Dr. Doom's Advice to ECB: 'Slash Interest Rates to Zero'

(August 9, 2011) — The European Central Bank (ECB) should reverse monetary tightening immediately and cut interest rates to zero, economist Nouriel Roubini is asserting.

In an article published in the Financial Times, Roubini — also often referred to as Dr. Doom for his critical and pessimistic economic views — concludes that the ECB would be wise to slash interest rates to zero as part of a series of crisis measures to prevent a global depression.

The ECB’s recent purchase of Spanish and Italian bonds — which, according to the The New York Times, was reported by traders but which the central bank itself would not confirm — follows market turmoil after Standard & Poor’s downgrade of the US’ credit rating.

According to Roubini, while major governments may not be able to stop their economies from falling into recession again, they could still prevent a very severe slump. Therefore, with Spain and Italy poised to lose their access to credit, he is advising that both countries should begin “big purchases” of government debt.

Meanwhile, Stephen King, HSBC’s chief economist, writes in another article published by the FT that the ECB should embrace easy money in “exactly the same” way as the US Federal Reserve.

“At the heart of the problem is the ECB’s unwillingness to be seen ‘monetizing’ government debt. Yet if the alternative to QE is the collapse of the euro or a descent into depression, then massive expansion of the ECB’s balance sheet seems a small price to pay,” he writes, adding that the Eurozone will be forced to eventually face fiscal union or face the same type of “fiscal anarchy leading to financial implosion” of the post-Soviet era.

Comparing the current difficulties of the Eurozone to the post-Soviet era, King continues: “The break-up of the Soviet Union at the beginning of the 1990s might seem only tangentially connected to the eurozone’s current plight, but the haemorrhaging of political unity that followed the Soviet Union’s collapse led eventually to the destruction of a single currency which, for a short while, had been the sole legal tender across a large number of newly-formed republics. The post-Soviet era – a period during which the rouble area shrank dramatically – thus provides a template against which the risks to the eurozone can be gauged.”