Hartar Blog

In his last press conference Mario Draghi said that the ECB was ready for negative deposit rates if necessary. His comments led to several European bankers rejecting this as a possibility ( here and here ). The comments of the Deutsche Bank and Commerzbank CEOs reflect on either their ignorance of how monetary policy works or their fighting against an ECB action that could make their lives harder (and their profits lower). Martin Blessing from Commerzbank argues that "too much cheap credit could lead to future crises" and he concludes that he does not know "how too much cheap liquidity can solve a problem that was created by too much cheap liquidity." This argument has now been wrongly used for 5 years, I thought that by now we would have learned that this is the wrong analogy. Fischen from Deutsche Bank complains that setting negative interest rates on deposits at the ECB would be like "penalizing banks". And this "will later be felt in a painful man...

Martin Wolf at the Financial Times argues that the future of the world economy, in particular that of advanced economies, looks sluggish because investment rates have displayed a downward trend over recent years, even before the financial crisis started. I made similar points in my blog post yesterday , let me add some evidence to that story. It is a fact that since the mid 1990s interest rates in the world started a downward trend. This trend was explained by Ben Bernanke in his March 2005 speech “To be more specific, I will argue that over the past decade a combination of diverse forces has created a significant increase in the global supply of saving--a global saving glut--which helps to explain the relatively low level of long-term real interest rates in the world today”  This can easily be represented in a standard demand and supply chart for the global market for funds where the saving glut is simply a shift of the saving (supply) curve to the right. What was interesting abo...

The presentation of Larry Summers at a recent IMF conference  has generated a good amount of comments. While some of what he said was not completely new, the way he put together some of these ideas to present a fairly pessimistic view of the state of the US economy has led to a debate around the possibility of secular stagnation (see Krugman ). Secular stagnation refers to the fact that some of the output losses during the crisis become permanent, the economy does not ever return to the previous trend. But there was something else that Larry Summers discussed that I also find interesting: he referred to the fact that in previous expansions the US economy barely managed to reach full employment despite the existence of strong bubbles and excesses. This also leads to a pessimistic view of the recent years and not so much because of what happened after 2008 but what happened before 2008. Here is some data and a story to make you share that pessimism: it is a fact that global real inte...

In a recent Vox article , Lorenzo Bini Smaghi raises some questions about the argument that austerity is the main reason why European countries' growth rates have been so low since 2008. To be fair, he is open to the idea that austerity has done some damage but he suggests that structural issues are also responsible for what we have seen in Southern European countries. His main argument can be summarized by a set of charts where growth during the 2008-2012 period is shown to be negatively correlated to measures of competitiveness. For example, comparing growth during the crisis with the competitiveness index produced by the World Economic Forum, one gets the following correlation: So the argument is that the low growth performance of Southern Europe (and Ireland) during the crisis is related to their structural problems. I will not disagrees with the statement that some of those countries have structural weaknesses that can constraint their growth rates. But I find that the chart a...

When I teach these days about the negative performance of the Euro economies over the last six years I always get asked about how policy makers could get it so wrong. The answer can be found in the article that Hans-Werner Sinn published today in the Financial Times ( Why Draghi was wrong to cut interest rates ). It is hard to know where to start commenting on the article. It is not only inconsistent but also full of arguments that go against any economic logic and misleading use of partial data. Interestingly, the article starts with the argument that given that inflation in the Euro area is below its target and falling (down to 0.7% in October), it seems that "last week's interest rate cut is understandable". Correct. That's the only reasonable paragraph of the article as the next one opens with the sentence: "However, deflation in parts of a currency union is not the same as deflation of a union as a whole, because its internal effects on competitiveness canno...