I have little company when it comes to extolling the virtues of the Bundesbank or German economic thinking more generally. For me, it’s an issue of principle. Over the past 22 years I have come to deeply respect the German (including “Austrian”) view of economics, money and Credit, and monetary management. I’m partial to a sound analytical framework, discipline and the so-called “orientation of stability.” Back in 2004, in a CBB titled “Issing vs. Greenspan,” I highlighted a WSJ op-ed by then ECB Chief Economist Otmar Issing, with his prescient warning against central banks ignoring Bubbles:
From Issing’s article, aptly titled “Money and Credit”: “Huge swings in asset valuations can imply significant misallocations of resources in the economy and furthermore create problems for monetary policy. Not every strong decline in asset prices causes deflation, but all major deflations in the world were related to a sudden, continuing and substantial fall in values of assets. The consequences for banks, companies and households can be tremendous… Prevention is the best way to minimize costs for society from a longer-term perspective. …it should not be overlooked that most exceptional increases in prices for stocks and real estate in history were accompanied by strong expansions of money and/or credit.”
This has been a multi-year battle for what constitutes sound analysis and economic doctrine. Mr. Issing and the Bundesbank know they have won the debate on Bubbles, money, Credit and monetary policymaking. There is reason to believe they view U.S. monetary and fiscal policymaking as an ongoing disaster. And it is ironic that markets today celebrate Mr. Draghi’s desperate move to adopt Fed-like quantitative easing. As Mr. Issing wrote this week in the FT, “Juvenal would have said: Difficile est satiram non scribere (It is difficult not to write a satire).”
I suspect the Bundesbank has commenced preparation for a difficult confrontation. I am less clear on the stance of what appears an increasingly divided Merkel government, although a decisive shift in German public sentiment has seemingly begun. According to recent polling (YouGov), only 33% of respondents now support Ms. Merkel’s handling of the euro zone crisis, down sharply over recent weeks. And, for the first time, a majority (51%) of Germans now believe they would be better off without the euro (Merkel was said to be “profoundly disturbed”). The vast majority of Germans want Greece out of the euro, and fewer each week would be content subsidizing profligate Spain and Italy. If either the Bundesbank or the Federal Constitutional Court of Germany should in coming weeks draw a harder line, they might just enjoy an outpouring of support from the German people – if not global risk markets.