Tuesday , September 25 2018
Home / Real-World Economics Review / Yves Mersch, ECB banker: we really don’t care (about house price inflation)

Yves Mersch, ECB banker: we really don’t care (about house price inflation)

Summary:
There we go again. According to mister Mersch, a central banker, the ECB only has to care about consumer price inflation and not about financial stability. Mister Mersch knows this isn’t right. Legally, the ECB do has to care about financial stability. It’s part of the mandate of the bank. In a practical sense, caring about financial stability is what central banks do. While they do not excel at influencing the rate of consumer price inflation (which is influenced by wages, profit margins, productivity changes, prices of intermediate products like oil and also, but only to a limited extent, by interest costs). Mister Mersch knows all this. He is an old man. he must have studied ancient textbooks. What did the textbooks of yonder state about central banks (and I have little to add)?

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There we go again. According to mister Mersch, a central banker, the ECB only has to care about consumer price inflation and not about financial stability. Mister Mersch knows this isn’t right. Legally, the ECB do has to care about financial stability. It’s part of the mandate of the bank. In a practical sense, caring about financial stability is what central banks do. While they do not excel at influencing the rate of consumer price inflation (which is influenced by wages, profit margins, productivity changes, prices of intermediate products like oil and also, but only to a limited extent, by interest costs). Mister Mersch knows all this. He is an old man. he must have studied ancient textbooks. What did the textbooks of yonder state about central banks (and I have little to add)?

  • They are the bank of banks
  • They are the bank of the government
  • They have to take care of  a well-functioning payment system
  • They guard financial stability
    • which means that they have to guard the liquidity and solvability of banks
    • which means that they have to investigate (not the same thing as ‘guard’) the liquidity and solvability of households as far as this is related to banks (read: mortgage lending, but also student loans and payday lending)
    • which means that they have to take care that banks and financial institutions are not overstepping their boundaries
    • which means that they have to make sure that money creating credit is provided for productive loans only, not for purchases of existing assets (read: houses)
  • They have a role to play when it comes to the external value of the currency
  • They do not really have a large role to play when it comes to the internal value of the currency. Central banks can control interest rates. They can control the economy downwards: just increase the interest rate to a very high level and the economy will tank. But they can’t really stimulate the economy (though they can create asset price bubbles). Proof: the investment rate in the EU is still low, after all these years of low rates.

Central banks can’t do this alone. And they are quite powerful, which means that we need tight parliamentary control. Mister Mersch knows all of this. So, why does he state that the ECB has to give priority to consumer price inflation as we measure it? It’s another way of stating: the ECB (more precise: the central banking system of the Eurozone, including the national central banks) does not care about asset price bubbles. It should. It’s also part of the mandate.

Merijn T. Knibbe
Economic historian, statistician, outdoor guide (coastal mudflats), father, teacher, blogger. Likes De Kift and El Greco. Favorite epoch 1890-1930.

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