When last night we previewed this week's annual Jackson Hole symposium at which Mario Draghi is scheduled to speak just before the market close on Friday, we said that the ECB head is warming up for the trip by speaking at the Lindau economics symposium in Germany this morning "and as such he could front run himself." Unfortunately for many who were expecting some advance highlights, Draghi disappointed those who hoped he would preview his Jackson Hole appearance.
So what did Draghi talk about? Instead of previewing the ECB's inevitable taper (especially as the central bank will soon run out of Bunds to buy at the current pace of monetization), the central banker defended growing criticism of his unorthodox monetary policy, and said the ECB's policies such as QE and NIRP, saying they have been a success on both sides of the Atlantic, and that the purchase of some $15 trillion in assets has somehow made economies "more resilient."
Speaking to the Lindau audience of 17 Nobel laureates and 350 young German economists, a nation which has been one of the stiffest critics of ECB policies such as quantitative easing, Draghi's speech avoided any specific hints on current ECB deliberations, and instead said officials must be “unencumbered by the defense of previously held paradigms that have lost any explanatory power.”
He then launched into a vocal defense of QE, saying that “when the world changes as it did ten years ago, policies, especially monetary policy, need to be adjusted. Such an adjustment, never easy, requires unprejudiced, honest assessment of the new realities with clear eyes, unencumbered by the defense of previously held paradigms that have lost any explanatory power”
Aptly on Monday, Nick Macpherson, a former UK Treasury official said what we have been saying since 2009 when he compared QE to "heroin" because it has been so difficult to wean the UK, US and eurozone economies off it. Lord Macpherson, who was permanent secretary to the Treasury when the Bank of England started QE in 2009, tweeted on Monday: "QE like heroin: need ever increasing fixes to create a high. Meanwhile, negative side effects increase. Time to move on."
An elegant exit strategy from a policy which is yielding diminishing returns.— Nick Macpherson (@nickmacpherson2) August 21, 2017
Draghi disagreed:"a large body of empirical research has substantiated the success of these policies in supporting the economy and inflation, both in the euro area and in the United States," he said referring to a body of evidence written mostly by central bankers and other career economists who still can't figure out the reasons for the mass popular anger that culminated in Brexit and Trump.
The ECB buying relatively safe assets such as government bonds means that banks can lend more and invest in riskier assets, which in turn improves access to credit for riskier borrowers, Mr Draghi said. He added: "Policy actions undertaken in the last 10 years in monetary policy and in regulation and supervision have made the world more resilient. But we should continue preparing for new challenges."
Draghi also said "studies" (again, central bank studies mostly) show "innovations" such as forward guidance and trillions in bond purchases under QE have been successful in supporting the economy and inflation.
As Bloomberg notes, that view wasn’t wholly endorsed by Nobel Laureate Christopher Sims: “My view is that the unconventional actions that the Federal Reserve took in the early stages of the crisis were extremely effective as a major lender of last resort,” he said in a Bloomberg TV interview with Francine Lacqua. “The subsequent quantitative easing I don’t think was harmful, I think it may have been somewhat helpful, but I don’t think it’s been a major powerful instrument of monetary policy.”
Meanwhile, other critics of QE - such as this website - simply show insane charts such as the one below according to which over the past 9 years central banks have acquired 40% of world GDP in terms of assorted assets, and have argued for years that this has inflated asset bubbles and stoked inequality by rewarding the asset-rich while punishing savers, a view that has become increasingly mainstream.
In any case, Draghi had to have the last word: after leaving the podium, Draghi took one last swing at his critics. "you need serious conceptual analysis and base policy on that, not on prejudice, or -- even worse -- on moral grounds,” he told reporters after his speech. “Some people say ‘Oh, QE is immoral, because it creates money out of nothing."
Actually, what it ultimately creates is war - one which will be conveiently scapegoated on the "nationalist fascist" du jour. Luckily we still haven't quite gotten to that point just yet.