Welcome to European Tribune. It's gone a bit quiet around here these days, but it's still going.
I think we have to accept that the people at the ECB and EC operate under a different understanding of reality than we, and most economists, do. They are thoroughly influenced and even blinded by their ideology. It's a bit like the Iraq war. We understood it was absolutely stupid, even I who was just 17 at the time understood that, but all these highly educated and intelligent American officials did not.

The ECB+EC people believe that Europe's return of growth is dependent on investor confidence, because if confidence returs investors will invest and create jobs and hence demand, even if ironically don't admit the problem at the moment is a lack of demand.

Krugman has called this the belief in the confidence fairy. If we just behave virtuosly, she will arrive, wave her magic wand and make all the economic problems go away. They also believe that the one thing which scares investors the most is when bondholders have to take haircuts (in spite of the fact that the reason bondholders get higher rates than you get for deposits at the central bank is that they carry higher risk), followed by bondholders being converted to equity, or equity holders being invited to take part in rights issues.

It is unclear why they believe these things, as they are not in any way supported by evidence. According to surveys, investors currently refuse to invest not because they lack confidence (or because taxes are too high and regulations too paralyzing), but because there is not enough demand for their products. Why build a new factory when your old one is operating at half capacity? Further, why should you worry in the least over bond vigilantes when every country with a central bank which is doing its job can borrow at the lowest rates for several centuries?

Because this is ideology. It is belief. This is a world-view which says the world works in this way, and damn the consequences and evidence. This is the why Olli Rehn tells economists to stop researching this subject, because evidence will show that the current policies are not working, which will undermine confidence and hence stop said policies from working. Pointing out that confidence is not the crucial factor will result in the same kind of answer, in this Kafkaesque world of circular arguments.

Peak oil is not an energy crisis. It is a liquid fuel crisis.

by Starvid on Mon Mar 18th, 2013 at 07:37:00 AM EST
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It's a bit like the Iraq war.

The analogy is striking. Untold mayhem and suffering unleashed with cascades of "unforeseeable consequences" (mostly foreseeable), because of a mistaken belief which didn't stand up to serious scrutiny : the existence of WMD.

"Growth through austerity", on the other hand, seems to be much more tenacious as a belief : it only took a few months to deflate the WMD myth, but the ECB are laying waste to one country after another, without comprehending the visible disproof of their doctrine.

It is rightly acknowledged that people of faith have no monopoly of virtue - Queen Elizabeth II

by eurogreen on Mon Mar 18th, 2013 at 08:57:00 AM EST
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This read is no longer supportable. Because if belief in confidence was the guiding star, then actions as arbitrary and unforeseeable as illegally bailing in depositories would be unthinkable. It would simply never occur to someone honestly ascribing to such a paradigm to do this.
They are not doing damage because they do not know better. Damage is the point.
by Thomas on Mon Mar 18th, 2013 at 11:40:56 AM EST
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When they talk about 'confidence' they mean 'investor confidence'. If the 99% are involved in a bank run it is of little consequence as long as 'investors' are 'confident'.

I distribute. You re-distribute. He gives your hard-earned money to lazy scroungers. -- JakeS
by Migeru (migeru at eurotrib dot com) on Mon Mar 18th, 2013 at 12:59:23 PM EST
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The point is the arbitrary and unforeseeable nature of the revocation of the bank guarantee. Why would investors think themselves safe from random and illegal confiscations when the people are not? They cannot. And thus, this move strikes directly at the heart of what they profess to hold most sacred. So they must be liars. The values they profess are not the values they hold, and they are attempting to sow chaos.
by Thomas on Mon Mar 18th, 2013 at 01:11:36 PM EST
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The Cypriot banking sector was - and is - a cancer. Having a finance sector that pays nine times the interest of everyone else, and is holding assets 8 times your gdp is madness. This move does not end this state of affairs.
It does damage the savings of everyone in Cyprus, makes whole bondholders that should not be made whole, and undermines the faith in deposit guarantees across the continent. It is vile end-to-end. Evil, embodied in accounting.
by Thomas on Mon Mar 18th, 2013 at 01:19:01 PM EST
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