As the Bank of Japan began its hopeless quest to stimulate growth with negative interest rates (see my blog yesterday – The folly of negative interest rates on bank reserves), the latest data from the ECB came out on lending to households and non-financial institutions. It tells an interesting story. The story has to be framed within the knowledge that oil prices have now fallen by some 77 per cent. But the major factor that is not usually mentioned when commentators talk about ECB policy changes and the likely impacts is the on-going and manic fiscal austerity in the Eurozone, which puts the whole region in a recession-type straitjacket, where monetary policy changes, weak in impact at best, have little hope of achieving anything positive. The logic of the reliance on monetary policy for counter-stabilisation is also built on a failure to understand what drives the economic cycle. The belief that banks will suddenly lend just because the central bank imposes a tax on their reserve deposits (negative interest rates) or offers them cheap loans to on-lend to households and firms is misplaced. Banks do not loan out their reserves and firms will not borrow from banks no matter how cheap the money is if there are no profitable opportunities to pursue. It is time the authorities abandoned their neo-liberal myths and got real. The Eurozone needs a massive fiscal expansion and it needed it 7 or 8 years ago. The ECB is the only institution in the flawed system that can provide the financial resources to make that happen and it could, with Brussels approval, bypass the ‘no bailout’ clauses in the Treaty to make that happen. It won’t, and the Eurozone will muddle on with increased poverty rates and rising social instability. What folly!…Bill Mitchell – billy blog
The ECB could stand on its head and not have much impact
Bill Mitchell | Professor in Economics and Director of the Centre of Full Employment and Equity (CofFEE), at University of Newcastle, NSW, Australia
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