… was illustrated today by Raghuram Rajan, the Reserve Bank of India governor, along these lines:

From Centralbanking.com

Rajan also questioned the existing monetary policy stance of industrial countries. Specifically, he asked whether pushing real interest rates lower through forward guidance, asset purchases or nominal rate cuts was “part of the solution, or part of the problem”.

The slow pace of growth, he said, casts doubts over whether the low interest rate environment was really encouraging people to spend and invest more.

He observed that the main spenders before the crisis were typically the people who were hit the hardest, and made the point that people who had borrowed against their houses were now struck with negative equity.

The people who saved before the crisis, he said, were largely saving for their retirements. After the crisis they find themselves needing to save more, a problem that is compounded if the central bank pushes down real interest rates and reduces their income further.

In other words, low interest rates have a contractionary effect.

This is an update of my favorite chart these days, following the release of this year’s first-semester figures of Eurozone unemployment (19,246,000).

The overall government deficit (all 17 countries included, dotted red line) peaked in 2010, when austerity began. It has declined since then. And notice: Last time the deficit declined  (2005-07), it dropped with a bit of growth and job creation. Not because of austerity.

With austerity, the falling deficit correlates with job destruction: First time in the one-and-a-half decades of the euro’s existence.

And the reason is simple: Governments’ provision to raise taxes and cut spending has, unsurprisingly, acted pro-cyclically.

European leaders must have strong, powerful reasons to implement policies that harm the physical and emotional health of their citizens. Do they?

More on this on Social Europe.

 

 

A vast literature now exists on the banking crisis that blew up financial markets and the real economy in the Fall of 2008. Some explain the unfolding events that led Lehman Brothers to file for bankruptcy (notably, Inside Job). Others analyze the conditions that triggered the series of events that culminated in the global financial meltdown. Among the latter, I recommend the reading of this paper by Jan Kregel. Jan tells of three stages of the crisis. Each time, regulators offered a narrow view of the causes of instability, and each time they believed that with a quick fix the system would revert to normal. Today, they remain powerless to prevent future instability, because they do not have a theory of financial market instability.