Sometimes it is extremely difficult to tell the difference between economic idiocy and self-serving bullsheet. I am a big fan of Occam’s Razor which says the simplest explanation, the one with the fewest assumptions, is likely to be best.
However, which explanation is simpler – stupidity or self-serving propaganda?
While pondering that question, let’s take a look at how the question arose. It comes from a statement made by the Chief economist at Deutsche Bank in an article written by Ambrose Evans-Pritchard for the Telegraph.
Please consider Pressure on the ECB grows as Mario Monti rides to rescue
“The ECB must make it clear that it will not allow Italy’s bond yields to rise above 5pc, however much it costs,” said Thomas Mayer, chief economist at Deutsche Bank.
He described the current policy of half-hearted bond purchases as “a recipe for failure”, signaling to markets that the ECB is not willing to see the job through with overwhelming force.
Britain’s Vince Cable, echoed the calls for bolder action, blaming the ECB’s passive stand for the dramatic escalation of the crisis last week that pushed Italy’s €1.8 trillion to brink of meltdown and spread contagion to France.
“The central bank has to have unlimited powers to intervene to support economies, and indeed banks, to prevent collapse,” he told the BBC.
Idiocy or Self-Serving Bullsheet?
Are these people really dumb enough to believe central banks can impose their will on the markets?
I have to ask because former ECB president Jean-Claude Trichet empahtically said “We say no to default”. He also said no to soft-default. Well guess what? Greek debt was restructured and the ECB is holding a ton of it.
Eventually the markets impose their will. It may be by destruction of the currency, something that both Vince Cable and Thomas Mayer fail to consider (or simply ignore) or the markets may impose their will with interest rates as has happened with Greece and Portugal.
To be sure, it is theoretically possible (at least for a while) for the ECB to print enough money to drive rates in Italy to zero. However, such action would be in violation of the Maastricht Treat, it would put German taxpayers at risk, and it would eventually make the Euro worthless if done long enough.
I do not know what if any stake in the matter Vince Cable has, so it is easy enough to think he is a complete economic idiot.
The situation is more complex with Thomas Mayer. He may be talking his book, scared to death what happens if debt held by Deutsche Bank blows up. Perhaps he would be fired if that happened.
Nonetheless, a general Mish rule says “when stupidity is one of the choices, give it the benefit of the doubt”.
There may be a combination of factors at play here (and probably is), but to pick a single answer “economic idiocy” rates to be the best choice.
Mike “Mish” Shedlock
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