Econintersect: German economist Dirk Ehnts, University of Oldenburg, says that German President Christian Wulff is right on target with his recent economic comments. Wulff said that the sources of the financial crisis have not been neutralized and that: “Without a major change of policy new financial crises loom.”
Ehnts says Wulff’s comments prompts questions such as:
- Do we ‘trust’ markets, or do we embed those markets in a regulatory environment?
- How could incentives could be so misaligned as to produce such a situation (the financial crisis)?
Topic headings in Ehnt’s Op Ed reveal much of his thinking. One section, “Crowding Out” refers to the process by which financial engineering diverted money from the real economy to the realm of complex securities and derivatives that did little more than multiply risks in an attempt to create more return from greater leverage.
Other section titles are also revealing: Examples are “Do We Trust Markets?” (already mentioned), “Speed without Brakes” and “Past is Prolog.”
According to Dirk Ehnts there is no clear theoretical basis for waht is now occurring. He wrote:
There is a huge gap in monetary macroeconomics. It becomes very obvious in Europe, where inflation is now way above the 2% ceiling set by the ECB. While some regions experience strong inflation, others are in deflationary territory or somewhere between. The countries which have borrowed strongly from abroad in the recent past have lower inflation rates than the group of net exporters. How can this be, if money is neutral and capital flows from the past should have no influence on economic activity today?