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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 markets. 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 desirable.