Credibility: Does It Matter?

RL Ellison

With the credibility of politicians around the world at record lows and that of bureaucrats and the media not far behind, pundits everywhere cough up all sorts of explanations when best-laid plans go south, pointing the fickle finger of certainty in every which direction.

Perhaps nowhere is this more apparent than in the debate whether the European Central Bank should suddenly become the monetary cavalry of last resort riding their trusty printing press to the rescue and forever clean up the critical, pitiful fiscal mess the European Union now finds itself wallowing in.

 The division is clear-cut. Hardliners say no, enablers, yes.

For the enablers it’s not so much: “Help us now and we won’t do it again.” It’s: “Help us now and we won’t ever have to do it again.” For the hardliners the problem with that is it relies to a certain extent on predicting the future, something no one can accurately accomplish.

Grabbing the headlines on the Internet recently was a story entitled: “Half of Hollywood Is Broke.” The article focuses on several celebrities who, for various reasons, have bitten the bankruptcy bullet. For many it’s an attention getter. A closer look reveals that several of them surprisingly have gone BK more than once. After the first time, like a lot of things in life, it apparently gets easier.

Buried somewhere in this debate is the valid question: Why make laws if you’re only going to break them when it’s to your convenience? And buried in that question is another, more important one: What about credibility?

That seems to be the message of Otto Issing, a former member of the Executive Board of the European Central Bank. Issing, a German, in a Financial Times article, “Bond Buying by the ECB Would Result in Moral Hazard,” writes: “…the situation in the euro area is fundamentally different from the US or the UK. No one would argue that the Fed should guarantee the debt of individual states. No need because there are strict limits for debt financing by US states. (Someone apparently forgot to inform our legislators here in California!) This is also a fundamental principle of the European Union…”

Issing goes on to point out that it was precisely this principle that every EU member signed, according to the provision in the Maastrictcht treaty, to ensure a stable currency. Simply put, you agreed, should the need ever arrive, to have your feet held to the furnace. Now that the need is here, you want others who have honored that pledge to hold their feet to the flame. We hate to digress, but this sounds eerily like some left-wing-Barney Frank hatched screen play for an upcoming left wing Hollywood movie starring Sean Penn and Susan Sarandon.

Issing goes on: “Pressing the ECB into the role of buying public debt of individual member states would create the biggest conceivable moral hazard.”

“On top of these alarming and monetary consequences,” Issing continues, “providing monetary financing would break the law—a constitution ratified by all governments and parliaments…..How credible is an announcement of ‘strict future rules’ if at present violation of law is so widely, not only accepted, but requested?  

In case you may not recognize it, Issing is posing the famous unintended-consequences question here:

“If the ECB goes in the direction of becoming the ultimate buyer of the public debt of member states detailed consequences are hard to predict. However, one thing seems to be certain. It would be a daunting challenge to restore credibility,” he concludes.

We don’t know if Issing would ever consider renouncing his German citizenship and running for Congress here, but we believe someone who truly understands the danger of creating moral hazards, i.e. credibility, would win by a landslide.