Mario Draghi, president of the European Central Bank (ECB), is a damsel in distress, the old scream queen from the classic Universal horror pictures. With just months until his tenure is finished, Draghi’s hopes of a hero swooping in and rescuing him from all the chaos and confusion plaguing the Frankfurt-based institution will be granted. That knight in shining armor will be none other than Christine Lagarde, chief of the International Monetary Fund (IMF), a subzero interest rate-loving and deflation-hating Keynesian interventionist. After a couple of years on the job and abysmal economic results, she will next take on the role befitting Fay Wray or Mae Clarke.
Like the Wings television series from the 1990s, Draghi’s tenure as ECB president has been a grueling, agonizing, and befuddling eight years. To spur growth in the aftermath of the Great Recession, our man in Frankfurt fired every bullet in the chamber without ever hitting a bullseye. Now that his gun is empty, he has resorted to tossing the weapon at the economy as the last resort akin to a slapstick gag.
The ECB hosted its July policy meeting, announcing that its main refinancing operations, marginal lending and deposit facility will be left unchanged at 0%, 0.25%, and –0.40%, respectively. The last time rates were this low was in 2011, when the central bank was contending with the regional sovereign debt crisis. But that wasn’t all.
A huge part of the ECB’s policy statement dealt with the immediate future. Draghi signaled that a cut to interest rates was coming sometime before the first half of 2020 – the market is anticipating a reduction in rates in September. But what makes this move fascinating is that it admits that everything the central bank has done in the last eight years has been a failure. As the saying goes, the definition of insanity is doing the same thing over again and expecting different results. Is the ECB a madhouse being run by the inmates? No, that is insulting to mental hospitals.
Consider this: The ECB is thinking about initiating yet another round of quantitative easing (QE), a measure of encouraging lending and enabling investment by adding new money to the supply through government securities acquisitions. This has been the go-to policy for not only the ECB but also central banks worldwide. Moreover, the ECB is mulling over other unconventional stimulus measures to boost growth. One of these is introducing a “tiered system for reserve remuneration” that would decrease charges that financial institutions pay to store their excess cash at the ECB. Another option is to adjust “the size and composition of potential new net asset purchases,” which would tie into its plans for more QE.
Despite throwing everything but the kitchen sink at the European economy, Draghi conceded that the economic outlook for the region is getting “worse and worse.” In the end, the ECB recommended in its statement:
“The need for a highly accommodative stance of monetary policy for a prolonged period, as inflation rates, both realized and projected, have been persistently below levels that are in line with its aim.”
And that is exactly what it is going to happen when Lagarde takes over.
En Garde, er, Lagarde!
It was recently announced that European Union leaders selected Christine Lagarde, head of the International Monetary Fund (IMF), as the next ECB president. Surely, with a laundry list of qualifications, Lagarde will bring something new to the table. Yeah, and the Robert Mueller testimony was a win for the Democrats!
Lagarde possesses all the hallmarks of a Keynesian interventionist, from lamenting deflation to defending subzero interest rates. Lagarde might be a fresh face at the ECB, but she will inevitably continue where Draghi left off – and perhaps then some.
This is not a prediction but a spoiler alert: Lagarde will bring rates into the subzero territory and flood the economy with more credit. When rates are in the negative, or so the Keynesian theory goes, consumers will choose to spend their money rather than save it, which will supposedly stimulate the economy. But the reality is that depositors are paying for the privilege of storing their assets in a bank.
Of course, the ECB is not the only central bank to maintain this disastrous policy. The Bank of Japan, the Swiss National Bank, and the Riksbank have brought rates down to negative. The results? The countries that have tried negative rates in the last few years have not experienced much of a benefit.
Other central banks, meanwhile, are inching closer to subzero, such as the Bank of Israel (0.25%), the Denmark National Bank (0.05%), and the Bank of England (0.75%). The Federal Reserve has been holding in the 2.25% to 2.50% range. While they are preparing a rate cut, it is unlikely that the Eccles Building will dip its toe into red water, though former Chair Janet Yellen did say that it would be prepared to impose subzero rates in the event of a steep downturn.
Will the ECB ever admit that these nostrums are as successful as Beto O’Rourke’s presidential aspirations? With Lagarde soon to make her debut on the ECB roster, it is time to be afraid. Be very afraid.
A Real Draghi on the Economy
The eurozone economy is moving as fast as a family of four who just spent two hours at the Golden Corral. The monthly gross domestic product has not topped 1% since 2007; the closest it came was in early 2010 when the GDP hit 0.8%. That’s it. The eurozone M3 money supply has exploded since Draghi took office and nothing has happened. Sure, he will blame Brexit and global trade tensions, but the European economy was not really going anywhere even prior to both events. Like much of Europe’s history, the region is soaking in a bloodbath and it will not be relieved from the anguish anytime soon.