Central bankers seem to be an affable group of fellows. Clubbable, as the British might say. A bit on the reserved side, their cocktail parties must seem like Economic Department soirées, without the occasional pleasant-on-the-eyes graduate assistant. Efficient, bureaucratic types such as T. S. Eliot must surely have had in mind when writing The Lovesong of J. Alfred Prufrock.
"...I am not Prince Hamlet, nor was meant to be;The stuff of good bureaucrats and effective military staff, with a touch of the common mailman. Excepting embellishment that indolent recuperation has allowed, this is verbatim, as those-who-know have written it. You can't, and really do not need to, make this stuff up.
Am an attendant lord, one that will do
To swell a progress, start a scene or two,
Advise the prince; no doubt, an easy tool,
Deferential, glad to be of use,
Politic, cautious, and meticulous;
Full of high sentence, but a bit obtuse;
At times, indeed, almost ridiculous--
Almost, at times, the Fool."
In Luke 16:19-31, when the beggar Lazarus dies he went to Heaven, while the rich man, Dives, went to Hell. Dives wanted to warn his brothers and asked Abraham if Lazarus could be sent back to tell them. Abraham refused. "If they hear not Moses and the prophets, neither will they be persuaded, though one rose from the dead."Central Banking Publications
29 January 2008
"We are not panicking, are we?" ask the central bankers. (They don't KNOW yet? - Jesse)
Ben Bernanke has come in for a lot of stick for allegedly panicking in the face of stock market collapses but other central bankers are not acquitting themselves very well either.
Many of them were on duty – but off the record – at Davos last week. Messrs Trichet of the ECB, Geithner of the New York Fed, Carney of the Bank of Canada, Knight of the BIS and a gaggle of others. All stressed the extreme gravity of the situation. But they seemed completely at a loss when it came to policy responses. (Let's see, shall we prevaricate and cut rates, or jawbone and cut rates? - Jesse)
It must be better to cut rates decisively now, said one, even if we have to raise them again later. The costs of precipitating a banking collapse are so horrendous they far outweigh the risks of a little increase in moral hazard and the risk of stimulating inflation. Others nodded sagely. (Collapse? OMG, the Wall Street bonus money was at risk! - Jesse)
The old system that they thought they understood and to a degree managed has gone, said another. “Everything is on the table”; “the extent of this crisis is very far-reaching”. They welcomed initially the repricing of risk but this has gone far beyond that with the losses of the monoline insurers put at up to $150bn. (Everything? - Jesse)
Faced with what threatens to become not just a credit crunch but the biggest banking crisis in a generation, all they have are their poor little interest rate tools. They are all one-club golfers, after all. No wonder there is a new mood of humility about. (Bet me - Jesse)
Bernanke under fire
When at its emergency video conference convened by Ben Bernanke at 6 pm on Monday 21 January, the Federal Open Market Committee decided to lower rates by 75 basis points to 3.5%, the biggest single cut since 1982, it took the decision “in view of a weakening of the economic outlook and increasing downside risks to growth.”
Ed Yardeni, a well-known Fed watcher, says the FOMC statement should have read: “The Fed chairman panicked on Monday… He convinced all of us to vote for the rate cut except cranky old Bill Poole.”
Accusations of panic came from George Soros, the FT, The Economist and many other quarters. And far from cheering markets, only a few days later the Fed came under pressure to cut again by at least another 50 basis points at its regular meeting. What is going on? (Neo-Keynesians are such rate cut sluts - Jesse)
The first big cut came at the end of a day which saw shares in Asia and Europe plunge as investors dismissed President Bush’s plans for a fiscal boost, unveiled on Friday, 18 January, as largely irrelevant. After the overnight losses on Asian exchanges, European bourses followed suit. On January 21, The FTSE 100 lost 5.5% to 5,578, its biggest drop since the World Trade Centre attacks. the DAX was down 7.2% to 6,790 whilet the CAC 40 tumbled by 6.83% to 4,744.
The Fed top brass – people like Don Kohn and Tim Geithner – knew full well that they would be accused of a knee-jerk reaction to the markets, validating the growing view that Bernanke was following Greenspan in holding monetary policy in thrall to a Wall Street standard. But they were driven to act by fear of a cumulative and rapid collapse. ("Uh, can we have a heads-up for the next imminent collapse? - Jesse)
Yet it later transpired that the global stock market rout of 21 January may well have been triggered, not by fears of a US downturn as by the actions of one bank – Société Générale of France – as it frantically sold shares to unwind positions entered into by its rogue trader Jerome Kerviel in the course of accumulating losses initially put at €4.8bn ($7bn). (Le cover story? - Jesse)
Informed of this belatedly by the Banque de France, the Fed somewhat lamely insisted that they would have done the same if they had known at the time. (Yeah, and next time we'll tell mom. - Jesse)
What price central bank cooperation?
Central bankers were just breathing a collective sigh of relief that over Christmas and the New Year the collective action to relieve market tensions announced on 12 December had actually succeeded. Then they were hit by a new phase of the crisis – the sudden deterioration in the economic outlook for the United States, the stock market collapse, the SocGen affair, the monoline insurance crisis and widening losses at leading banks. ((But meanwhile the Fed was telling US 'all is well?' - Jesse)
Christian Noyer, the governor of the Banque de France, might say he is “not at all worried” about Société Générale, despite it falling victim to the biggest fraud in banking history. (Its only money. Yours! - Jesse)
But when the French central bank admitted that it had known about the fraud since the weekend (19-20 January), there were raised eyebrows in other central banks. Why weren’t we told?
Noyer’s late call to the Fed – and to how own government
On Monday 28 January Christian Noyer admitted that he was informed of the crisis on Sunday 20 January but delayed informing his government until the following Wednesday because he wanted to avoid the danger of leaks as the bank sold the position on the market. (Cherchez le Goldman Sachs. - Jesse)
Moreover, he insisted that SocGen’s actions in selling its positions had no influence on the Federal Reserve’s decision: “I consider that this affair has nothing to do with the monetary policy of the Fed,” he said. “It was a striking action but one that they took based on their judgment of the economic situation in the United States and so has nothing to do with European markets.” (Psych! - Jesse)“The Fed does not decide its monetary policy actions, particularly not its exceptional ones, because of the situation on European markets in one day. That’s nonsense.” Thus central banks have started the year on the back foot, increasing moral hazard and giving a public demonstration of how not to cooperate. (Life imitates high school. - Jesse)
Sarkozy/Lagrande to lead calls for tighter regulation
When in doubt, call for more regulation. Inevitably, continental central bankers and politicians have seized on the banking crisis to call for more regulation. Noyer has already highlighted three areas in which the regulation of rating agencies needs to improve in the wake of the credit crunch: the degree of transparency in rating methods and the overall role of rating agencies in the securitisation process; whether to change the metric used for rating bonds and structured products and introducing a specific rating for liquidity risk. (Non-competitive! We risk losing important financial business to better organized crime - Jesse)
But regulation of ratings agencies and hedge funds are seen as yesterday’s agenda. Newsmakers expects France to use its presidency of the EU in the second half of this year to press hard for much greater harmonisation of financial regulation in the EU, including London…” (les renegade roast-boeufs, les vaches folles. LOL - Jesse)
Sovereign wealth funds hit back
Heads of the top sovereign wealth funds from the Gulf states, Russia and other emerging markets were in fighting mood in Davos.
Leading the calls for tighter regulation and codes of conduct was Larry Summers, the former US treasury secretary. What would happen in a 1992-type situation, he asked, if SWFs were involved in speculating against a currency as George Soros speculated successfully against the pound? It would create intolerable diplomatic tensions. We need ex ante assurance that this type of situation will not happen. That is why we need a code of conduct. (The IMF and World Bank have exclusive franchises for that - Jesse)
Not so, retorted the funds. We have always been and remain responsible investors. We do not need any of your codes of conduct imposed on us.
On the contrary, it is up to you in the heartland of your famous capitalist system to get your act together. You have lectured us for decades on the need for tighter bank regulation, anti-money-laundering rules and so on and now you are in a bigger mess than we ever got ourselves into. It is your banks who are coming cap in hand to us because they made such a mess of their business under your much-touted regulatory regimes. Get your own houses in order…. (After all we have stolen from you, and this is the thanks we get? - Jesse)
It is the revenge of the emerging markets."Daily coverage of general central banking developments is available to subscribers through our website: Central Bank News
What more can we say? Sleep well.
