December 11, 2014

Europe’s guardians of monetary orthodoxy should fear the printing press, while bank regulatory lunacy persists.

Moghadam argues that the opposition to printing money” based on the lack of structural reforms is wrong, since “output did not contract at the start of the crisis because of labor and product market regulations – those have been around for decades”. In this he clearly makes a valid point.

But, when even after stating “most European companies rely on banks rather than bond markets for their capital needs”; and that “interest rates for private sector loans have not fallen as much [as yields on sovereigns]; adjusting for lower inflation they have in fact risen” Moghadam goes into a convoluted explanation of how companies, because of higher equity prices, can still benefit from a QE in which ECB buys government bonds… then he clearly shows he has not understood one iota about how current credit risk-weighted capital (equity) requirements for banks distorts the allocation of bank credit to the real economy.

Europe should always be wary of the money “printing press” but, if the printing takes place while the allocation of the resulting liquidity is distorted, then it needs to be truly scared.