IAP Political Forum

The interest rate policy pursued by the ECB during the current crisis is proving to be quite controversial. Especially, when it is diametrically opposed to that adapted by the U.S.A. Namely, large reductions in U.S.A. rates and small increases in the Euro Zone.

Before attempting to analyze the goodness of these strategies is interesting to see whether these strategies are justified. To do that reading the objectives of central banks could be enough. Thus:

ECB

Objectives:
 
"The primary objective of the ESCB will be to maintain price stability".

And: "Without prejudice to this objective, the ESCB shall support the general policies of the Community in order to help achieve EU objectives set out in Article 2 '. (Paragraph 1 of Article 105 of the Treaty)

The objectives of the Union (Article 2 of the Treaty on European Union) are a high level of employment and sustainable growth and non-inflationary.

FED

Objectives (monetary policy):

To promote effectively the goals of full employment, stable prices and moderate interest rates on long-term

The ECB press release of September 5 (3) makes it quite clear that the ECB has scrupulously fulfilled its objectives since the beginning of the crisis:

"we have been crystal-clear since the beginning of the financial turbulence that we would make a strict separation between the monetary policy stance - which is designed exclusively to deliver price stability in the medium term in an exceptionally difficult period - and the implementation of this monetary policy through the Eurosystem credit operations. "

1) www.ecb.int/ecb/orga/tasks/html/index.es.html
2) www.federalreserve.gov/pf/pf.htm
3) www.ecb.int/press/key/date/2008/html/sp080905.en.html

Today, I read a text that is linked with my previous post in which we can read some comments about the results of the central banks policies. Moreover, I couldn't found the Goldman Sachs' text mentioned in the new. So, I will thank if anyone could give me a link to that new.

Text (translated but not checked) taken from http://www.elpais.com/articulo/economia/Estados/Unidos/convierte/intervencionismo/elpepueco/20080914elpepieco_2/Tes

The United States turns to the interventionism Goldman Sachs criticizes the coyness of the economic politics(policy) in the eurozone 
A year of crisis leaves a new economic order in West. Aside of the Atlantic Ocean, the Administration Bush has practised forts cuts of interest rates, massive injections of liquidity to save the banking, public rescues of big financial institutions and ambitious packages of fiscal helps. In other words, a ferreous public interventionism to avoid the turbulences after years and years of sermons on the kindness of the free market. In the European bank, you upset nothing. Result: the economy of the USA, origin and principal area of contagion of the financial hurricane, amateur bullfight the temporary one with a growth of 3 %, while the eurozone flirts dangerously with the recession. This it is the synthesis of the situation for the analysts of the North American Goldman Sachs.

The big merchant banks and the Anglo-Saxon economists have never been very friends of the intervention of the State in the economy. But now they seize this activism with the faith of the converted one. " The United States has reacted to the crisis passing to the interventionism, while the reactions in Europe have been shier ", according to Goldman's report, published this week. The final result is conclusive: " The lack of political impulse explains the differences in the growth of the USA and the eurozone ", report the economists of the entity.

Something is changing enclosed when the think tanks neoconservadores subscribe to this thesis. " Europe has been too strict, too rigorous in its economic policy and goes of head to the recession ", assures from Washington Desmond Lachman, economist of the influential American Enterprise Institute (AEI).

The thousands of millions spent in this new role of the Administration Bush has served to attenuate the blow, while Europe scarcely has reacted and suffers the consequences of this inaction, the experts underline. The falcons - this way one calls the ferreous guardians of the orthodoxy - they dominate now in Europe, but the crisis demands pragmatic solutions. After the snap of the mortgages garbage, the answers were similar: massive injections of liquidity on both sides of the Atlantic Ocean. But there it ended the similar one. From this moment the differences in economic policy have been notable. The results, also.

- Budgets under pressure. The fiscal policy is the best example of the differences. The Government Bush approved before the summer an ambitious plan of stimulus of almost 170.000 million dollars and it prepares a new package for 2009. In Europe - " except in Spain ", according to Goldman Sachs-, the response is symbolic. For several you cause. On the one hand, it seemed that the eurozone was bearing better the crisis, which was making an intervention less necessary. In addition, the political scheme plays a role relevant: the Agreement of Stability and Growth limits the possibility of incurring deficit, and the agreements in Brussels are not easy. The climbing of the Euro - that puts up the price of the exports, though it begins to correct - has played also a role in the problems of the eurozone.

There are other reasons. " The State of the Well-being gives to Europe more generous schemes of automatic response to the crisis " in aspects as the unemployment benefits, according to the merchant bank, which criticizes the " lack(mistake) of political impulse " in Europe to start discretionary measures and to fight against an economic cycle that deteriorates with rapidity. Jose Carlos Díez, economist chief of Intermoney, underlines that to the step that goes " Europe is going to react when the war has been ended ". " The revenue per capita of the USA overcomes fully the European for motives as this one: they react more rapid and generally they give in the nail ", it adds. Not always: after 11-S, the USA went out of the crisis with a strong cut of the interest rates. With this policy, it helped to swell the bubble that it has exploited now.

- The dilemma of the ECB and the Fed. " Some say that the world will end in flames, others frozen ". The poet Robert Frost was not thinking about the central bankers when he(she) wrote this phrase, but it is what happens: the economy traverses the risk of catching fire for the inflation, and of freezing for the risk of recession. The ECB and the Fed have before yes a dilemma: the interest rates are a luck of thermostat to warm the economy (lowering the types to stimulate the credit and the consumption) or to cool it (raising them the lendings increase in price). The Federal Reserve (Fed) them has gone down 5,25 % to 2 % from the beginning of the crisis. The ECB them has chosen to raise, which there supposes " a monetary additional restriction in a moment of whip credit restriction ", supports Antonio Villarroya, analyst of Merrill Lynch. " One more mistake ", it grants Díez. For Deutsche Bank, it explains because " the mandate of the ECB centres only on the inflation, whereas the Fed has in it counts also the growth ". Goldman aims at an additional difference: " The ECB had an immediate response to the crisis with the injections of liquidity to calm the interbank tension ", but recently it has chosen to harden the regulation. On the other hand, the Fed " has extended " the options of the banks of access to the window of cash.

- Bank rescues. The European economy goes worse, but the North American banking suffers more. Bear Stearns's rescues and hypothecary Freddie Mac and Fannie Mae supposes a cost of up to 230.000 million dollars for the American budget. In Europe scarcely there have been rescues, except in the United Kingdom (Northern Rock) and Germany. " The economic European policy is being involved less than american, partly for the minor need ", it aims At Goldman.

- Spain. In the times that run, it is not easy to find positive allusions to the Spanish economy between(among) the Anglo-Saxon analysts. But Goldman Sachs assures that Spain still has margin for the fiscal stimulus as its  low national debt, as Germany, whereas France and Italy have this route closed. In addition, the Spanish economy answers well to these stimuli.