An Impeccable Disaster
By PAUL KRUGMAN, The New York Times
Published: September 11, 2011
On Thursday Jean-Claude Trichet, the president of the European Central Bank or E.C.B. – Europe’s equivalent to Ben Bernanke – lost his sang-froid. In response to a question about whether the E.C.B. is becoming a “bad bank” thanks to its purchases of troubled nations’ debt, Mr. Trichet, his voice rising, insisted that his institution has performed “impeccably, impeccably!” as a guardian of price stability.
(T)he problem is the E.C.B.’s obsession with maintaining its “impeccable” record on price stability: at a time when Europe desperately needs a strong recovery, and modest inflation would actually be helpful, the bank has instead been tightening money, trying to head off inflation risks that exist only in its imagination.
And now it’s all coming to a head. We’re not talking about a crisis that will unfold over a year or two; this thing could come apart in a matter of days. And if it does, the whole world will suffer.
So will the E.C.B. do what needs to be done – lend freely and cut rates? Or will European leaders remain too focused on punishing debtors to save themselves? The whole world is watching.
Understanding Trichet and Conpany: A Note
September 12, 2011
What are Jean-Claude Trichet and company really thinking right now?
The most likely scenario is this: they bet on mean-reversion in unemployment, on the magic full-employment equilibrium-restoring properties of the market, on their role as prudent stewards of financial rectitude, and on a take-no-prisoners commitment to price stability in all circumstances as the driving force behind the great moderation.
They were wrong.
They now have a choice.
They can admit that they were wrong. Then they will probably have to resign, and then be snubbed worldwide. Nobody likes a loser.
Alternatively, they can double down. Their reputations right now are underwater. What do they have to lose reputationwise by saying more absurd nonsense? And there is a chance that tomorrow the confidence fairy will appear, wave her magic wand, and the V-shaped recovery will start.
That is my guess as to how to understand what Trichet and Company are now saying: they are reputationally-bankrupt zombies gambling for resurrection.