"The ‘dinosaurs’ were right to point out QE’s negatives"

Frank Westermann

Financial Times Opinion, October 10th, 2019.

Your editorial “The euro’s guardians face a roar of the dinosaurs” (October 7) dismissed concerns raised by six prominent former central bankers over the European Central Bank’s renewed stimulus as a “partisan attack”, favouring savers, and as a roar of the dinosaurs, alluding to former Bundesbank president Helmut Schlesinger’s age of 95 years. Well, I am only half his senior, and have advocated the need to consider the position of borrowers (not savers) in a series of research articles and a book. And in my view, the Financial Times has published a very bad editorial.

There can be no reasonable doubt that the ECB’s policy over the past decade has been predominantly fiscal in nature. From a pure monetary policy standpoint, its stance would simply be out of proportion. More concretely: the ECB has followed a bailout policy for states and banks ever since the beginning of the global financial crisis in 2008.

Such a policy does have its theoretical foundations. I have co-written, with Aaron Tornell and Romain Rancière, an article the FT’s editorial board would love: in “Systemic Crisis and Growth”, we argue that occasional bailouts of the borrowers in times of crisis are necessary and support investment, healthy risk-taking and growth.

According to the FT, Mr Schlesinger, Otmar Issing and the others ignore these benefits of ECB policies. But here is the point: even if this is fully taken in to consideration, it is democratically elected governments, not central bankers, who should decide on the extent of the bailouts. Initially, the central bank can take the role of a lender of last resort, but 10 years after the crisis this is no longer appropriate.

The FT’s international comparison is also flawed: consider for instance the US. It has managed the process of “tapering” successfully. Also the Federal Reserve, before starting quantitative easing, asked Congress for permission. It never had a full allotment policy to banks and never bailed out individual states. Japan would be a better analogy, but not a good example either, as it experienced decades of stagnation. It had dramatically wasteful Keynesian spending programmes and ran up the government debt to more than 200 per cent of gross domestic product.

The former central bankers are right to point out the negative side-effect of QE. Anyone knowing Mr Issing’s efforts to create a truly European institution free from partisan considerations should be concerned about this analysis and take the position of the former central bankers more seriously than the FT has in its editorial.

Frank Westermann Osnabrück University, Germany

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