Saturday, January 24, 2015

Central Bank Critics Showing up Everywhere

The move by the Swiss National Bank (SNB) to unpeg from the Euro has caused a massive reaction/disruption around the world. Not only in the markets themselves, but suddenly central banks are coming under attack from all sides. Even from sources normally friendly to them. 

This will be something to follow this year. Is this just a one time "gut reaction" because the SNB caught the world by surprise? Or, is this the start of a campaign to discredit individual national central banks as "too small" to deal with global problems? It's something to watch for over time. Let's explore it below.

Below are just a few of the barrage of articles calling the credibility of central banks into question after the move by the SNB. Each article is linked below with a brief quote or comment just below it.

Chicago Tribune article - this article offers some support for the SNB, but also says this:

"But this surprise has not been met with shouts of wild glee. Many eastern European homeowners suddenly have to repay their mortgages in now-much-more-expensive Swiss francs. Currency markets are in turmoil, banks are losing millions, and foreign exchange trading houses are flirting with insolvency. Paul Krugman, among other economists, says that it is abandoning its commitment to fight deflation, losing institutional credibility with markets, and in the process making it harder for other central banks to make credible commitments."

Macro Digest - End Game for Central Bankers - this one offers no support for central banks

"I fully understand the rationale for the move, but like most of the market I'm extremely disappointed in the SNB’s communication and handling of the issue, but that’s the bigger lesson: Why is it most people trust or bother to listen to central banksMajor central banks claim to be independent, but they are totally under the control of politicians."

"The new dimension of central banking is the “communications policy” which is not only the poorest policy but also only really a front for “talking the market into believing our dream” without any further action."

Wall Street Journal - Lagarde's swipe at the SNB - notice the IMF is not pleased and is pictured as the ultimate source of approval for central banks (hold that thought for the future)

"The move hasn’t been endorsed by the IMF: “I’m going to reserve judgment on the pertinence of that move because we have not discussed it with governor Jordan and I would certainly want to understand exactly where he was coming from.”

"That’s why central bankers must take greater care than the SNB showed Thursday to avoid global financial instability: “I think I understand why he’s doing it, but talking about it would be good.”

Now for some people who are always critics of central banks - they showed up everywhere on the internet after the SNB news.

Former Reagan Budget Director David Stockman - no kind words here for central banks

"In Stockman's view, the unfolding drama in world financial markets simply underscores how the Federal Reserve and its lapdogs among other central banks have distorted honest capitalism and enriched speculators."

Bill Holter of Miles Franklin   - no kind words here either

"Another aspect to what and how the Swiss moved on Thursday is that of “central banks” themselves.  Did the Swiss not know they were going to float the franc on Monday when they confirmed the peg publicly?  Did they or did they not inform the IMF prior their actions?  What about the BIS which is headquartered within their borders in Basel, surely they tipped them off? " 

"Christine LaGarde claimed in an interview with CNBC that she had no prior notice, really?  If this is true then it shows the Swiss central bank has moved in an “every man for himself” type of action.  It also shows the “united front” of central banks is not so “united” anymore!  If Ms. LaGarde is not telling the truth and in fact the IMF did have prior knowledge, what would this mean?  It would mean the central banks are finally losing control of the rig.  It would also mean the central banks have distorted currencies, interest rates etc. so badly that once Mother Nature takes over, we can expect repeat performances all over the world and amongst all assets and currencies."

And then we have even the former chief economist for the Bank of International Settlements (the bank of central banks) questioning central banks ability to function properly any more. 


The Telegraph - former BIS economist warns that QE in Europe is doomed to failure

"The economic prophet who foresaw the Lehman crisis with uncanny accuracy is even more worried about the world's financial system going into 2015."
"Beggar-thy-neighbour devaluations are spreading to every region. All the major central banks are stoking asset bubbles deliberately to put off the day of reckoning. This time emerging markets have been drawn into the quagmire as well, corrupted by the leakage from quantitative easing (QE) in the West."
"We are in a world that is dangerously unanchored," said William White, the Swiss-based chairman of the OECD's Review Committee. "We're seeing true currency wars and everybody is doing it, and I have no idea where this is going to end."
"Mr White is a former chief economist to the Bank for International Settlements - the bank of central banks - and currently an advisor to German Chancellor Angela Merkel."

NY Times - New QE from ECB may be Too Little, Too Late

This article says the QE from the ECB may be too small suggesting that the problems are too big for just the ECB to handle. 
Concluding comments:
I could easily have listed many more articles, but you get the idea. All of a sudden, questioning the credibility and competence of central banks is in fashion around the world. Even by folks who are usually friendly.
Please note that both the IMF and a former BIS chief economist were happy to jump on the bandwagon. The NY Times article calls into question if the actions of the ECB are "too small".
It is impossible to know if the Swiss Bank decision was good or bad looking in from the outside. It is also impossible to know if all this blowback is just a one time "gut reaction" to all the uproar the Swiss move caused in the markets. We have to remain open to the possibility that this could be the start of a campaign to convince the public that individual national central banks just cannot manage the situation any more. That it is just "too big" for them to deal with. Look at what just one decision by one central bank just triggered. 
All during 2014, both the IMF and BIS issued repeated warnings that central bank QE policies were creating asset bubbles that could trigger another crisis some day. Now we have this incident where something bad did happen. Everyone was quick to pile on the SNB for its handling of things. The IMF emphasized that it is important for central banks to act in a "coordinated" way around the world.
Remember, Jim Rickards forecast is that there will be another major financial crisis bigger than the 2008 crisis. He says it will be deemed "too big" for any national central bank to handle this time. He says the IMF will step forward to take the lead at the global level. Not the US Fed or any other individual national central bank
Is all this just coincidence? It very well could be. But obviously we need to watch and see how things unfold. If Jim Rickards forecast eventually pans out, at some point we will be told that the new global crisis is "too big" for any national central bank to handle and must be managed at the global (IMF) level.

If he ends up missing this forecast however, then the odds are that we are seeing a series of unrelated events that really are just coincidence. My own feeling is that we probably will get an answer by the 2016 US elections. We'll see what happens and cover it here, regardless of the time frame involved.

Added note: Another fallout for central banks related to what the Swiss did is that it shows how when push comes to shove, national central banks are forced to do whatever they have to do in their nation's self interest (regardless of the impact on everyone else).

This interview with John Mauldin @ King World News talks about that problem. Going forward we can expect this problem to continue. So watch for increasing calls for someone (like the IMF) to "coordinate" central bank actions on a global level and keep Jim Rickards forecast in mind if that does happen. 


  1. when push comes to shove, national central banks are forced to do whatever they have to do in their nation's self interest (regardless of the impact on everyone else).

    This is my feeling. When people lose confidence in central banks, they will not trust another level of central banks....the IMF. I believe it will be every nation for themselves if a bigger crisis hits.

  2. That is one of the 4 possible future scenarios I listed in this article:

    We will follow events here as best we can and see how things turn out over the next few years.