Posted by: Dirk | June 12, 2013

Monetary policy à outrance

Axel Leijonhufvud describes what we today call “quantitative easing” in his Keynesian economics and the economics of Keynes on p. 20:

In the Treatise, Keynes had already arrived at the conviction that, if a contraction were once allowed to gather momentum, the type of monetary policy measures conventionally used by the Bank of England up to that time would be inadequate to correct the situation rapidly enough. A belated Central Bank action, he urged, must take the form of “open-market operations to the point of saturation” or a “monetary policy à outrance” as he termed it. He was careful to point out that such a policy would mean that the Central Bank would incur losses on its open market operations over time. This type of monetary policy already borders on the fiscal policy measures advocated in the General Theory. The suggestion that the Old Lady of Threadneedle Street should run her affairs in this manner was – if possible – received with even more horror in 1930 than the “unsound” Keynesian fiscal policy recommendations in later years. Keynes’ experiences with the Bank of England representatives, when he was a member of the Macmillan Committee, demonstrated quite clearly the uselessness of investing his influence and energy in pressing for this type of monetary policy. If the Central Bank could not be made to take losses for the general welfare, the government must. In reading the General Theory, Keynes’ “political” experiences from 1930 on must be remembered.

This is quite interesting with regard to the ongoing case at the German constitutional court. So, if the central bank buys up sovereign bonds from the periphery and this incurs losses over time, then the constitutional court would perhaps be considering a ruling against the current policies. Since the court has no say over the legality of the ECB operations that would not directly endanger the euro zone. It would be clear that further changes of law are necessary to continue with the euro. That outcome would be pushing policy makers to come up with reform proposals. Every crisis is a chance to start something new and better. The euro zone definitely needs new rules. The ECB followed an inflation target, it did so successfully, but nevertheless the whole thing came apart and was only saved by Draghi’s unconventional policies. Buying time he did. Now politicians have to start reforming the system. Can we finally get a meaningful debate on the euro in the European media? … Please?

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