German Chancellor Angela Merkel seems to have rocked the global financial boat with her intimation yesterday that central banks—with the Federal Reserve and the Bank of England leading the way—were overdoing it with their buy-every-asset-they-can-find approach to fighting the financial crisis. From the FT:
“What other central banks have been doing must be reversed. I am very sceptical about the extent of the Fed’s actions and the way the Bank of England has carved its own little line in Europe,” Ms Merkel told a conference in Berlin.
The FT put this story on the front page. But as I read I started wondering if maybe they’d overplayed it. After all, everybody at the Fed would agree that the mega-expansion of the central bank’s balance sheet to more than $2 trillion will eventually have to be reversed. And other things Merkel said could actually just as well have been uttered by Ben Bernanke. This one, for example:
Our most complex task will come once we have overcome the crisis. The question will be … can we return to a path of virtue, as far as public debts are concerned for instance.
Here’s Bernanke testifying to Congress this morning:
Unless we demonstrate a strong commitment to fiscal sustainability in the longer term, we will have neither financial stability nor healthy economic growth.
And the funny thing is, when I looked for reports of Merkel’s speech in the German papers, they didn’t emphasize her central bank comments at all. Handelsblatt’s headline was “Merkel fears credit crunch.” In the Frankfurter Allgemeine report of what I think was the same event (I’d have to pay 2 euros to read the whole article, so I don’t know for sure), the headline was about Merkel justifying state aid to GM subsidiary Opel and troubled banks. And as far as I can tell, Financial Times Deutschland didn’t cover the speech at all.
Here’s my little theory. Germans all have the Weimar Republic’s failed experiment in big deficits and super-expansive monetary policy seared in their historical memory—because, you know, it ended in hyperinflation that helped pave the way for the rise of Hitler. So German politicians feel they pretty much have to sound worried about what the Fed and Bank of England and U.S. and U.K. administrations are up to—remember Finance Minister Peer Steinbrück and his criticism of Anglo-American “crass Keynesianism” a few months back? But they’ve noticed what the global trade shutdown did to their economy (GDP has been dropping much faster in Germany than in the U.S.), and they’ve noticed that the frenzy of activity in Washington, London and elsewhere seems to be leading to some stabilization. So they’ll keep getting their snide remarks in. But they won’t actually act on them.
Update: I should note that FT columnist Wolfgang Münchau has a very different interpretation. He thinks Merkel was giving explicit instruction to the European Central Bank not to do any more quantitative easing (that is, buying of assets). Oh, and Goldman Sachs came out with a research report yesterday headlined, “Fed Asset Purchases: We Still Think More Is Needed.”