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Christopher Mahoney
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I spent eight years at Bank of America in New York (1978-86) covering Wall Street, then moved to Moody's Investors Service where I worked for 22 years, covering banks, sovereigns and corporates. I chaired the Credit Policy Committee for four years. I retired in 2007 as vice chairman. PLEASE... More
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  • Inside The Mind Of Mario Draghi 0 comments
    Jun 9, 2013 2:54 PM

    "The 'leave it alone' liquidationists were headed by Secretary of the Treasury Mellon, who felt that government must keep its hands off and let the slump liquidate itself. Mr. Mellon had only one formula: 'Liquidate labor, liquidate stocks, liquidate the farmers, liquidate real estate.' He said: 'It will purge the rottenness out of the system. High costs of living and high living will come down. People will work harder, live a more moral life. Values will be adjusted, and enterprising people will pick up the wrecks from less competent people'..."

    --Herbert Hoover, "The Great Depression"

    Another Draghi press conference*, another iteration of Mellonist Thought. Draghi's basic position, which has been iterated and reiterated for four years, is that Southern Europe must continue to go through purgatory in order to atone for its original sins of greed and indolence:

    "Fiscal consolidation is and remains unavoidable. It should be clear to everybody that you cannot have growth with endless debt creation. Sooner or later, you are going to be punished and the whole thing stops."

    The ECB is not to blame for zero growth and high unemployment: that is the fault of the defective countries and their lazy people:

    "You also have to ask yourself why these countries were not competitive. Why did they have to rely for growth in the good times, or "fairyland" times, on the protected sectors that were shielded from international competition?"

    It appears that there is more than a bit of Savonarola in Mr. Draghi. Although a Roman Catholic, he has a Puritan heart. He is truly a man of the world, highly educated, highly intelligent, with a resume intimidating in its excellence: MIT, Harvard, World Bank, Brookings, Institute for Advanced Studies, Goldman Sachs, Bank of Italy, ECB. Whatever Draghi's problem is, it is not intellectual ignorance or a low IQ.

    A bit of psycho-biography: Draghi has spent his entire professional life apologizing for Italy. Imagine his life, traveling around the world in order to explain and excuse his country's medieval politics and ungovernability. Try to imagine for a moment the depths of Draghi's contempt for Italian politicians (and voters), with their Byzantine disinterest in anything but power, family and money.

    Could Draghi be unconsciously (or even consciously) seeking revenge on his country's unmodern political culture, the succession of Andreottis, Fanfanis and Berlusconis and all of their satraps and corrupt henchmen? Does he perhaps think, like Lincoln, that only by going through a cauldron of fire can his country atone for its sins and enter the modern era? Does he, in other words, think that his utopian ends justify his brutal means? Certainly the tone of his monthly Q&A would suggest impatience if not contempt for the complaints of those who would question his disastrous policies.

    He explains to the doubting that near-zero inflation is a good thing:

    "The fact that inflation is low is not, by itself, bad; with low inflation, you can buy more stuff..low inflation is increasing people's purchasing power."

    Yes, it would if they were employed.

    Why is aggregate demand so weak?

    "You have a quite broad weakness in domestic demand and consumption, particularly because of the high levels of unemployment."

    So the unemployed are the cause of unemployment. QED.

    Is the ECB's Zero Growth Policy causing high unemployment? No, the problem lies with the occupied countries themselves:

    "The Governing Council is of the persuasion that the present levels of unemployment are the result of a combination of cyclical factors, as well as structural factors. As of cyclical factors, there is no doubt that the labour market in general is experiencing the combined effects of a credit crunch and the unavoidable fiscal consolidation that many of these countries have had to undertake. It is also true that some structural factors are blocking the labour markets."

    The people to blame for the eurozone's high level of youth unemployment are the unemployed youths themselves:

    "A fast-moving world, in other words globalisation, requires new skills and investment in human capital, meaning that youth unemployment can also be explained on the basis of a mismatch of skills and human capital."

    Are the ECB's policies responsible for the fact that business credit growth is shrinking and credit has been withdrawn from small businesses in the South? No, these are autonomous decisions being made by the banks:

    "When you talk to healthy banks that do not need to be recapitalised, you ask them why they are not lending more. The answer you get is that the net rate of return, adjusted for the risk of lending, is not high enough for them to lend...(Another) reason why banks do not lend is risk aversion, which is both micro, with respect to their clients, and macro, with respect to the general economic environment and the high uncertainty that still prevails in some parts of the euro area."

    Please don't hold the central bank responsible for negative credit growth.

    After four years of zero nominal growth and with over 12% unemployment, might it not be opportune to change from a zero-growth policy to a policy of robust nominal growth? No, it wouldn't make any difference. The problems are cyclical and structural, and the solutions rest within the countries themselves:

    "Ask yourself what should these countries change to become more competitive? And what adjustments are needed in order to achieve this objective?"

    Have the ECB's deflationary policies been effective? Is rising unemployment a signal of policy failure? Not at all, in fact our policies have been very successful:

    "When we all look back at what OMT has produced, frankly when you look at the data, it's really very hard not to state that OMT has been probably the most successful monetary policy measure undertaken in recent time."

    So there you have the evidence. Draghi is not unfamiliar with the relevant literature. He studied at MIT under Modigliani and Solow. He knows all about Fisher, Keynes, Friedman, Eichengreen and Krugman. I'm sure he even knows about Market Monetarism (perhaps Mark Carney has mentioned it to him). He understands how the modern semi-capitalist economy functions. What he is doing is conscious, deliberate, sincere and not an act of misfeasance. It is true that he is bound by his single mandate and by the politics of his Governing Council. But that does not explain the evident sincerity of his monthly testimony. He is a true Mellonist, as Krugman would say. He wants to purge the rottenness out of the system. He wants people will work harder and live a more moral life.

    Savonarola was tortured until he recanted, and then hanged and burned. I just want Draghi to recant.

    _____________________________________________________________

    *Draghi press conference, 6 June 13.

    Themes: euro, ecb, eurozone, draghi, italy
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