June 13, 2011
The other day, I watched a Few teenage kids knocking around my neck of the woods.
One lad in particular caught my attention.
He walked like a young fella with haemorrhoids, legs far apart as if in total discomfort. I watched him as he hung around with his mates, trousers sagging down so far that every time he walked, he had to spread his legs apart just to keep his jeans up.
Fashion can be a strange thing.
Have you too noticed the fashion over the past few years for young lads’ jeans to be slung lower and lower? It is called ‘‘sagging’’.
The genesis of this particular trend is quite interesting.
Sagging stems from American hip hop culture and originated in the prison system.
Belts are banned in US prisons for obvious reasons and as a result prisoners’ trousers sag. During the early 1990s,black gangster rappers, trying to ape the ‘tough guy’ prison look, first started mimicking this US prison look. It soon became de rigueur for the hip hop movement.
A decade or so later, like all fashion, it morphed out of the original ghetto and found its way into the mainstream.
Today, quite bizarrely, you have extremely white, southside Dublin schoolboys who couldn’t locate Mountjoy without Google Earth, hanging with their homies, trousers somewhere between their rear ends and their knees, a ping US penitentiary chic.
But that’s the way of fashion, how it gets there and where it comes from is sometimes lost on everyone, except for the fact that we end up with classically inappropriate behaviour for apparently no reason at all.
We’ve all seen friends wear the most unsuitable things because of fashion.
But fashion isn’t limited to clothes. Fashion is everywhere, in politics, in ideas and most definitely in economics. In the 1990s for example, it was very much the fashion to demand an independent central bank with no other mandate but to keep inflation low.
For years, economists have been divided Over whether it is better to apply clear rules or human discretion when setting economy policy.
Those in the rules camp have argued that economics is scientific and there are verifiable, immutable rules which should be applied.
Once you apply these rules, these economists contend that there is no need for discretion or judgment on the part of policymakers.
On the other hand, there are those of us who believe that a bit of judgment is necessary. Since the 1990s, the rules guys have been in the ascendency and as a consequence, political interference or judgment was not deemed necessary.
Nowhere has this particular fashion become more evident than in the approach to central banking.
The European Central Bank (ECB) and its ‘narrow-gauge’ concerns with inflation and rules, over and above the more broad concerns about how its policies affect societies is a classic example of this.
This particular fashion – for independent central banks – stems from the idea that the crisis of the 1970s was made worse by central banks printing money, which only led to stagflation, a combination of inflation and stagnation.
So in the 1990s, the central bankers of Europe bullied the politicians to make the ECB not only independent, but limited to a very narrow mandate. In contrast, the Federal Reserve in the US is a much more political institution, with a mandate that covers both inflation and growth.
The ECB rather than being more discretionary like the Federal Reserve is obsessed with rules. In a crisis this inflexibility makes it a poor institution in which to place our trust.
A crisis is by definition unexpected and therefore the rules, which were supposed to protect us from unexpected events, prove to be inadequate.
More than that, an inflexible institution in a crisis is not just inappropriate, it is dangerous.
It might seem strange to you, but the biggest threat to the EU is not the likes of Ireland and Greece, nor vocal Eurosceptics in Britain, nor hedge fund managers who are only too willing to ‘short’ the bond market of the next domino in the tottering European peripheral bond market.
The biggest threat to the European Union and to the concept of a family of Nations moving forward together is the ECB.
It has become a prisoner of the fashion of rules, and this is destroying the credibility of the EU.
Many of us ask ourselves why the ECB is determined to destroy Ireland by, for example, forcing us to pay all the â‚¬65 billion of bank bonds when we know that our banks are bust and pretty much useless in the economic sense of the word.
This is particularly unusual When we see that the ECB has injected â‚¬100 billion of capital into the Irish banking system’s funding already. The reason it is doing this becomes clear when you read the rules it has set itself.
The most credible Irish source on the ECB is the wonderful blog. Corner turned.com.
Quoting from the ECB’s 2008 annual report, we see that the bank may provide – temporarily and against adequate collateral – emergency liquidity assistance (ELA) to illiquid but solvent credit institutions.
But what happens if these institutions turn out to be insolvent like our banks?
Then, according to the narrow rules, the ECB can’t provide support.
So think about this, if our banks default on their debts they are by definition insolvent, but this means that the ECB can’t support them anymore.
So in order to stay true to its own rules, the ECB will not allow our banks to default because it would then have provided short-term assistance to insolvent banks and thereby change its own charter.
So, rather than kill off bust banks, let them go and welch on the sacred bondholders, the ECB is injecting capital into them, which is just throwing good money after bad.
Politically, Germany has just woken up to this nonsense and is now on a collision course with the ECB because Germany realises that the bondholders have to pay.
Otherwise, taxpayers in the likes of Germany and Finland will pay and they don’t want that. So due to the obsession with fashion and the resulting attachment to rules, the ECB is now both in control and out of control at the same time.
By imposing narrow rules of broad discretion, it is endangering the entire EU. It is making everyone – the debtors and the creditors – Eurosceptic. It is doing this to protect the bondholders and to adhere to its outdated rules.
The great Keynes once said: ‘‘When the facts change, I change my mind. What do you do, sir?”
The facts have changed – and more to the point – fashion is changing.
The idea of an independent central bank will disappear before the end of this crisis. What seemed logical 20 years ago, seems dangerous now.
The ECB is preventing the EU from recovering, it is preventing the EU from acting like a family of nations in the same way as ‘sagging’ is preventing thebe-gelled southside teenager from walking.
Fashions change because their time passes and they are superseded by something else.
The fashion for independent central banks will also fade as this European crisis get more intense.
David McWilliams hosts the Dalkey Book Festival next weekend; www.dalkeybookfestival.org