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Issing on Hayek & Bernanke

November 8, 2005

In contrast to a certain other, one central banker we shall miss after his impending retirement is the ECB's Chief Economist,Otmar Issing.

In one recent speech, he paid fulsome homage to Hayek and opined that:

It is obvious that only a free market economy is consistent with a free society. Only within such a framework can people act as free individuals and make the best contribution to their own well-being and that of others.

In another recent address, he was rather less enamoured of Deity-Elect, Ben Bernanke's ludicrous theory of the "global savings glut" [see below].

Both are worth a read, if only to make us further wonder how this man could have tolerated the c.40% increase in the ECB's balance sheet these past 3 1/2 years — a phenomenon which has contributed to the inflation of the Continent's very own housing bubble.

However, there is one fundamental weakness in the savings glut hypothesis. This flaw is that it is hard to blame countries for having a strong preference for savings and even harder to make them directly responsible for the excessive consumption and investment behaviour of debtor countries.
By definition, a current account "imbalance" always involves two parties: one that has excess net savings and thus records a surplus, and one that has excess consumption and investment, i.e. a current account deficit.
And while some countries may choose to accumulate surpluses, there is nothing that then automatically forces other countries to consume or invest more than they save domestically...
On the other hand, the (ex ante) relationship between savings and high levels of global liquidity, which we are observing today, remains an open issue. The savings glut hypothesis ignores the fact that a significant part of what is measured (ex post) as "savings" starts (ex ante) as excess liquidity.

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