Jean-Claude Trichet, the former head of the European Central Bank, in an interview with CNBC stated that there was only so much that central banks could do to save the economic situation at the present time. He also went on to say that Ben Bernanke was doing what should be done right now.
He spoke about the “bold and swift actions” without which there would have been a “great depression”. He asked for homage to be paid to the central banks for their way of dealing with the crisis that we are going through right now and their courage. It is far from certain that the words of Mr. Trichet will find some form of echo in the economies around the world.
But, today, the Dow Jones Industrial Average increased by 0.70% (up 102.76 at 14, 762.32) as of 11.39 ET. The FTSE 100 is also up 1.04% (63.26 points at 6, 091.72). The DAX made gains of +1.39% (+104.71 to 7, 797.16). The Nikkei was still down by -93.44 points at 12, 969.34 (-0.72%). The Shanghai Composite was still falling today at -0.18% (down 3.52 points at 1, 959.51).
It is true to say that when he spoke of the fact that central banks should not do the job of governments or the private sector and that they should allow those actors also to participate in economic recovery, he was perhaps not far wrong from the truth. Except, some might say that the Federal Reserve has been doing just the opposite by injecting billions into the economy through Quantitative Easing. By doing so, the private sector and the economy in general have not been doing their own thing. Trichet also went on to mention that the markets had over-reacted at the announcement that the Federal Reserve was going to withdraw the money supply from the economy by 2014 (if the markets showed sufficient stability).
He stated: “I think that it was appropriate for Ben Bernanke to say well this will not last forever…but he remained very conditional in his own explanation so I think it was very well done. It was carefully crafted”. Crafted is a good choice of vocabulary, but perhaps not entirely the most appropriate since it also means ‘skill in evasion or deception, guile’ and not just proficiency and dexterity. Wily old Ben Bernanke? Trichet stated that now we will just have to live with the over-reaction of the markets and get on with it.
But the central banks of all central banks (the Bank for International Settlements) stated yesterday that liquidity and money injections into the economies around the world had only put off the problem that was growing. It has given the economy time but it hasn’t provided global improvement and greater resources in the world. Continuing to purchase government securities will not provide that. Structural reforms of the economy must take place. Despite the fact that most analysts will tend to agree with that statement, it is true to say that the economies of the EU and the US, or even Japan and China cannot be treated in the same way.
The Bank for International Settlements issued a statement only two days ago saying that there was a risk of having $1 trillion wiped off of the value of bonds if yields rose. It stated that it was high-time for central banks to get things in shape. It stated in the report that a rise in bond yields to the tune of 3% over all maturities would bring about losses of 8% of Gross Domestic Product in the USA. This was without calculating the losses that would be incurred by the Federal Reserve.
Jean-Claude Trichet spoke of structural reforms that were needed, however, in Europe such as fiscal unity to iron out imbalances and stabilizing the private sector through growth.
Mario Draghi the current President of the European Central Bank gave a speech today in Berlin in which he stated that the Euro was stable and that Europe was strong. He stated: “fiscal consolidation can be made much more growth-friendly by cutting unproductive expenditures, by establishing credible and detailed medium-term fiscal plans and by lowering the tax burden where it is harming economic activity and job creation in particular”. However, despite the up-beat statement of Mr. Draghi, it is very much doubtful that any European government will reduce the tax burden in the current economic climate. We could keep our fingers crossed though, couldn’t we?
Trichet was the President of the European Central Bank between 2003 and 2011. Jean-Claude Trichet was largely criticized in Europe for his response to the financial crisis of 2008, since he defended the need for price stability, over recovery and consolidation of growth. It was also only when he stepped down from the European Central Bank that the value Greek bonds were cut in half.
Originally Posted: Bernanke on Trichet
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