{"id":14814,"date":"2022-04-22T13:13:49","date_gmt":"2022-04-22T17:13:49","guid":{"rendered":"https:\/\/multiplier-effect.org\/?p=14814"},"modified":"2022-04-22T13:16:30","modified_gmt":"2022-04-22T17:16:30","slug":"otmar-issing-is-still-living-in-his-monetary-fantasy-world","status":"publish","type":"post","link":"https:\/\/blogs.bard.edu\/multiplier-effect\/otmar-issing-is-still-living-in-his-monetary-fantasy-world\/","title":{"rendered":"Otmar Issing Is Still Living in His Monetary Fantasy World"},"content":{"rendered":"

Otmar Issing can look back on a long and consequential central banking career. Even in his retirement he is still living the part, evaluating whether his successors at the European Central Bank are pursuing stability-oriented monetary policies to his liking. His most recent critique (\u201c\u2018Living in a fantasy\u2019: euro\u2019s founding father rebukes ECB over inflation response\u201d https:\/\/www.ft.com\/content\/145b6795-2d21-48c6-984b-4b05d121ba16<\/a>) shows him on the wrong side of events and debates about sound monetary policy, again.<\/p>\n

Mr. Issing spent an eight-year stint at the Bundesbank as chief economist of Germany\u2019s legendary central bank and retired guardian of European monetary affairs. Misled by M3 overshots that were the result of the Buba\u2019s own rate hikes inverting the yield curve, Buba kept on hiking until it crashed newly unified Germany, and the ERM too. Recession-caused fiscal troubles then saw Mr. Issing\u2019s Buba cheerleading pressures for fiscal austerity. These involved hikes in indirect taxes and administered prices that were distorting headline inflation upwards and delaying Buba easing (see https:\/\/www.levyinstitute.org\/publications\/on-the-burdenr-of-german-unification<\/a>). The ensuing malaise in Europe was so pronounced that it almost prevented Mr. Issing from becoming a founding father of the euro.<\/p>\n

But the euro got lucky, courtesy of a last-minute push from America\u2019s dot-com boom. And so Mr. Issing got his chance as the ECB\u2019s influential first chief economist. Unfortunately, lessons from Germany\u2019s debacle ten years earlier were not learned. The newly formed euro monetary union repeated the blunder of pairing fiscal austerity with growth-unfriendly monetary policy, resulting in stagnation and inflation stubbornly above two percent due to austerity-inspired hikes in indirect taxes and administered prices distorting headline inflation (https:\/\/www.levyinstitute.org\/publications\/assessing-the-ecbs-performance-since-the-global-slowdown<\/a> and https:\/\/ideas.repec.org\/p\/imk\/studie\/01-2006.html<\/a>). \u00a0Germany itself was supercharging austerity and wage repression and turned into \u201cthe sick man of the euro\u201d. (see Bibow 2005 \u201cGermany in crisis \u2013 The unification challenge, macroeconomic policy shocks and traditions, and EMU\u201d, International Review of Applied Economics, 19(1): 29-50. And https:\/\/www.levyinstitute.org\/publications\/bad-for-euroland-worse-for-germany<\/a>)<\/p>\n

Not all members were stuck in stagdeflation though as financial liberalization fired up bubbles elsewhere in the euro area. (see https:\/\/www.levyinstitute.org\/publications\/how-the-maastricht-regime-fosters-divergence-as-well-as-fragility<\/a>) Nonetheless, Mr. Issing\u2019s previously held doubts about the optimality of Europe\u2019s monetary union were dissolving. So convinced of the optimality of the ECB\u2019s guardianship, he declared in 2005 that: \u201cToday, in light of the evidence gathered so far in the euro area, I am more confident in saying: \u2018One size does fit all!\u2019\u201d (see https:\/\/www.ecb.europa.eu\/press\/key\/date\/2005\/html\/sp050520.en.html<\/a>). He retired from the ECB just in time to be no longer in charge when the euro\u2019s apparent success story unraveled. But his immediate successors made sure to stick with the stability-oriented wisdom they had been taught by Mr. Issing, so that the euro area got stuck in the doldrums for years (https:\/\/www.levyinstitute.org\/publications\/germany-and-the-euroland-crisis<\/a>).<\/p>\n

It was only with the arrival of the Draghi team that enlightenment finally reached the ECB. Today, the ECB, still trying to steer a flawed monetary union that is lacking fiscal union, is confronted with unprecedented challenges in the form of a pandemic and the Ukraine war. Given Mr. Issing\u2019s track record, they should take encouragement from his latest critique \u2013 they may actually be doing something right. A monetary policy mindset that always and everywhere sees provoking recession as a matter of precaution is unlikely to yield optimal monetary policies outside of Mr. Issing\u2019s fantasy world.<\/p>\n

It is telling that Mr. Issing uses his recent interview with the FT as an opportunity to invent yet another fantasy. Attacking the ECB for failing to start normalizing monetary policy a long time ago, Issing is reported to have asserted that: \u201cThe prospect for a \u2018stagflationary\u2019 situation of rising inflation and slowing growth is \u2018the worst combination\u2019 for a central bank, said Issing, who contrasted monetary policymakers\u2019 responses to the two oil shocks of the 1970s. \u2018The Bundesbank tried to control inflation and the consequence was moderate inflation and a mild recession,\u2019 said Issing, who joined the German central bank in 1990. But \u2018the Fed waited too long\u2019 and the US had \u2018double-digit inflation and a deep, deep recession.\u2019\u201d<\/p>\n

It is of course true that inflation in the U.S. reached double digits in the 1970s and the U.S. suffered a double-dip recession in the early 1980s. Employment reached its trough at the end of 1982, 2.4 percent below the previous peak in early 1980. It was only in September 1983 that employment exceeded its pre-recession peak. Where Mr. Issing takes a deep dive into his \u201cstability-oriented\u201d dreamland is in asserting that (West) Germany only experienced a \u201cmild recession\u201d in the early 1980s. For in 1983 employment in (West) Germany was still 2.7 precent below its previous peak in 1980. It took until 1987 for (West) Germany\u2019s employment to finally exceed its pre-recession peak. Of course, Mr. Issing would blame (West) Germany\u2019s poor employment record despite allegedly only suffering a \u201cmild recession\u201d on \u201cstructural problems\u201d and a lack of fiscal austerity. Because in Mr. Issing\u2019s fantasy world \u2013 courtesy of the money neutrality postulate \u2013 \u201cstability-oriented\u201d monetary policy cannot possibly be responsible for anything else but price stability.<\/p>\n

I am reminded here of the late Milton Friedman, the arch-monetarist, who refuted Mr. Issing for his comfort-seeking fancies about the relevance of monetary neutrality propositions for central bankers (see https:\/\/onlinelibrary.wiley.com\/doi\/abs\/10.1111\/1467-8454.00169<\/a>), stating: \u201cNeutrality propositions give little if any guide to effective central bank behaviour under such circumstances. Perhaps they offer comfort to central bankers by implying that all mistakes will average out in that mythical long run in which Keynes assured us \u2018we are all dead\u2019.\u201d (see https:\/\/digitalcollections.hoover.org\/objects\/57393<\/a>)<\/p>\n

Central bankers, too, even the worst ones, deserve retirement before they are dead.<\/p>\n","protected":false},"excerpt":{"rendered":"

Otmar Issing can look back on a long and consequential central banking career. Even in his retirement he is still living the part, evaluating whether his successors at the European Central Bank are pursuing stability-oriented monetary policies to his liking. His most recent critique (\u201c\u2018Living in a fantasy\u2019: euro\u2019s founding father rebukes ECB over inflation […]<\/p>\n","protected":false},"author":187,"featured_media":0,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"footnotes":""},"categories":[15,40],"tags":[121,31,340,972],"class_list":["post-14814","post","type-post","status-publish","format-standard","hentry","category-eurozone-crisis","category-monetary-policy","tag-ecb","tag-eurozone","tag-monetary-policy-2","tag-otmar-issing"],"jetpack_featured_media_url":"","_links":{"self":[{"href":"https:\/\/blogs.bard.edu\/multiplier-effect\/wp-json\/wp\/v2\/posts\/14814","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/blogs.bard.edu\/multiplier-effect\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/blogs.bard.edu\/multiplier-effect\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/blogs.bard.edu\/multiplier-effect\/wp-json\/wp\/v2\/users\/187"}],"replies":[{"embeddable":true,"href":"https:\/\/blogs.bard.edu\/multiplier-effect\/wp-json\/wp\/v2\/comments?post=14814"}],"version-history":[{"count":5,"href":"https:\/\/blogs.bard.edu\/multiplier-effect\/wp-json\/wp\/v2\/posts\/14814\/revisions"}],"predecessor-version":[{"id":14819,"href":"https:\/\/blogs.bard.edu\/multiplier-effect\/wp-json\/wp\/v2\/posts\/14814\/revisions\/14819"}],"wp:attachment":[{"href":"https:\/\/blogs.bard.edu\/multiplier-effect\/wp-json\/wp\/v2\/media?parent=14814"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/blogs.bard.edu\/multiplier-effect\/wp-json\/wp\/v2\/categories?post=14814"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/blogs.bard.edu\/multiplier-effect\/wp-json\/wp\/v2\/tags?post=14814"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}