Opinion

Anatole Kaletsky

A central banker’s ‘license to lie’

Anatole Kaletsky
Jan 30, 2014 21:43 UTC

Federal Reserve Chairman Ben Bernanke, who retires this week as the world’s most powerful central banker, cannot be trusted.

Neither can Janet Yellen, who will succeed him this weekend at the Federal Reserve.

And neither can Mark Carney, governor of the Bank of England; Mario Draghi, president of the European Central Bank, or any of their counterparts at the central banks of Turkey, Argentina, Ukraine and so on.

I am not trying to aim a valedictory insult at Bernanke or his central banking colleagues. On the contrary, I am drawing attention to the skill and determination required by central bankers to perform one of the world’s most demanding and important jobs. For just as James Bond has a “License to Kill” in the Ian Fleming books, so central bankers possess a “License to Lie” — or, putting it more diplomatically and politely, to make promises about the future that cannot be honored and often turn to be false.

Nobody ever blamed a central banker for promising to support the currency and then suddenly allowing a massive devaluation — as happened in Argentina last week and may soon happen in Turkey, Ukraine, Russia and many other emerging markets.

Venice’s renaissance shows a path for European revival

Anatole Kaletsky
Jan 23, 2014 15:45 UTC

“I have seen the future and it works,” said Lincoln Steffens, a left-wing American journalist, on returning from the Soviet Union in 1919. After a weekend in Venice at a seminar organized by the Italian ambassador to Britain, I found myself struck by the same thought, which is not exactly the reflection that the world’s most perfectly preserved medieval city is supposed to inspire. Venice is a clichéd metaphor for “Old Europe” — a sclerotic old continent fixated on its past and now retiring to become a museum society, destined gradually to sink beneath the sea. But should we perhaps be inspired, not depressed, by the thought of Venice, the ultimate “museum city,” as a microcosm of Italy and even of Europe as a whole? After all, Venice is still standing, not sinking into the sea, and after 500 years of supposed decline it is still stunningly beautiful. Maybe Italy and Europe, instead of sinking, will also prove their resilience and make a comeback?

An event this week that pointed to this conclusion was the deal on electoral reform announced by Italy’s two biggest political parties: Matteo Renzi’s governing socialists and the opposition led by Silvio Berlusconi. This pact, which should create stronger majority governments, was significant — not just for Italy but for all of Europe, because quite modest policy reforms would be sufficient to revive the Italian economy and transform economic policy debate across Europe. For example, a broad consensus now exists for moderate labor reforms, for big reductions in the employment tax burden, for dismantling overlapping layers of government bureaucracy and for shifting welfare spending from over-generous pensions to education, training and active measures to help the unemployed. But none of these “supply-side” reforms would achieve useful results unless supported by a stimulus from monetary and fiscal policy.

The European Central Bank understands this, and even the German government’s resistance to economic stimulus is eroding. So if a stable and democratically credible Italian government showed willingness to seriously implement supply side programs, the ECB would surely respond with strong measures to expand credit, especially small business loans. And given the importance of small businesses to Italy, an aggressive program of officially-backed SME lending could have a similar electrifying effect on the Italian economy as it did last year in Britain, with government-guaranteed mortgage loans. In turn, a rebound of economic activity in Italy would have big effects on business and financial confidence in Spain, Greece, Portugal and France, as well as quite possibly transforming the German economic policy debate.

Central bank stimulus is here to stay, but what if it fails?

Anatole Kaletsky
Nov 14, 2013 16:29 UTC

If anyone still doubted that central bankers all over the world will keep interest rates at rock-bottom levels, those doubts should have been dispelled this week. Janet Yellen’s statement on Thursday to the U.S. Senate that the Fed has “more work to do” to stimulate employment, and that “supporting the recovery today is the surest path to returning to a more normal approach to monetary policy,” capped a series of surprisingly clear commitments to easy money from central bankers this week. On Wednesday Joerg Asmussen, a member of the executive board of the European Central Bank, and Ewald Nowotny, the Austrian central bank governor — both of whom had previously been reported as voting against last week’s surprise ECB rate cut — said that they might in fact support further rate cuts and even negative interest rates, as well as the possibility of breaking the taboo against U.S.-style purchases of government bonds. And Mark Carney, the Governor of the Bank of England, reiterated more strongly than ever that any early increase in British interest rates was out of the question, despite the fact that the outlook for the British economy has turned out to be much better than the BoE had expected.

But what if these zero interest rate policies produce disappointing results in the year ahead, as they have in each of the past four years? What if the world economy fails to spring back to life or just plods along with sub-par growth, despite all this stimulus, as has happened in each of the past four years?

With luck, these questions will not need answering because fiscal austerity has acted as a powerful headwind to economic recovery in the U.S., Europe and Britain and these budget consolidation efforts are now being relaxed. The new records on Wall Street and other stock markets suggest growing confidence among investors that monetary stimulus will finally deliver decent levels of growth next year — and this does indeed seem likely. But what if the optimism turns out to be wrong? What if the U.S. and Britain fail to grow by at least 3 percent next year, and what if Europe stays stuck with sub-1 percent growth and mass unemployment? In that case, the monetary and fiscal policy experiments since the Lehman crisis would have to be judged as failures — and that judgment would open the way to much more radical ideas than zero interest rates and QE. Such radical ideas would be of two opposing types.

Don’t expect the euro’s rally to last

Anatole Kaletsky
Oct 31, 2013 15:05 UTC

What is happening to the euro? Currencies are more important than stock market prices or bond yields for many businesses and investors, not to mention for globe-trotting families and humble tourists. Which makes it surprising that so little attention has recently been devoted to the strengthening of the euro, which hit its highest level since 2011 this Monday, having jumped by 5.5 percent since September and over 8 percent since early July. This remarkable ascent, which has also driven the euro to its highest level against the yen since the 2008-09 financial crisis, means that European exporters are losing competitiveness, Americans and Asians who live or travel in Europe are feeling like poor relations and many economists are starting to worry that Europe’s nascent economic recovery will be snuffed out.

Purely financial players, by contrast, seem to be more enthusiastic about the euro’s strength than they have been for years. Speculative futures bets in favor of further euro appreciation have reached their highest level since the summer of 2011 — and the only time they were higher than that in the past decade was in the period just before the Lehman shock. Significantly, both of these speculative crescendos were followed by sharp euro declines, since currency markets generally turn when bullish sentiment reaches extreme levels. But there is a deeper reason to expect the euro’s seemingly irresistible rise to reverse.

Currencies tend to move in trends for many years, and the fact is that the euro’s long-term trend against the dollar is still almost certainly downwards, despite the big gains of the past few months.

Market euphoria misreads the signals from Brussels and Rome

Anatole Kaletsky
Apr 25, 2013 15:31 UTC

Financial markets, which balance judgments from some of the world’s most highly paid and best-informed analysts, are often uncannily right in anticipating unpredictable events, ranging from economic booms and busts to elections and terrorist attacks. But markets can sometimes can be spectacularly wrong, especially when it comes to politics. A classic case was the slump on Wall Street after last November’s election in the United States. This week’s market action in Europe may offer an even clearer example of market confusion about two fascinating but Byzantine political entities – the Italian government and the European Central Bank.

European stock markets have rebounded strongly this week in the face of deteriorating economic and financial fundamentals from across Europe on the basis of two political events: the reluctant agreement by Italy’s 87-yearold president. Giorgio Napolitano, to serve another seven-year term because nobody else could be found to do the job; and hints from ECB council members that they might vote to cut interest rates from 0.75 percent to 0.5 percent next Thursday.

Neither of these events remotely justified investors’ euphoria. The ECB case is straightforward. First, the ECB may well disappoint next week, since several influential decision makers oppose a rate cut. Second, even if the ECB does act, a quarter-point cut will do nothing for growth. Third and most importantly, such a tiny rate cut, if it happens, will simply underline the ECB’s refusal to follow the U.S. Federal Reserve, the Bank of Japan, the Bank of England and the Swiss National Bank in expanding the money supply or taking other “unconventional” measures that could potentially have a much greater financial impact than any marginal fiddling with interest rates. So much, then, for the silly idea in Europe that “bad news is good news” because economic weakness will force the ECB to cut rates.

The age of austerity is ending

Anatole Kaletsky
Feb 28, 2013 15:35 UTC

Whisper it softly, but the age of government austerity is ending. It may seem an odd week to say this, what with the U.S. government preparing for indiscriminate budget cuts, a new fiscal crisis apparently brewing in Europe after the Italian election and David Cameron promising to “go further and faster in reducing the deficit” after the downgrade of Britain’s credit. But politics is sometimes a looking-glass world, in which things are the opposite of what they seem.

Discussing the outcome of Friday’s “sequestration” of U.S. government spending is best left to the month ahead, when we see how the public reacts to government cutbacks. But in Italy, Britain and the rest of Europe, this week’s events should help convince politicians and voters that efforts to reduce government borrowing, whether through public spending cuts or through tax hikes, are both politically suicidal and economically counterproductive.

In Italy, and therefore the entire euro zone, this shift is now almost certain. After the clear majority voted for politicians explicitly campaigning against austerity and what they presented as German economic bullying, further budget cuts or labor reforms in Italy are now off the agenda, if only because they would be literally impossible to implement. If Angela Merkel demands further budget cuts, tax hikes or labor reforms as a condition for supporting Italy’s membership of the euro, a majority of voters have given an unequivocal clear answer: Basta, enough is enough. Most Italians would rather leave the euro than accept any further austerity – and if Italy left the euro, total breakup of the single currency would follow with an inevitability that might not apply if the country exiting were Greece, Portugal or even Spain.

The losers in Italy’s election are already clear

Anatole Kaletsky
Feb 21, 2013 18:00 UTC

We don’t yet know the winner of Sunday’s election in Italy, but the losers are already clear. And in this election, who loses may be much more important than who wins.

The obvious loser is Mario Monti, the charming and eloquent economics professor who is widely credited with saving Italy from a Greek-style debt crisis during his one-year term as Italy’s unelected prime minister. Monti could have gone down in history as the most effective and intelligent Italian leader of his generation, had he decided to opt out of this weekend’s election and instead sought appointment as Italy’s president. That is a mainly ceremonial role that can become very important in times of constitutional crisis (which in Italy occur all too often), and Monti could almost certainly have won strong endorsements  from Italian politicians on the left and right.

Instead, Monti surprised everyone by founding a political party and running for Parliament at the head of a center-right grouping. This now looks like a big mistake. According to the last pre-election polls, Monti’s group is running a humiliating fourth, after the Italian Socialist Party, Silvio Berlusconi’s resurrected personal party and stand-up comedian Beppe Grillo’s anarchic Five Star Movement. Worse still for Monti, he seems to have helped his archenemy Berlusconi by splitting the opposition to the scandal-ridden former prime minister. If Monti’s party performs as badly as expected, it will be all too easy for his opponents to present the election as a clear rejection of the painful economic reforms he imposed on his long-suffering countrymen at the behest of the German government and the European Central Bank.

Can a real central bank save Europe?

Anatole Kaletsky
Jul 19, 2012 16:17 UTC

Why is it that the U.S., Britain and Japan, despite their huge debts and other economic problems, have not succumbed to the financial crises that are threatening national bankruptcy for Greece, Spain and Italy – and perhaps soon for France?

After all, even the strongest British and American banks, such as HSBC and JPMorgan Chase, have now admitted that they were as accident-prone as their continental rivals. Borrowing by the U.S., British and Japanese governments is well above European levels relative to the size of the economy. These governments are not even considering fiscal consolidation as ambitious as the 3 percent deficit targets now being written into national constitutions across most of Europe – and Britain has missed by a wide margin the much less demanding targets David Cameron set himself in 2010.

Given that financial markets are supposed to be dispassionate arbiters of economic management, why are they punishing Mediterranean countries with cripplingly high interest rates, while the British, U.S. and Japanese governments are left free to borrow without any apparent limits at almost zero cost?

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