http://krugman.blogs.nytimes.com/2012/06/02/catastrophic-credibility/
Catastrophic Credibility
A little while ago Ben Bernanke responded to suggestions that the Fed needed to do more — in particular, that it should raise the inflation target — by insisting that this would undermine the institution’s “hard-won credibility”. May I say that what recent events in Europe, and to some extent in the US, really suggest is that central banks have too much credibility? Or more accurately, their credibility as inflation-haters is very clear, while their willingness to tolerate even as much inflation as they say they want, let alone take some risks with inflation to rescue the real economy, is very much in doubt.
Yesterday I pointed to the German breakeven, a measure of euro area inflation expectations, which has plunged lately. Here’s a longer view:
Note the peak in April 2011. It wasn’t very high; slightly above the ECB’s target, but arguably still too low to make the needed adjustment within the euro area feasible. Nonetheless, the ECB raised rates — and that was when the euro really began falling apart. The direct effects of the rate increase can’t explain that unraveling, but the effect on expectations — aha, so they really are that fanatical about price stability! — can.
Now the breakeven is plunging. I’d like to think that the ECB is holding frantic meetings and planning to announce a surprise sharp rate cut, preferably to zero, the day after tomorrow. But I doubt it. The fact is that the ECB is highly credible: most observers, me included, are quite sure that it is totally allergic to inflation and relatively indifferent to the collapse of the real economy.
The Fed has conveyed a milder form of the same message, issuing forecasts that show inflation slightly below target and unemployment far above target; given its dual mandate, this should be a flashing siren calling for more action. Yet these forecasts have been accompanied by statements to the effect that no action is currently called for. The Fed has therefore created the credible expectation that it will move only if inflation is far below the claimed target, and doesn’t really care about unemployment.
My earnest hope is that both central banks will rethink the meaning of credibility, and in particular what kind of credibility they really want to have, very soon. And by very soon I basically mean tomorrow."
Yesterday I pointed to the German breakeven, a measure of euro area inflation expectations, which has plunged lately. Here’s a longer view:
Now the breakeven is plunging. I’d like to think that the ECB is holding frantic meetings and planning to announce a surprise sharp rate cut, preferably to zero, the day after tomorrow. But I doubt it. The fact is that the ECB is highly credible: most observers, me included, are quite sure that it is totally allergic to inflation and relatively indifferent to the collapse of the real economy.
The Fed has conveyed a milder form of the same message, issuing forecasts that show inflation slightly below target and unemployment far above target; given its dual mandate, this should be a flashing siren calling for more action. Yet these forecasts have been accompanied by statements to the effect that no action is currently called for. The Fed has therefore created the credible expectation that it will move only if inflation is far below the claimed target, and doesn’t really care about unemployment.
My earnest hope is that both central banks will rethink the meaning of credibility, and in particular what kind of credibility they really want to have, very soon. And by very soon I basically mean tomorrow."
http://hat4uk.wordpress.com/
Bipolar politics is mad.
There is no easy way to sanity.
There are solved problems.
Let us solve problems.
Sooner is better. As soon as you can is best.
jenny8lee . . .
http://www.zerohedge.com/
Why A Grexit Would Make Lehman Look Like Childs Play
Submitted by Tyler Durden on 06/02/2012 - 10:14"The ECB has €50 billion of GGB bonds still on their books. Those would not get paid at par by Greece if this is an amicable breakup, but this is quickly heading to a pots and pans thrown in the kitchen sort of break-up. Why would Greece pay the ECB if they feel like the ECB drove them out? Don’t forget, not for a second, that most of the money Greece now gets goes to pay back the ECB and IMF. The EFSF is totally out of luck. The ECB might be able to offer something to a post drachma Greece, but the EFSF offers nothing. The IMF has more negotiating power, as their direct loans had more protection in the first place and they are likely to provide additional funds post exit, but quite simply Greece won’t be able to pay them in full on existing loans. With the ECB, EFSF, and IMF all taking big losses, their credibility is hurt. Worse than that, they have exposure to Portugal, Ireland, Spain and Italy and the markets (if not the politicians) will become very concerned about those exposures. The IMF may see its alleged firewall crumble before it is ever launched. The ECB, integral to any plan to protect Europe will have lost credibility and many will question their solvency. The EFSF will be hung out to dry and immediately the market will attach all their risk to Germany and France, not making people in those countries particularly happy."
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