Tags: Hildebrand | QE | Europe | Fed

BlackRock's Hildebrand: QE Won't Work for Europe

By Dan Weil   |   Tuesday, 19 Aug 2014 03:00 PM

The European Central Bank (ECB) has promised to engage in quantitative easing — bond purchases — if necessary to boost the sagging eurozone economy, and many believe it will end up doing so.

But Philipp Hildebrand, vice chairman of BlackRock, says that the ECB should refrain. "This is the path the U.S. Federal Reserve took in 2008, but it would be a mistake for the ECB to follow," he writes in the Financial Times.

"Bond yields are already at record lows. Reducing them further is unlikely to stimulate investment in an economy that, unlike America's, is still funded largely through the banking system rather than the bond markets."

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German 10-year government bonds yielded 1 percent near midday Wednesday, compared with 2.4 percent for 10-year Treasurys.

"The eurozone still has deep problems," he notes, adding that France and Italy need to reform their labor markets, lower business taxes and "continue to repair their public finances."

The fact that quantitative easing (QE) is unlikely to succeed doesn't by itself mean that the ECB shouldn't try, Hildebrand says.

"After all, another lesson from the crisis is that in the face of impending disaster, you should try different approaches until something works."

The problem is that "QE would merely enable governments to borrow even more cheaply, giving recalcitrant politicians an easy way out," he writes. And it would further distort financial markets.

As for the Fed, its easing has hampered the economy by pushing Americans to keep $10.8 trillion of their money in cash, bank accounts and money-market funds that pay very little interest, says MarketWatch commentator Rex Nutting.

"In essence, there's $10.8 trillion stuffed into mattresses," he writes. And that's not good for the economy, Nutting points out. "An economy can't really grow if no one's willing to gamble on the future."

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