Sunday, February 25, 2018

Financial Times Reporter Triggers the President of the Bundesbank

I have never seen reporting like this before in the "Lunch with the FT" feature of the Financial Times.

Claire Jones, the FT’s Frankfurt bureau chief, invited Bundesbank president Jens Weidmann for the feature section profile lunch. Halfway down her profile, she writes that she triggered Weidmann during the lunch:
For a nation [Germeny] that views debt as a sin (the word for it, schuld, also means “guilt”), the ECB’s aggressive attempts to keep the European show on the road — which have included promises to spend trillions buying government bonds and savage cuts to interest rates that savers here hate — have come to symbolise everything the euro’s enemies detest about the single currency..

Does Weidmann think it has made matters more difficult for the ECB that he as president of the revered Bundesbank has been so openly critical? He demurs. Germans would not have trusted their central bank, had it not been consistent with its traditional view, he argues...

Later he adds: “Trust comes through understanding. But it also comes with personality.” Some think the German wariness of the ECB would change if a German were to succeed Draghi after he leaves at the end of next year. But it would be an extraordinary change — for Weidmann and the bank. He has been the most vocal of the handful of the council’s 25 members to have opposed the bank’s bond-buying...

He argues that, if monetary union is going to work, then the question of nationality must be put to one side. Talking about which country people are from all the time “illustrates a certain nervousness” that Weidmann thinks in time would weaken people’s trust in the euro.

“If you say, ‘We would never have somebody from Malta at the ECB’, I mean, how would the Maltese feel? Do you think that they would be willing to accept ECB policy?”

I reply that I think the Maltese know it is very unlikely that one of them will succeed Draghi.

“Well you know what I mean,” he bristles. “If you exclude a country and say nobody from Luxembourg, Malta, whatever . . . this is not how it should work.”

We are by now an hour into lunch. As I tackle my schnitzel, Weidmann is losing his cool. This discussion about a candidate’s nationality is “completely absurd”, he says. “I mean, would you have asked if this institution is right for an Italian?”
Weidmann is absolutely correct here. Shouldn't the soundness of monetary stewardship by an ECB presidential candidate be first and foremost, not the candidate's nationality? I can understand why he gets triggered with the line of questioning by this reporter. Especially, since he is the most conservative of money printers that is in a position to succeed current ECB president Mario Draghi next year.

What difference does it make that he comes from Germany?



  1. I think the biggest failure of the Austrians is the failure to get average people to understand that inflation is a purposeful government program. There is no reason we can’t do that. Further, nothing good is going to happen until this simple idea dawns on a significant portion of the public.

    The second biggest failure is to not pound the proposition that the free market does not and never has stalled, or need “stimulus” or needed something to provide it with “momentum”. Demand the Keynesians and statists provide the historical example.
    Their example will always be 1929. However, Keynesian Daniel Kuehn has demonstrated that the 1920 depression was caused by the cutbacks in spending and money growth at the end of WWI. He calls the depression “The austerity depression of 1920–21”.

    The austerity depression of 1920–21

    During World War I federal expenditures ballooned and although the new income tax was able to partially finance the war effort, most of the financing was done through federal borrowing and by the highly accommodating monetary policy of the Federal Reserve. The role of the Federal Reserve at this time was expressed unambiguously by the New York Federal Reserve Bank Governor Benjamin Strong, who told a Congressional committee in 1921 that ‘I feel that I, or the bank at least, was their [the Treasury’s] agent and servant in those matters’ and further added that the wartime inflation caused by the low interest rates maintained by the bank were ‘inevitable, unescapable, and necessary’ for prosecuting the war
    (Strong, 1930) [emphasis added}

    This is the pure Rothbardian explanation. Wars are funded with fiat money which robs average people of purchasing power without the victims understanding exactly what is being done to them and without any due process of law. If the citizens had to make an immediate sacrifice in the form of a forced contribution of tax money to fund wars on a pay-as-you-go format, there would be far fewer wars. Kuehn then notes that the inflation encountered by the populace had been caused by the “expansionary policy of the Federal Reserve” and thus not any alleged “market failure”. After the war, such policy was “sharply curtailed” as was government spending leading to the predictable bust:

    However, after the war ended the deficit spending of the Wilson administration and the expansionary policy of the Federal Reserve were sharply curtailed to bring a halt to the inflation. By November 1919 the Wilson administration balanced the federal budget, slashing monthly expenditures by almost 75% in a matter of months.4 The New York Federal Reserve Bank raised the discount rate by 244 basis points over the course of eight months, with other Reserve System banks following suit. Shortly after these austerity measures were taken, the 1920–21 depression was under way. Postwar industrial production in the USA peaked in January 1920 as the economy moved into a major depression, with production levels dropping by 32.5% by March 1921.5 This loss in output is second only to the Great Depression in American economic history (Romer, 1999), although its duration was considerably shorter. Declines in output were matched by precipitous drops in employment and the price level. The proximate cause of the 1920–21 depression was a deliberate fiscal and monetary retrenchment following World War I.

    The fact that the depression was cured with limited government involvement is important but not as important as this unmentioned truth as to its cause.

  2. What spawned Kuehn's paper was the absence of the mention of Woodrow Wilson in a short article that Tom Woods did on the 1920 depression for The American Conservative in 2009 or . However, prior to doing that short article, I heard him repeatedly joke about Wilson's "stroke of luck", Wilson's debilitating stroke which allowed his aids to slash spending and money growth that might not have happened if Wilson had been healthy. Clearly, “Austrians” are aware of the slashing of spending and money creation at the end of WWI during the Wilson regime.

    Krugman (the Creep) has vouched for Kuehn's article by claiming that Austrians "have their timing wrong" and don't seem to understand Wilson's role. Geeeeesh. But Krugman has implicitly vouched for the cause of the depression as the end of artificial government boom which funded WWI.

    Nevertheless, you still have a very screwed up portwar funny money system which led to 1929. The statists will be unable to deal with trying to locate that magic moment in history where the market failed requiring their input and "stimulus".

    1. But Krugman is correct when he writes that in 1921 "there was substantial monetary easing."

      There is confusion about this amongst some Austrians as I have written about several times. They misread Rothbard:

    2. I guess I missed that specific bit of information although I was aware generally of the big increase in the money supply throughout the decade. I think it is essential to point out:

      a) The 1920 depression was triggered by cutting the spending and money growth that had sustained the WWI military effort;

      b) There could have been no military effort without the Fed money growth which Krugman has vouched for;

      c) There is no way to blame the 1920 depression upon “market failure”; and

      d) There was no government program to maintain wage rates during the depression which were clearly not “sticky”.

      The fact that there was some serious monetary “easing” which shortened the 1920 depression doesn’t really help the Keynesians because I don’t think anyone denies that such is the general short term result of monetary easing. But such easing leads to busts which we had in 1929.

      Final thought: Always insist that the Keynesians and statists have the burden of proof to justify violent intervention and to identify their alleged historical incidents of “market failure”. Markets do not fail due to lack of stimulus, wages are not "sticky" and laissez faire does not cause monopolies. Most everything Keynesians do is based upon those false claims.