This Day On The Street
Continue to site
ADVERTISEMENT
This account is pending registration confirmation. Please click on the link within the confirmation email previously sent you to complete registration.
Need a new registration confirmation email? Click here

The European Central Bank Plays a Logical Song

NEW YORK (TheStreet) -- When U.S. policymakers pushed austerity and high unemployment, cutting the deficit in half despite sluggish growth, the Federal Reserve stepped in with its program of quantitative easing.

Economists and analysts are still arguing over the impact of QE, but the alternative was to do nothing, because the usual weapon of monetary choice, cutting interest rates, was no longer available. Interest rates had fallen to near-zero.

The situation is often called "pushing on a string" or a "liquidity trap," and it now seems Europe is in it with us.

In a surprise move yesterday, the European Central Bank cut its key interest rate in half. That sounds like a lot, but it was actually just a one-quarter point cut, from 0.50% to 0.25% on refinancing.

The response by markets can be described as "meh." Most European stock markets are down this morning. So is the value of the euro.

Europeans seem divided on the bank's action, locked as they are in their own intellectual straitjackets.

Rolf Wenkel of Deutsche Welle calls the move a "risky game" and remains more fearful of inflation than deflation. England's The Economist insists the bank was forced to act, noting that Europe's inflation rate is now lower than Japan's, where deflation has been the problem for a decade.

What it looks like to me is that Europe, Japan and the U.S. are all in the same boat, pushing on strings to jump-start economies when a better solution -- simply spending money -- is clearly at hand.

I know. The debt, the debt, the debt. There are many Europeans who say the same thing, that the debt must be paid and no new loans should be taken out. But a fiscal policy of austerity pulls money out of the economy. When governments spend less, there is less spending. When they keep taxes high, there's less in the economy to tax.

If you want more spending, if you need more spending, here's a crazy idea: spend.

I should watch what I say here or they'll be calling me, in the words of Supertramp's The Logical Song, "a radical, a liberal, fanatical, criminal." There are times when all the world's asleep, preferring truth-tellers to be "acceptable, respectable, presentable, a vegetable." 

That's just the kind of criticism dished out regularly at economists such as Paul Krugman who say the cure for low spending is more spending. There are entire blogs devoted purely to ridiculing the very notion. 

I'm showing my age here, but the Supertramp song came out in 1979, a time when our problems seemed equally intractable, only in the opposite direction. Back then it seemed that inflation was inevitable and, as Marvin Goodfriend of the Richmond Fed later recalled, the Fed responded with policies targeting interest rates to break inflation's back when politicians refused to act.

When conventional political wisdom runs counter to what the economy needs, when fiscal policy comes off the table, we increasingly expect central bankers to save us. We expect the economic system to push policies opposite to what politicians are implementing, to take away the financial punch bowl in 1979, to leave it out and even spike it in 2013.

But the result is always going to be unsatisfactory, an economic hangover. The 1970s were called the decade of "stagflation," a time when growth was stagnant with inflation rampant. We're going through a similar period today, and for the same reason.

We'd rather believe what we choose to believe, and expect bankers to magically make things better. But bankers' powers are limited. Until we all trade ideology for bankerly practicality, the underlying economy is not going to change.

It's only logical.

This article was written by an independent contributor, separate from TheStreet's regular news coverage.




Check Out Our Best Services for Investors

Action Alerts PLUS

Portfolio Manager Jim Cramer and Director of Research Jack Mohr reveal their investment tactics while giving advanced notice before every trade.

Product Features:
  • $2.5+ million portfolio
  • Large-cap and dividend focus
  • Intraday trade alerts from Cramer
Quant Ratings

Access the tool that DOMINATES the Russell 2000 and the S&P 500.

Product Features:
  • Buy, hold, or sell recommendations for over 4,300 stocks
  • Unlimited research reports on your favorite stocks
  • A custom stock screener
Stocks Under $10

David Peltier uncovers low dollar stocks with serious upside potential that are flying under Wall Street's radar.

Product Features:
  • Model portfolio
  • Stocks trading below $10
  • Intraday trade alerts
14-Days Free
Only $9.95
14-Days Free
Dividend Stock Advisor

David Peltier identifies the best of breed dividend stocks that will pay a reliable AND significant income stream.

Product Features:
  • Diversified model portfolio of dividend stocks
  • Updates with exact steps to take - BUY, HOLD, SELL
Trifecta Stocks

Every recommendation goes through 3 layers of intense scrutiny—quantitative, fundamental and technical analysis—to maximize profit potential and minimize risk.

Product Features:
  • Model Portfolio
  • Intra Day Trade alerts
  • Access to Quant Ratings
Options Profits

Our options trading pros provide over 100 monthly option trading ideas and strategies to help you become a well-seasoned trader.

Product Features:
  • Actionable options commentary and news
  • Real-time trading community
SYM TRADE IT LAST %CHG
AAPL $121.30 0.00%
FB $94.01 0.00%
GOOG $625.61 0.00%
TSLA $266.15 0.00%
YHOO $36.67 0.00%

Markets

Chart of I:DJI
DOW 17,689.86 -56.12 -0.32%
S&P 500 2,103.84 -4.79 -0.23%
NASDAQ 5,128.2810 -0.5040 -0.01%

Free Reports

Top Rated Stocks Top Rated Funds Top Rated ETFs