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Will the ECB’s “Expansive Monetary Policy” Defeat Deflation?

The governor of the Bank of Italy recently expressed his views on how the European Central Bank can effectively combat deflation risks.

Here's an excerpt from an Oct. 11 Bloomberg article:

The European Central Bank must maintain its expansive monetary policy for some time to counter deflation risks, Governing Council member Ignazio Visco said in an interview with Italian newspaper Il Corriere della Sera.

"Price changes tend to be very low, if not negative, and a gap has been created with our goal of price stability, with effects that can be dangerous," said Visco, who is also the governor of the Bank of Italy. "For this reason, monetary policy must be expansive and remain so for a long time. Through our monetary policy we are able to intervene effectively to defeat deflation."

Visco argued in favor of changing the ECB's inflation goal -- currently set at below, but close to, 2% -- because it's "vague and difficult to understand." The new target should be symmetrical at about 2% in the medium term, he said.

…. [Visco] backed the ECB's request that European banks increase loan-loss provisions -- even before the expiration of loan moratoriums in several countries.

"The supervisory authority knows very well that non-performing loans will increase," said Visco, urging banks to use their capital buffers to protect against bad debt. "If we do not immediately book in the balance sheet what manifestly cannot be recovered, the banks will accumulate losses so large that they will require rapid and substantial recapitalization, perhaps in difficult market conditions."

But, is it wise to put so much confidence in the policies of central banks?

Robert Prechter's 2020 edition of Conquer the Crash addressed the widespread yet false belief about the Federal Reserve's power (which he calls the "potent directors" fallacy). The same line of thought applies to other central banks:

It is nearly impossible to find a treatise on macroeconomics today that does not assert or assume that the Federal Reserve Board has learned to control the credit supply, interest rates, the rate of inflation and the economy. Many people believe that it also possesses immense power to manipulate the stock market.

The very idea that it can do these things is false...

Real economic growth in the U.S. was greater in the nineteenth century without a central bank than it has been in the twentieth century with one. Real economic growth in Hong Kong during the latter half of the twentieth century outstripped that of every other country on earth, and it had no central bank. Anyone who advocates a causal connection between central banking and economic performance must conclude from these remarkable facts that a central bank is harmful to economic growth. For recent examples of the failure of the idea of efficacious economic directors, just look around. Since Japan's boom ended in 1990, its regulators have been using every presumed macroeconomic "tool" to get the Land of the Sinking Sun rising again, as yet to little avail. The World Bank, the IMF, local central banks and government officials were "wisely managing" Southeast Asia's boom until it collapsed spectacularly in 1997. Prevent the bust? They expressed profound dismay that it even happened. In 2007-2009, the U.S. economy imploded despite unprecedented activity by presumed "potent directors." I say "despite," but the truth is that directors cannot make things better and have always made things worse.