My suggestions for the ECB's Policy Review

The European Central Bank (ECB) has opened a forum where you can let them know what you think in advance of their current review of policy.

Check out the ECB Listens Portal here.

I've just filled in their questionnaire, and I've downloaded my responses as a pdf file. But I've copied my comments here. As you will see, I really did my best to convince them that (a) they have a vital role to play, and (b) there are lots of things that they should be doing!

I quite enjoyed it. Why not have a go too?  The consultation process will continue until August 2020


Age :  55-64
Gender : Male
Sector : Academia and education
Country of residence : France

What does price stability mean for you? 

How do changes in general price levels affect you/your organisation and your members?

 

Even 2% inflation is very bad for people who are trying to live on their savings, given that Banks offer such poor returns on savings. When you can't even keep the value of your savings without being lucky with your investments, there is something very wrong.

I also reject your statement that the main contribution of central banks should be to maintain price stability. Central banks should be providing the money that is needed for the economy to function. That function should not be in the hands of commercial banks, whose only obligation is to maximize profits for their shareholders.

Are you concerned about either deflation or inflation being too high?

Ideally, there would be no inflation. It can be argued (realistically) that the 2% ideal inflation rate that the ECB tries to obtain is simply a way of hiding the fact that we are all paying interest on the unsustainable levels of global debt - currently $253 trillion. $68 trillion of that is held as assets by the worlds 50 largest banks
If we assume that there is roughly 2% interest to pay on that debt, and that there is not enough money
available to pay off the debt, the consquence is that debt continues to increase, and the 2% inflation is the result.

For which types of goods and services do you feel the effects of price changes most?

Because of the ECB policy of creating €2.78 trillion since 2015, and using it to purchase assets on the financial markets, the inflationary effects have been almost entirely limited to increasing the value of financial products. This has made a lot of rich people very much richer. Had the same amount of money been injected into the real economy (by providing money directly to citizens, for exampled, or financing useful projects like fighting climate change), there would have been more inflation in the real economy.
However, there are ways to cope with that. The ECB could simply remove excess money from the Eurozone by imposing a small universal tax on all Euro-denominated transactions. That way, debt-free money could be injected into the system, without any inflation.

When you think about inflation, how relevant do you find the increase in the cost of housing?

The increase in house prices has been catastrophic for citizens, and is directly the result of a system in
which commercial banks can literally create money out of thin air when they make loans (as stated clearly by the Bank of England in 2014  Banks should be prevented from lending money they don't have, and this is especially true in the case of providing loans for buying houses. Currently, in France, you can get 25 year fixed rate loans for around 1% - less than inflation. This cannot make sense. But it directly explains why housing costs are going through the roof, with an enormous advantage for those who are lucky enough to already own property.

What are your economic expectations and concerns?

What economic concerns are you/your organisation and your members facing?

The biggest problem facing businesses, governments and citizens is unsustainable debt, and the crippling cost of the interest charges that the debt incurrs. Eurozone governments owed nearly €10 trillion at the end of 2018, and that number will have gone up even more (I'm waiting for the ECB's figures to be published in April to update the figures. That debt means that in 2018, Eurozone taxpayers paid €213 billion in interest payments, and the total interest payments since 1995 had already reached a staggering €6.4 trillion.
And that massive cost of interest payments is just the interest paid on government debt. If it were possible to determine the amount of interest paid by businesses and citizens, the total cost for the economy would be astronomical. Some researchers consider that 50% of everything we spend is the result of hidden interest charges.
There is only really one solution to this untenable situation. The ECB should use its essentially unlimited power to create new money (€2.78 trillion since 2015), to inject debt free money into the economy. This is the only way to deal with the problem of debt.

How have changing economic conditions affected you in the last decade (for example, how have they affected your prospects of finding a job)?

I already have a permanent job as a French government scientist - I'm a research director at the CNRS. Many of the fundamental problems we face (massive unsustainable debt) are really only obvious when you look at the massive increase in inequality, where a few extremely rich individuals and corporations now possess much of the world's wealth. This needs to change. The ECB should be working to fix this situation, rather than using its money creation power to inflate asset prices on the financial markets.

How do low interest rates and monetary policy in general affect you/your organisation, your members and the overall economy?

I was recently offered a loan of €75,000 by my bank to spend on anything I like at 1% interest over 12 months. This is insane - because my bank doesn't have the €75,000 on its books. It just creates the money out of thin air when it makes the loan.
Note that this sort of loan is only made to relatively wealthy people like me who are zero risk for the bank. Commercial banks will only create money like this when there is no real risk for them. This is not what the economy needs.
And this sort of behavior means that the current total of €253 trillion global debt will just go up even more. It has already increased by nearly 50% since the financial crisis.
Only the ECB (and other central banks) are in a position to change this by injecting debt-free money into the economy. You have to do something.

What other topics matter to you?

Do you think the ECB should give more or less attention to these other considerations and why

Absolutely! Morgan Stanley estimates that solving climate change will require $50 trillion by 2050. How will this be paid for? By borrowing yet more money from Commercial banks? Sure, they will be happy to keep increasing the amount of money they create out of thin air, and just increasing even further the amount owed by governments, businesses and citizens. But the end result of all that money creation by commercial banks will be crippling interest costs and yet even more inequality as taxpayers pay even more to those very wealthy people and corporations that own the assets.

It is exactly the same thing for the current corona-virus pandemic. Governments are promising to spend $5 trillion to cope with it. But where will they get the money? As usual, they will go to the commercial banks who just create the money by creating yet more debt. US government debt is already at $23.5 trillion. Presumably this will increase to $25.5 trillion. Eurozone government debt was already €10 trillion at the end of 2018. Do we just allow it to increase to $12 trillion? If we do, it means yet more taxpayers money will be paid to wealthy asset holders, commercial banks, and north american pension funds. And that process will never stop, until the ECB does something to allow debt to be paid off.
The ECB is the only place in the Eurozone that holds the cards here. You can create money and use it for the public good. And now that the ECB is no longer headed by an ex Goldman-Sachs banker, I have some hope that perhaps things could change. Maybe the ECB could think about its responsibilities to the 330 million people who live in the Eurozone.

Are there other issues not mentioned above that you think the ECB should be concerned with when setting its policies?

I have argued that to control the Eurozone money supply, the ECB needs two mechanims. One would
inject debt-free money into the economy. This could be done very simply by creating a ECB bank account for every Eurozone citizen and just crediting it with a given sum every month. There would be no discussion about who was paying for it, or whether one country was paying for some other country, because everyone in the Eurozone would be treated absolutely identically.

Secondly, the ECB needs a mechanims for removing excess money from the system to prevent inflation. This could also be done very simply by imposing a microtax on all Euro-denominated transactions.
Importantly, this could be made to apply to transactions wherever they occur. Thus, if there are large
volumes of foreign exchange in London, they would all have to pay the tax to the ECB.
Importantly, this mechanim is not actually for raising revenue - it would simply remove money from the system. And the rate of the microtax could be continuously adjusted to keep inflation at the optimal level.
You will say the optimum is 2%. I would say 0%, but whatever the target value, the combination of debt-free injection into the real economy, and the microtax to remove any excess means that the ECB would be much better equipped to stablilize the money supply.

The current range of tools (namely specifying the minimum interest rate and various forms of quantitative easing) are clearly inadequate.
Very importantly, the injection of debt free money into the system and removal of money via the microtax would progressively allow the system to clear the mountain of debt that is currently making it impossible for us to deal with all the other critical issues that face the world.

I note that if the ECB was indeed to impose a microtax on all Euro-denominated transactions, wherever they occur, it would be relatively simple for governments and local authorities to add an additional component to raise revenue.

How will climate change have an impact on you/your organisation, your members and the economy?

The cost of climate change could be catastrophic for all of humanity. For the reasons I have outlined
above, I think that the ECB has an absolute responsibility to step in and provide the debt-free finance
needed to cope. You are almost our only hope.

How can we best communicate with you?

To what extent do you feel well informed about the ECB/your national central bank?

I think you do a reasonable job in trying to explain your current actions. However, I am totally unconvinced about the fundamental issues. The ECB apparently believes that money creation should be the responsibility of commercial banks whose only real objective is maximising shareholder profits. This explains why they are so happy to create money for buying property (where they can reclaim the property in case of default), or buying up government bonds. Indeed, the Basel Banking regulations state that lending to governments with AAA to AA- ratings has zero-risk, meaning that they do not even need capital to back it up their loans.

Money creation is far too important to be left in the hands of commercial banks.

How could the ECB/the Eurosystem improve the way it explains the benefits of price stability and the risks of inflation being too high or too low?

Currently, you provide no explanation of why 2% inflation is optimal. In a world where we should be aiming for sustainability, it seems to be a major error to assume that expanding the economy by 2% a year is somehow desirable.

What could we do to improve your understanding of the decisions we take and how they affect you?

Change the decisions you take so that they are directly in the interest of Eurozone citizens. For example, you could do this by providing direct payments to Eurozone citizens, or directly financing the fight against corona-virus, or climate change. You could also provide money directly to Eurozone governments to pay off the €10 trillon in debt. You may claim that article 123 of the Lisbon Treaty prevents this. But paragraph 2 of the article, says that the restrictions on providing funding to governments does not apply to publicly ownedcredit institutions. Thus each Eurozone government could nominate such an institution (or create one) that could receive direct ECB funds. To avoid problems, such payments should be directly proportional to the population size in each country.

If you did make such moves, then not only would people understand why you do things (and remove thesuspicion that you are working in the interest of the banking sector), they might also feel a stronger desire to remain part of Europe. If you continue to be seen as primarilly protecting the value of assets in the financial markets, there is a serious risk that Brexit will be just the first example of people wanting out.