Readers may have seen two charts that are part of a column by David Wessel published last week. For five European countries, they compare actual interest rates with those prescribed by a standard policy rule. Wessel’s charts provide some interesting evidence that European Central Bank monetary policy has been either too loose or too tight most of the time for several currently ailing European economies, given these countries’ inflation rates and gaps between actual and potential output.
In other words, with a large economy and varying inflation over the regions, central bankers suck, they needlessly keep the peripheral regions in a skew, never really having interest rates that match real growth rates. This is bubble stuff.
The problem here is the lenders, the banks. The European Central Banks can only get to the average for the Eurozone. We have the same problem in the USA. California, and the West, which pay 40% of the debt service costs for Congress are a separate economy, yet the Federal Reserve looks mostly at business in DC, mainly Congressional spending.
Competitive regional banks are the solution; using the same currency but restricting their yield curve to the regional economy they serve. We need regional banks with money creation powers over the region they serve, as does Europe. Decentralized banking helps a lot.
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