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In Praise Of The European Central Bank

Most financial blogs are scathing in their criticism of central banks. They give the impression that anything and everything that any central bank does is, at best, a harmful mistake and, at worst, a conspiracy to impoverish “the 99%”. That message is inaccurate and dangerous.

There is no doubt that the Fed, the US central bank, under the chairmanship of Alan Greenspan (from 1987 to 2006) and under the chairmanship of Ben Bernanke (from 2006 up until the crisis began) committed terrible mistakes that destabilized the global economy and ultimately brought about the crisis.

It is just as true, however, that after the crisis started, it has been central bank policy that more than anything else has prevented a collapse of the global financial system and the beginning of a new Great Depression that would have accompanied it.

In this blog, I would like to focus on the European Central Bank (ECB). From 2007, when US subprime mortgage loans began to default en masse, the ECB implemented a series of increasingly aggressive policy measures that ranged from traditional “lender of last resort” liquidity provision to Quantitative Easing on a very large scale.

Had the ECB not acted, the entire European banking sector would have failed. That would have forced the governments of Europe to bail out the banks and their depositors, who, otherwise, would have lost most of their deposits. The bailout costs could easily have topped €1 trillion. Government borrowing on that scale would have pushed European interest rates up into the double-digits. Consequently, Europe’s economy would have collapsed, with the unemployment rate probably exceeding 25% from one end of the continent to the other.

Along the way, the member states would have abandoned the Euro and returned to their own national currencies. The economic implosion of Europe and the breakdown of European Monetary Union would almost certainly have dragged the global economy into a severe depression.

In July 2012, ECB President Mario Draghi stopped that unfolding scenario in its tracks when he said, “Within our mandate, the ECB is ready to do whatever it takes to preserve the euro. And believe me, it will be enough.” In recognition of his achievement, the Financial Times newspaper named Draghi “Person Of The Year” in 2012; Forbes listed him as the 8^th most powerful person in the world in 2014; and Fortune magazine ranked him as the world’s second greatest leader in 2015.

The ECB has not stopped in its efforts to keep the European economy afloat. In March, it increased the size of its Quantitative Easing program from €60 billion to €80 billion per month. Nevertheless, the crisis in Europe and the crisis in the global economy have still not ended. And, disturbingly, central bank policy appears to be nearing the end of its effectiveness as interest rates move closer to (or even below) 0%.

Be that as it may, the central banks have bought us eight years of prosperity that we would not have had otherwise. It’s now time for the national governments to step up and support the economy with fiscal policies focused on investments designed to create new jobs in new 21^st Century industries. For instance, now is the time for Angela Merkel to abandon Germany’s horribly misguided budget surpluses and announce that she, too, “is ready to do whatever it takes” to prevent an economic catastrophe.

I have just uploaded two Macro Watch videos that will explain everything you need to know about the ECB. Combined, these two videos are approximately 45 minutes long and contain 70 downloadable charts and slides. So, if you want to become an expert on ECB policy in 45 minutes and have a Macro Watch subscription, log in now and watch ECB Policy: All You Need To Know, Parts One and Two.

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