ECB and moral hazard

We remember the “Greenspan put” in the late 1990s, when investors in the United States thought that the Federal Reserve would act to prevent a fall in the equity market. There are grounds to fear that the ECB, by committing to keep monetary policy highly expansionary, has now also given rise to several moral hazards (excessively risky behaviour among economic agents, who believe that they are insured by the ECB). In many countries, the public debt ratio is rising, with governments possibly thinking that the ECB will have to ensure their fiscal solvency for a long time (a case of “fiscal dominance”); Investors are buying assets (in particular real estate) in the belief that the ECB’s policy insures them against a downturn in the prices of these assets; Investors are accepting risk premia that are lower than the default risk (on High Yield bonds for example) because they believe that the ECB, which wants to keep the economy’s borrowing costs low, insures them against a rise in risk premia. It is well known that in reality, central banks do not provide lasting insurance against such risks.