A feature of the credit crunch era has been the expansion of the role of central banks which has mostly been symbolised by the rise in the size of their balance sheets. This has happened because they found that the interest-rate weapon ran out of ammunition especially for those who were/are unwilling to countenance negative interest-rates. Also the interest-rate weapon ran out of effectiveness as otherwise we would not be where we are. Accordingly what are called extraordinary monetary measures began and whilst the media obsesses on what the European Central Bank (ECB) will do next right now I note that with a Swiss Franc to Euro exchange rate of 1.2010 as I type this the Swiss National Bank (SNB) is very near to its 1.20 cap. According to market reports it has Euro bids and therefore Swiss Franc offers starting at 1.2008. If you think that this is just run of the mill currency intervention then take a look at this from Bloomberg News.
Holdings increased to 495.1 billion francs ($490 billion) from a revised 462.7 billion francs in November, the central bank based in Zurich and Bern said on its website today.
So we have a hint to the scale on which the SNB was intervening in December. But also I would like to draw readers attention to what it does with the money.
As of the end of the third quarter, the SNB held 45 percent of its reserves in euros and 29 percent in dollars. The bulk was invested in highly rated government bonds, with 16 percent in equities.
If we consider this there are three issues. Firstly when did central banks become equity market punters? The Swiss are very keen on referendums, did I miss it? Also leaping from the page is the phrase “highly rated government bonds” and I would be interested in readers thoughts as to how one defines that in these times. Of course if we look at their likely definition then on a mark to market basis profits will be reported. Thirdly you may note that the SNB buys mostly Euros but only holds 45% of its reserves in them so it is not only equities it is an apparent expert about.
What are central banker experts in or at?
The credit crunch era has led to many examples summarised by these lyrics from Genesis.
O Superman where are you now?
Indeed some of their moves have exhibited this.
Been haunted by a million screams
Indeed an example of the outright disarray that has often accompanied all this has been demonstrated by the Bank of England today. From the Financial Times.
Lord King, the former governor of the Bank of England, kept the governing body of the central bank in the dark on serious internal dissent, denied non-executive directors information about financial stability and fell out with them over alleged leaks, minutes from the financial crisis reveal.
This poses all sorts of questions including on whose authority did Governor Mervyn King do this? Also I note that we are seeing another failure here of the concept of non executive directors.This is before we get to the issue of “serious internal dissent”. About what?
So bad were things at the Bank of England at the time of the Northern Rock collapse that the Court of the Bank of England thought this about it.
(It had) “proven the sense and strength of the tripartite framework”.
I am not sure that even the apocryphal civil servant Sir Humphrey Appleby would have possessed the cheek to claim that! Also I am reminded of this from Animal Farm.
Several of them would have protested if they could have found the right arguments.
Perhaps Governor King presided over this type of business model described by George Orwell.
In future all questions relating to the working of the farm would be settled by a special committee of pigs, presided over by himself. These would meet in private and afterwards communicate their decisions to the others. The animals would still assemble on Sunday mornings to salute the flag, sing Beasts of England, and receive their orders for the week; but there would be no more debates.
Or as Governor King would prefer us to consider it.
What matters to the country are the decisions that we took, and those decisions prevented a repetition of the Great Depression and made it possible for the recovery that is now under way.
If that is so perhaps he would like to remind us why he was voting for an increase in QE (Quantitative Easing) at the end of his tenure as Bank of England Governor.
The Consequences of Reality
The problem is that however they try to rewrite history it is plain that central bankers have been living in the world described by Genesis.
This is a land of confusion.
An example of this has been seen recently by the disinflationary pressure being driven by the falls in oil and commodity prices. An example of this was demonstrated earlier if we skip down to New Zealand.
The ANZ Commodity Price Index fell a further 4.4% in December – the tenth consecutive monthly decrease in the index. The index weakened 17% over calendar 2014.
Added to this comes the news that the price of a barrel of Brent Crude Oil has fallen below US $50 this morning so there is more to come in the pipeline. This gives plenty of food for thought for the ECB as it peruses the latest consumer inflation data.
Euro area annual inflation is expected to be -0.2% in December 2014, down from 0.3% in November.
In its “land of confusion” the annual rate of consumer inflation was supposed to be between 0.6% and 2% when policy was set for now (March 2013). In spite of a relatively wide range their arrow has shot past the target. I do not wish to further embarrass them by also stating their forecast for the oil price because my point is that much of the future is uncertain and that as you control more and more things they make themselves and even more importantly us ever more vulnerable to this. But we do know that the consumer inflation rate looks set to fall further if the current level of commodity and especially oil prices is any guide.
Another factor which has surprised central banks has been the fall in many bond yields. Please do not misunderstand me I expect them to try to bask in applause from their policies. But in the longer-term with a weak political class I fear that our poor battered can has taken another beating as it is kicked to some unspecified future date. Meanwhile we see troubled countries like France experience downgrades and yet have a 0.75% ten-year bond yield.
Today is a lesson in be careful what you wish for. Central banks and their media cheerleaders keep pushing the “More,More,More” argument with the enthusiasm of Agent Smith from the Matrix films. However my point is that we are seeing a build-up of unintended consequences and side-effects from all of this. It is not so much the failure to forecast falling commodity and oil prices and the consequent disinflationary pressures that bother me as after all that is 20/20 hindsight now it is that so much depends on such matters. These type of events have increased in the credit crunch era and if you like there are a lot more Black Swans then there used to be. Thus policy right now has a dagger to its heart.
The first step to solving a problem is to realise you have one. Does anybody see any sign of central banks doing this?