German Chancellor Merkel Calls Out The Central Bankers

This seems to be central bank day. Angela Merkel, the German Chancellor, was out with a speach today that takes the Fed, Bank of England and European Central Bank to task for their recent adventures.

From the WSJ Real Time Economics blog, here are the translated excerpts of her speach relative to central bankers:

Also among the causes [of the crisis], in my opinion, is ultimately behavioral patterns that were also politically supported, so for example through monetary policy in the United States and through refusals in the world’s biggest [financial] markets to accept any rules. …

… Ladies and gentlemen, I believe the most complicated phase with regard to the future of the social-market economy will begin when we’ve overcome the crisis. Will we manage to return to the path of virtue – not having done so has actually been the worst thing about crises past – with regard to, among other things, public debts? When will we reach this point? …

But the independence of the European Central Bank must be preserved and the things that other central banks are now doing must be retracted. I view with great skepticism the powers of the Fed, for example, and also how, within Europe, the Bank of England has carved out its own small line. The European Central Bank has also bowed somewhat to international pressure with the purchase of covered bonds. We must return together to an independent central-bank policy and to a policy of reason, otherwise we will be in exactly the same situation in 10 years’ time.

The fact that that won’t happen without mechanisms, without rules and without social engagement … is why it’s so important to build an international financial-market regime. And for us as members of the European Union it’s important to hold to the discipline of our own treaties. That will yet require from us the most rigorous political work. If [a country] tries once more to buy short-term growth by skirting these rules, then it will be politically almost impossible for the others to demand that their citizens follow the rules. So the resolution of this international financial and economic crisis will also be a practical test for international cooperation. I will continue to keep calling for this.

At the moment, we all have so many daily problems to solve that the long-term perspective can get lost. But that must not happen, because we would then fall into in a deep crisis of the entire political system. I don’t want that to happen because I’m a friend of democracy and have experienced it wonderfully through German reunification. That’s why I will fight to ensure that we draw the right lessons [from the current crisis].

Chancellor Merkel is consevative when it comes to fiscal and monetary measures and she is also involved in a fight for her political life. The people of Germany live with memories of the Weimar inflation. For them that is the ultimate economic catastrophe, not deflation or depression. That is the lens through which her views need to be viewed.

No one can know the eventual outcome and unintended consequences of the actions currently being undertaken to fight this recession. Not to fight it would probably be foolish but not to listen to Merkel and others who share her views is foolish as well. Central banks are conducting a grand experiment not following a path of previous experience.

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