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Frankfurter Allgemeine Zeitung
The normalization of monetary policy
Dr. Michael Heise, 16.11.2009
A policy of historically low
dotcom crash or the housing
interest rates and unbridled
crisis sowed the seeds for
liquidity was called for in the
fresh excesses on the financial
months gone by to avert a
collapse of the financial
system. Now the time for an
So far, so good. But wouldn’t a
exit seems to be gradually
less expansionary policy
approaching. For months now
undermine economic activity?
the economy has been
First off: monetary policy only
showing signs of improvement.
affects the real economy with a
Central bank growth
time lag of one to two years. If
projections for 2009 and 2010
interest rates are raised today,
are being nudged up and the
that would have little impact
ECB will probably move them
next year when government
up a further notch in
demand programs are still
December. Super-low interest
providing a boost anyway.
rates and abundant liquidity
Could an about-face in
are fueling the financial
monetary policy prompt a new
markets and treating the banks
banking crisis? That is also
to juicy profits. All of this has
unlikely. The banks are not
helped the economy to get
short of liquidity but rather
back on its feet. But if the
capital, despite the
medicine is administered for
considerable progress already
too long, new excesses and
made. The European Central
financial market bubbles will
Bank no longer needs to inject
form. We have experienced
unlimited liquidity, particularly
this repeatedly in recent years
as it could counter any
as low interest rates deployed
renewed bottlenecks swiftly.
to tackle the Asian crisis, the
Nor would a higher interest
rate than the current 1% on 12-
In sum, therefore, there are
month funds derail the banks.
good reasons to initiate the
At most this would curtail their
normalization of monetary
profits somewhat, while at the
policy now. But there is no
same time pushing up those of
cause to over-dramatize the
the ECB, that is, indirectly, of
situation. It borders on the
the tax payer.
absurd when the ECB comes
under fire for acting
The biggest risk inherent in a
irresponsibly from those very
gradual exit is not a renewed
quarters who bemoaned its
flare-up of the banking crisis
hesitancy in the crisis. The
but a steep rise in the euro
expansionary policy was
which could jeopardize the
appropriate and there is still
nascent upswing in the euro
time to avoid exuberance and
area. Whether we see such
aberrations down the road.
sustained strength of the euro
However, the change of tack
hinges crucially on whether the
must come soon.
ECB and the Fed move more
or less in step or act very
differently. If the Fed puts off
the about-face for longer, it will
be imperative for the euro that
the Asian central banks do not
also stick to their expansionary
stance and continue hoovering
up dollars to prevent their
currencies from appreciating.
This would render an “isolated”
euro appreciation almost
inevitable. International
coordination of the gradual
crisis policy exit plan is highly