ECB politics and sound economics

ECB politics and sound economics

The ECB’s Governing Council meets on Thursday, May 8, 2014, to discuss the issues. On the surface, this may look the easiest and least painful short-term measure if one ignores the effects of the creeping expropriation of citizens’ savings and pensions through an inflation rate which is higher than interest on savings.

Old-fashioned economists, including John Maynard Keynes, used the hypothesis that man would act rationally in his decisions. Keynes’ theories led to a kind of economist who looked for a strong state role in the economy. Therefore, his teachings can only be applied as long as governments are wise, non-populist and benevolent. Under this assumption, his theories could be acceptable. However the proof demonstrates this is not the case.

A large number of today’s dominant economists see demand as the main driver of any economy. Therefore, in times of weaker economic cycles, the government should stimulate demand by either greater public spending and therefore create debt, or ‘easy money’ which means low interest rates, even risking inflation. The result of a one-sided application of these, admittedly quite popular, theories is today’s financial and economic crisis. Our politicians and a large number of business leaders, especially in finance, have followed these theories. 

Strangely enough, although such theories have proved to be unsuccessful, they are still upheld and the market is blamed for the crises. We forget that the underlying reason for the crises are public deficits which are too high resulting in a crisis of sovereign debt, the policy of easy money and overregulation. Money supply was kept artificially cheap in order to stimulate demand. This created unsustainable, debt-driven demand on one side and provided the basis for exaggerations in the banking and financial sector on the other. 

The importance of investing private savings in the economy was, and is, widely ignored by economists and politicians. 

The only sustainable remedy to the problem is growth through innovation and increased productivity. We know that innovation and increased productivity is best furthered through free markets and a modest, however efficient, regulatory environment. Social cohesion is also stronger in such market economies. 

As opposed to traditional economic theories, especially Keynesian, behavioral economics and behavioral finance consider the human being and his rarely rational behavior, as central to the dynamics of an economy. Behavioral economics, as an academic and economic discipline is quite new, and is a lot more realistic.

By clicking "I Agree" below, you acknowledge that you accept our Privacy Policy and Terms and Conditions. Feel free to check out our policies anytime for more information.
I agree