The financial crisis is causing people to do some funny things, but when the head of one of the world’s biggest central banks looks down the lens and tells people to stop being so cautious and go and spend, spend, spend, you know something strange is going on.

Despite European high street stores offering up to 90 percent off, rattled Euro consumers have reacted to the financial crisis by slamming the brakes on spending.

It is not exactly an irrational response. Jobs are being slashed at an eye-watering rate and savvy shoppers know that, as stores become ever more desperate, there is a good chance the
must-have jeans, gadget or new car they have been eyeing may be even cheaper in a few weeks.

So Jean-Claude Trichet, the head of the European Central Bank, decided to take it upon himself at the latest ECB news conference to try a bit of French sales patter after the bank kept interest rates at 2 percent but signalled further cutting was on the way.

“Households are saving more than we would suggest, especially in a number of countries where savings are particularly high,” he said. Rough translation - stop hoarding your money and go to the shops and spend some money so we can get the economy going again.

The evidence is pretty clear cut. Official data showed that Euro zone household savings rose to 14.4 percent in the third quarter of last year, the highest in four years.

It is what is known in economists jargon as the ‘paradox of thrift’ a term coined by Britain economist John Maynard Keynes to explain the fact that people saving more in bad terms only adds to the problem by further sapping demand.

    European Central Bank President Jean-Claude Trichet could not have been clearer about the short-term path of euro zone borrowing costs after cutting interest rates by another 50 basispoints on Thursday to match the historic low of 2 percent.
    “The next important meeting is in March, not February,” he told the ECB’s monthly news conference, signalling a month’s time-out from the current rate cutting cycle. 
    But Trichet’s new buzzword, that the ECB is keen to avoid a liquidity trap, caused confusion among journalists and economists alike.
    After Trichet cited avoiding a liquidity trap four times in answers to questions about how low rates could go, one reporter finally asked him for a definition, leading to the following exchange at the end of the news conference:
    Journalist: What is your exact definition of a liquidity trap? Is it in the Keynesian sense or how do you define it?
    Trichet: It is Keynesian if you wish, but the problem is that experience has demonstrated that once you were there it was very difficult to get out.”
    Journalist: There, where? You mean zero?
    Trichet: A very, very low interest rate.
    Economists saw his comments as confirmation that rates have further to fall, with most tipping a benchmark ECB rate of 1 percent by September.
    But they were puzzled by Trichet’s definition of a liquidity trap — as opposed to the more usual understanding of a combination of economic recession, low official interest rates, a high propensity to save, and deflation making central bank actions ineffective.
    “Since the ‘trap’ refers to the central bank’s inability to revive the economy, you cannot avoid the trap simply by stopping the rate cuts before you hit zero, if you have not yet had an impact on the economy,” UniCredit economist Marco Annunziata said, noting that the solution was unconventional policy such as direct purchases of assets, U.S. Federal Reserve-style.
    So far, the ECB has not embarked on this path, although Trichet says “non-standard action” is possible.

Economists are now certain the European Central Bank will cut interest rates again at its next meeting, the only question is how much.
ECB chief Jean-Claude Trichet’s blunt hint that a rate cut is possible, although not certain, at the next rate meeting on November 6 cemented expectations that the central bank is readying more ammunition to fire at the financial crisis.
Although Trichet would not be drawn on the size of the possible cut, using the past as a guide suggests it could be a repeat of Oct. 8’s half a percentage point reduction.
In June, Trichet flagged a quarter-point rate hike by saying that it was possible, although not certain that the ECB “could decide to move our rates by a small amount” — a qualification that was missing from Monday’s announcement.
   ”The absence of this language in today’s speech, suggests that the ECB President is leaving the door open to a bigger reduction,” Fortis Bank economist Nick Kounis said, tipping a half a percentage point cut to 3.25 percent.
Although the majority of its 25 rate changes have been by only 25 basis points, the pattern shows the ECB is more likely to be bold when cutting rates than when raising them.
Six of the nine rate cuts the ECB has undertaken since 1999 have been of 50 basis points, compared to only two of the 16 rate hikes.
The last two rate cuts, on Oct. 8 and before then in June 2003, were both 50 basis point moves — so the ECB could well go for three in a row.
Some have speculated that the ECB may even cut rates by 75 basis points, although it has never made such a large leap in its 10-year history, either up or down.

Governments threatening to cap the pay of bank bosses in the wake of the financial market crisis might be better off linking their earnings to the more humble salaries of the central bankers now cleaning up the mess.

Politicians from Berlin to Canberra are up in arms about the multi-million dollar bonuses and lavish perks earned by bank executives now that the high-risk debt they allowed to proliferate has brought the global financial system to its knees and forced taxpayers to pledge an estimated $3.2 trillion to fix the mess.

Germany plans to block access to its bank rescue scheme to banks whose executives earn more than 500,000 euros ($673,800) a year — more than the amount earned by the world’s top two central bankers put together.

U.S. Federal Reserve chief Ben Bernanke’s $191,300 a year looks like loose change when compared with $22 million bonus pocketed by Lehman’s fallen head Dick Fuld in March or the 14 million euros earned by Deutsche Bank CEO Josef Ackermann last year, even if he and the rest of the Deutsche Bank management team are foregoing their bonuses this time around as a mark of respect.

European Central Bank chief Jean-Claude Trichet is only slightly better off with 345,252 euros a year. Bank of England governor Mervyn King earns a mere 275,340 pounds a year or roughly 355,000 euros, while the 35.78 million yen salary of Bank of Japan Governor Masaaki Shirakawa is worth about 265,400 euros.

Just weeks after the European Central Bank tightened its
rules on the assets banks can use as collateral in central bank
lending operations, it’s thinking about broadening them again.

At a summit in Paris on Sunday, euro zone governments
suggested the ECB follow the U.S. Federal Reserve’s lead in
accepting commercial paper, the short-term debt which many
companies use to fund their day-to-day operations.

Europe’s commercial paper market is worth $800 billion, and
the ECB said it would consider changing the rules on
accepting the paper, which must meet the same high standards
applied to long-term corporate and government debt.

The ECB said on Sept. 4 it would toughen these standards to
stop banks taking advantage of its relatively generous rules and
creating artificial instruments to get their hands on central
bank liquidity.

“What we are going to look at is … how we can widen the terms of our rules to have an even broader system of guarantees than we have today,” ECB President Jean-Claude Trichet said on Sunday.

According to the ECB’s statute, it already has the power to
intervene in markets “by buying and selling underlying assets
outright or under repurchase agreements”.

But analysts said the ECB might be unwilling to use this power
because of doubts about who would foot the bill.

Unlike the Fed, which is backed by the U.S. Treasury, the
euro zone central bank has no government chequebook at its
beck and call.

“The problem in Europe is, who would pay?” said Bank of
America economist Gilles Moec. “Who would play the role of the
Treasury when there is no centralised budget authority?”

“Even if legally they can do it, I think that they would be
reluctant to go along the same lines as the Fed.”