The Urge to Punish, by Paul Krugman, in NY Times: I’ve been hearing various attempts to explain the ECB’s utterly bizarre refusal to cut interest rates despite soaring unemployment, sliding inflation, and on top of all that the special problems of a monetary union that probably can’t survive unless overall demand is strong. The most popular story seems to be that the ECB wants to “hold politicians’ feet to the fire”, letting them know that they won’t get relief unless they do what’s necessary (whatever that is).
This really doesn’t make any sense. If we’re talking about enforcing austerity and wage cuts in the periphery, how much more incentive do these economies need? If we’re talking about broader fiscal union or something, what is it about the imminent collapse of the whole system that the Germans supposedly don’t understand? Is there any conceivable way that cutting the repo rate by 50 basis points will somehow undermine actions that would otherwise happen?
What does make sense, maybe, is a two-part explanation. First, the ECB is unwilling to admit that its past policy, especially its past rate hikes, were a mistake. Second — and this goes deeper — I suspect that we’re seeing the old Schumpeter “work of depressions” mentality, the notion that all the suffering going on somehow serves a necessary purpose and that it would be wrong to mitigate that suffering even slightly.
This doctrine has an undeniable emotional appeal to people who are themselves comfortable. It’s also completely crazy given everything we’ve learned about economics these past 80 years. But these are times of madness, dressed in good suits.