enlarge.
Spain’s 10-year yield is also below 1.3% – click to enlarge.
Leaving for the moment aside how sensible it is for the bond yields of virtually insolvent governments mired in “debt trap†dynamics to trade at less than 1.3%, one must wonder: what can possibly be gained by pushing them even lower? Does this make any sense whatsoever?
Meanwhile, the ECB let it be known that it wouldn’t buy any bonds with a negative yield-to-maturity exceeding 20 basis points – the level its negative deposit rate currently inhabits as well. What a relief! What makes just as little sense is that the economic outlook presented by Mr. Draghi on occasion of his press conference was actually quite upbeat.
