Monday, June 18, 2012

"Easy money has morphed into financial repression"

Think of it this way, just after the Euro came into being, the German economy was in what I labelled a soft depression due in large part to Germany’s own post-unification credit excesses. So the ECB decided to prop up the German economy with low interest rates, rates that produced negative real interest rates and housing bubbles in Ireland and Spain. This was a policy designed to "bail out" the indebted German economy. We called it easy money then because it allowed massive speculation to be funded by cheap loans in credit markets. Now that the bubbles have popped, easy money has morphed into financial repression. But the goal is the same as it ever was: to "bail out" the indebted by ‘repressing’ interest income that creditors can receive.
The interesting bit about this policy is that economic policies right across the indebted developed economies have been extremely favorable to creditors in bailing financial institutions out of their lending excesses at taxpayer expense. Yet, at the same time, creditors are being savaged by the sharp downturn in net interest income due to the easy money policy we are now calling financial repression.
Read it at Credit Writedowns
Chart of the Day: The smoking gun showing how the ECB wrecked the Spanish economy
By Edward Harrison

A couple months back I wrote a couple posts about how The Economy Needs a Bubble!
when interest rates are held below the growth rate of an economy (See also The Economy Needs a Bubble, but Treasuries are NOT it!). One point I might add to Edward’s post, is that the groups of creditors benefiting from bank bailouts and being hurt by financial repression may very well represent different groups based on income/wealth. In my opinion, this is an important distinction for understanding the political motives behind each policy and assessing any likely changes to policy down the road.

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