Chart of the Day: The smoking gun showing how the ECB wrecked the Spanish economy
The other Edward posted a thorough analysis of the situation in Spain this weekend. I recommend that piece, Rescue Me, highly. Here’s a chart that caught my eye.
The other Edward writes:
Well one thing should be clear by now, part of the responsibility for the situation lies with the ECB who applied (as they had to) a single size monetary policy even though this was clearly going to blow bubbles in the structurally higher inflation economies. And so it was, Spain had negative interest rates applied all through the critical years, and now we have the mess we have.
Back in 2006 inspectors at the Bank of Spain sent a letter to Economy Minister Pedro Solbes complaining of the relaxed attitude of the then governor, Jaime Caruana (the man who is now at the BIS, working on the Basle III rules) in the face of what they were absolutely convinced was a massive property bubble. Their warning was ignored.
Negative real interest rates aka easy money have recently been re-labelled financial repression. Now in the aftermath of a property bubble, they are seen, not as emblematic of central banks’ blowing bubbles, but of central banks stealing net interest income from savers to bail out debtors.
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.
To me, these two policies are the signature hallmarks of our post-financial crisis economic policy making. And the two policies are in direct conflict with one another.