Flat-Earth European Central Bank Misreads Oil Spike Again, And Kicks Spain In The Teeth

[interestrateripoff]

http://www.telegraph.co.uk/finance/comment/ambroseevans_pritchard/8364775/Flat-Earth-European-Central-Bank-misreads-oil-spike-again-and-kicks-Spain-in-the-teeth.html

The demarche is reckless, politically-motivated, and risks causing yet another spasm of the EMU debt crisis. If recovery proves to be more fragile than it looks – vulnerable to a fiscal squeeze in the West and a credit squeeze in the East – this ECB error will have global ramifications.

The ECB's governors might usefully study Systematic Monetary Policy and the Effects of Oil Price Shocks, a seminal work in 1997 by a Professor Ben Bernanke of Princeton.

The reason why such shocks often lead to slumps is because policymakers make a hash of it. "The majority of the impact of an oil price shock on the real economy is attributable to the central bank’s response, not the inflationary pressures engendered by the shock,” wrote Bernanke.

No doubt ECB governors need to prove their hawkishness after Bundesbank chief Axel Weber walked out of the Eurotower in disgust, more or less stating that he did not wish to take over a body that had departed so far from orthodoxy, and succumbed to political pressure by purchasing the bonds of bankrupt states.

AEP wrong here in my opinion, the oil price shock is down to Bernanke pumping billions of dollars into the system helping to cause political instability with increasing food/oil prices which has resulted in political unrest in certain oil producing nations. There are also other variables in this ripple effect, but one of the major primary ones is Fed policy.

Systematic Monetary Policy and the Effects of Oil Price Shocks the paper in question.

[indirectapproach]

Nah.

It's bread prices and that is a result of the emergence of Brazil, India and China.

There is nothing the Fed or anyone else can do about it really.

[OnlyMe]

A seminal paper by bernanke - a load of ***** then.

The last thing the world economy needs durng a shift from oil dependence is an artificial stimulus on demand which aggravates the situation and reduces the time available to build out alternative energy sources and allows populations to adapt to the changing conditions. Talk about throwing petrol onto the fire.

Has there ever been a more myopic bunch of ingrates determining economics polcies - likely never, which means we'll see disruptions and effects the likes of which have never seen before.

[thod]

The purpose of central banks monetary policy is to spoil the party just as it gets going. There will always be areas not doing so well and those who wish the party to continue will point them out. They did exactly the same thing after the dot-com bubble burst. They kept interest rates too low for too long leading to the bubble. Perhaps this time they will avoid the same mistake.

[LiveAndLetBuy]

http://www.telegraph.co.uk/finance/comment/ambroseevans_pritchard/8364775/Flat-Earth-European-Central-Bank-misreads-oil-spike-again-and-kicks-Spain-in-the-teeth.html

AEP wrong here in my opinion, the oil price shock is down to Bernanke pumping billions of dollars into the system helping to cause political instability with increasing food/oil prices which has resulted in political unrest in certain oil producing nations. There are also other variables in this ripple effect, but one of the major primary ones is Fed policy.

Systematic Monetary Policy and the Effects of Oil Price Shocks the paper in question.

I have a feeling the 2008 oil spike occurred before any QE had taken place. As I recall nobody really knew what caused it at the time.

[OnlyMe]

The purpose of central banks monetary policy is to spoil the party just as it gets going. There will always be areas not doing so well and those who wish the party to continue will point them out. They did exactly the same thing after the dot-com bubble burst. They kept interest rates too low for too long leading to the bubble. Perhaps this time they will avoid the same mistake.

Err, they;ve already made the same mistake and a lot worse in bailing out the very worst of companies ever to haunt the markets.

[fluffy666]

The last thing the world economy needs durng a shift from oil dependence is an artificial stimulus on demand which aggravates the situation and reduces the time available to build out alternative energy sources and allows populations to adapt to the changing conditions. Talk about throwing petrol onto the fire.

Nothing wrong with increasing demand.. IF it is done correctly.

Which in this situation means putting people to work by building energy related equipment - reactors, building retrofitting, railways, etc. Stuff that will be long term useful; not just flooding the markets with cash and hoping it employs someone on the way to China.

[LiveAndLetBuy]

The purpose of central banks monetary policy is to spoil the party just as it gets going. There will always be areas not doing so well and those who wish the party to continue will point them out. They did exactly the same thing after the dot-com bubble burst. They kept interest rates too low for too long leading to the bubble. Perhaps this time they will avoid the same mistake.

I think the point AEP is partly trying to make is that up to 2005 the ECB kept rates low to help out Germany (and screw Spain). And now the ECB is threatening to increase interest rates to help out Germany (and screw Spain). So while indeed there will always be areas that aren't doing so well and others that are doing better, the ECB should at least be consistent in how it treats those areas. Spain was doing pretty well until it joined the euro, but by constantly setting interest rates to only help out Germany, it has pretty much destroyed the Spanish economy.

[Bloo Loo]

I think the point AEP is partly trying to make is that up to 2005 the ECB kept rates low to help out Germany (and screw Spain). And now the ECB is threatening to increase interest rates to help out Germany (and screw Spain). So while indeed there will always be areas that aren't doing so well and others that are doing better, the ECB should at least be consistent in how it treats those areas. Spain was doing pretty well until it joined the euro, but by constantly setting interest rates to only help out Germany, it has pretty much destroyed the Spanish economy.

Nobody screwed Spain, except Spain

Same in Ireland...and Iceland...and Greece.

[Bloo Loo]

Nothing wrong with increasing demand.. IF it is done correctly.

Which in this situation means putting people to work by building energy related equipment - reactors, building retrofitting, railways, etc. Stuff that will be long term useful; not just flooding the markets with cash and hoping it employs someone on the way to China.

Germany did just this between the wars.

They built major fortifications around the country...and superb Autobahns to allow fast deployments. TO house the workers, they built camps. To supply the trucks, they commandeered trucks from the private sector....they denuded forests and imported materials from all over the world.

they built more camps.

[LiveAndLetBuy]

Nobody screwed Spain, except Spain

Same in Ireland...and Iceland...and Greece.

nope

[SomethingHasToGive]

Nobody screwed Spain, except Spain

Same in Ireland...and Iceland...and Greece.

and Britain...

[fluffy666]

Germany did just this between the wars.

They built major fortifications around the country...and superb Autobahns to allow fast deployments. TO house the workers, they built camps. To supply the trucks, they commandeered trucks from the private sector....they denuded forests and imported materials from all over the world.

they built more camps.

Well, first they had hyperinflation and default, which meant that they were in a much better financial position in the run up to WWII.

[Bloo Loo]

nope

exsqueeze me?

which Germans utilised a ponzi house price expansion scheme in Spain? which ECB did all that lending?...which banks in Spain are now not marking to market their possessions?

some questions I would like expanding upon please.

[indirectapproach]

The Spanish have their fair share of the blame to shoulder but to deny that setting European interest rates for German convenience rather than European benefit had a detrimental effect on Spanish prospects, is misplaced.

[Traktion]

http://www.telegraph.co.uk/finance/comment/ambroseevans_pritchard/8364775/Flat-Earth-European-Central-Bank-misreads-oil-spike-again-and-kicks-Spain-in-the-teeth.html

AEP wrong here in my opinion, the oil price shock is down to Bernanke pumping billions of dollars into the system helping to cause political instability with increasing food/oil prices which has resulted in political unrest in certain oil producing nations. There are also other variables in this ripple effect, but one of the major primary ones is Fed policy.

Systematic Monetary Policy and the Effects of Oil Price Shocks the paper in question.

AEP is right. Even if you think the cause isn't overheating BRICs, raising the ECB rate will do nothing to help. How will expensive (EDIT: to borrow) Euros make a difference if it is 'Bernanke pumping billions of dollars into the system'?

IMO, whether Bernanke or the BRICs are to blame matters not, base rate increases are supposed to calm an overheating economy - I don't see run away credit growth in the Eurozone, do you?

Edited March 7, 2011 by Traktion

[gravity always wins]

Nah.

It's bread prices and that is a result of the emergence of Brazil, India and China.

There is nothing the Fed or anyone else can do about it really.

What a load of boll*x.

[LiveAndLetBuy]

exsqueeze me?

which Germans utilised a ponzi house price expansion scheme in Spain? which ECB did all that lending?...which banks in Spain are now not marking to market their possessions?

some questions I would like expanding upon please.

You've pointed out some reasons why Spanish banks are partly responsible for the mess in Spain. I agree. You can also point the finger at corrupt developers, corrupt Autonomas running out of control, an overly beaurocratic economy that hinders free enterprise, backed up by labour laws that constrict the labour market, etc, etc.

However you said "Nobody screwed Spain except Spain".

I disagree. Spain lived with those problems without their economy collapsing completely ... until it joined the euro. While Spain might have expected that ECB rates might not suit their economy all the time, it seems that the ECB is setting rates that actually run counter to the Spanish economy 90% of the time. That's what has really screwed the Spsnish economy.

Saying that the ECB hasn't screwed Spain is like saying Greenspan didn't screw the US economy, or Labour/BoE didn't screw the UK economy. They all kept rates way too low during a credit boom.

[Traktion]

The purpose of central banks monetary policy is to spoil the party just as it gets going. There will always be areas not doing so well and those who wish the party to continue will point them out. They did exactly the same thing after the dot-com bubble burst. They kept interest rates too low for too long leading to the bubble. Perhaps this time they will avoid the same mistake.

The party is over already... it ended in 2008. We're currently in the hangover.

There is no overheating in the Eurozone, much like there isn't in the UK. Broad money is barely growing, if not contracting. If people aren't borrowing, how can an economy be deemed to be overheating?

Interest rates aren't a magic leaver to make stuff more expensive or cheaper. They're just a mechanism to make borrowing more expensive or cheaper. How would making borrowing more expensive, at a time when the economy is saturated with debt, make oil cheaper? It makes no sense at all*.

[* Unless rate increases alone give currency more value, which I doubt (why would they?). IMO, it is the increased economic activity which comes first, which encourages new borrowing and investment, which in turn leads to calls for increased rates to calm borrowing.]

EDIT: P.S. Thod, that isn't all aimed at you - I just got into a bit of a rant! Sorry about that!

Edited March 7, 2011 by Traktion

[indirectapproach]

"What a load of boll*x. "

Well how about,

http://www.google.fr/search?sourceid=chrome&ie=UTF-8&q=egyptian+bread+prices

Take your pick, brains.

[interestrateripoff]

"What a load of boll*x. "

Well how about,

http://www.google.fr/search?sourceid=chrome&ie=UTF-8&q=egyptian+bread+prices

Take your pick, brains.

How about the consumer booms fuelled by cheap money from 2003? Don't you think that this money might have looked for a return? Food is pretty inelastic.

Edited March 7, 2011 by interestrateripoff

[Bloo Loo]

You've pointed out some reasons why Spanish banks are partly responsible for the mess in Spain. I agree. You can also point the finger at corrupt developers, corrupt Autonomas running out of control, an overly beaurocratic economy that hinders free enterprise, backed up by labour laws that constrict the labour market, etc, etc.

However you said "Nobody screwed Spain except Spain".

I disagree. Spain lived with those problems without their economy collapsing completely ... until it joined the euro. While Spain might have expected that ECB rates might not suit their economy all the time, it seems that the ECB is setting rates that actually run counter to the Spanish economy 90% of the time. That's what has really screwed the Spsnish economy.

Saying that the ECB hasn't screwed Spain is like saying Greenspan didn't screw the US economy, or Labour/BoE didn't screw the UK economy. They all kept rates way too low during a credit boom.

IC..and thats a fair point..except...the Spanish economy was booming under the Euro...like ours was outside of it...sadly, the boom, like ours was Ponzi in nature.

Are you suggesting that if rates had been tailored to Spain, then all would have been well in Spain?

Surely low rates are meant to stimulate spending....not lending.

[copydude]

I have a feeling the 2008 oil spike occurred before any QE had taken place. As I recall nobody really knew what caused it at the time.

Wasn't it the glut of bailout money suddenly looking for anything other than property?

[LiveAndLetBuy]

Wasn't it the glut of bailout money suddenly looking for anything other than property?

Got this off wikipedia:

http://en.wikipedia.org/wiki/Price_of_petroleum

From the graph it looks like the 2008 oil spike came and went before most of the bailout money appeared on the scene

[indirectapproach]

"Don't you think that this money might have looked for a return?"

The money wasn't looking for a return in food. Whatever made you think that?

Increased demand for agricultural produce as a result of new found spending power in Brazil, China and India has led to a rapid increase in food prices, which has caused this North African/Middle east unrest.

I suspect the Americans have far less impact in this world than people think.