How former central bankers stepped up against the central banks

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George Dorgan
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There are already three former European central bankers who criticize more or less openly the European Central Bank (ECB). And there are many more……

Axel Weber, former president of the Bundesbank

Axel Weber quit the Bundesbank in February 2011 after he realized that the ECB violated the “non state financing” principle with the first SMP programs for Greece and Portugal. Later he took a new job at UBS, where he is supposed not to utter too much critics against the establishment.

Juergen Stark, former chief economist of the ECB

Juergen Stark left the ECB in September 2011 in protest against the ECB monetizing of debt. The current role of Juergen Stark is different. He decided to make his opposition against the ECB public. Juergen Stark spoke with the Manager Magazin last month.

“I see the need for consolidation in the euro area. Weaker states would have to leave the monetary union. What matters is that the Franco-German axis hold. The integration of the core must not be lost. Otherwise we get a political and economic disaster of historic proportions.”

In March he criticized the ECB and accused her of provoking inflation.

“Both the policy and the central banks have succumbed to the temptation to treat all problems of the world flooding the markets with liquidity. It is historically proven that “any particularly strong expansion of the central bank balance sheet leads to inflation in the medium term”.

At the end of July he called Draghi’s plan to save the euro at any cost “a violation of European law”. He said furthermore:

“It is not the task of a central bank – at least not a modern central bank, as we understand it in Europe – to finance governmental functions or to give money directly to states.”

Otmar Issing, former chief economist of the ECB

Another European central banker has voiced his opposition even more strongly. Otmar Issing worked for eight years in the Bundesbank and changed 1998 into the board of the ECB and remained there till 2006. He is called one of the “fathers of the euro”. In 1998 he called the the euro “a very courageous experiment.” Now he realizes that this experiment might fail soon. He will publish soon a book with title “How to save the euro and enforce Europe”.

Some of his opinions are:

“More and more bailouts, and everybody says, the dose should be increased further. This is wrong. The political union of Europe as a solution to the problem? Do you really think anyone wants more integration of Germany into Europe, if it means that Germans must pay even more to other countries?”

He claims that Spain and Italy had many years of cheap money before the financial crisis, but did not use this period effectively.

“Spain and Italy need to solve their problems themselves, as they caused them. During the years of monetary union Italy had always slow growth – an expression of bad policies. The global financial crisis has only accentuated the issues. Italy has so far done nothing to reform the labor market. The only exception are the Portuguese, they reform their country, they stick to agreements. What should the Portuguese think if other states constantly obtain exemptions from ?

“The euro will survive, but not with all members”, he adds.

More details on Otmar Issing’s new book can be found here.

Kurt Schiltknecht, former chief economist of the SNB

The next former central banker who is criticizing the central banks, is the chief economist of the Swiss Nationalbank (SNB) in the 1970s. In 1978 the SNB stipulated a cap for the franc, at that time against the German mark and was successful. Schiltknecht was member of the socialist party (SP), what made his election into the rather conservative Swiss National Bank more difficult. Interestingly he is now the main advisor for monetary policy to the right-win politician Christoph Blocher of the Swiss People’s Party (SVP). Both Schiltknecht and Blocher were opposed to the early SNB interventions in 2010, but were in favor of a EUR/CHF floor in Summer 2011, more details on Blocher’s homepage.

Here a selection of Schiltknecht’s critical voices against today’s SNB leaders:

[Capital controls in the 1970s:] we tried, with negative interest rates, with investment bans and such things, to influence the movement of capital. But these measures have never worked at all. (Source, more details here)

Pegging the Swiss franc against the euro is far more dangerous than pegging it against the stable German mark, as the SNB did in the 1970s. (Source)

In June 2010, when the SNB intervened at EUR/CHF 1.40, he said:

“It has been well established that these interventions have ultimately brought nothing huge. The market has not received a clear signal, the SNB has intervened too soon and has pumped too much money in the market. They have probably noticed that we are moving towards inflation.” (Source)

In August 2011, when the franc was trading near parity to the euro, he opted for the first time for interventions:

In difficult times, you have to give the market a clear signal, where the exchange rate should be. The SNB should not target a single exchange rate, but a basket of currencies. (Source)

The SNB did not listen to his statement, when she set the floor. If she had used a basket as reference, then the strong fall of the franc against the dollar since September 2011 would be less accentuated. The USD/CHF exchange rate would be lower, the franc less cheap for Americans and other parts of the world.

Schiltknecht confirmed his August 2011 proposal of a currency basket in April 2012:

Faced with declining confidence in the economic policy of the euro countries it could be advantageous to define an exchange rate target for a currency basket. In this basket could be included also countries, whose economic policies are more stable than the ones in Europe and in the USA. This could help to minimize the risk that an unpredictable and uncontrolled development in the euro area would have a devastating impact on Swiss monetary policy. Pegging the franc to a currency basket would be more useful than removing the peg completely. In current uncertain times the SNB must do everything so that the Swiss franc is not dragged down into the vortex of weak currencies.

Georg Rich, former chief economist of the SNB

Schiltknecht was not the only central banker to disapprove the SNB interventions in June 2010. Georg Rich was until the end of 2001 Chief Economist of the SNB. In 2010 he asserted:

“Until spring [2010] I totally agreed with the National Bank policy. In May, however, it was scary to me, as the SNB bought up such an extensive euro sums. ” (source)

The SNB intervened in May 2010 for 77 billion francs, but in 2012 she had to increase currency reserves by 59 in both May and June and by 41 billion francs in July.

Ernst Baltensperger, Thomas Jordan’s academic supervisor

Also in summer 2010 Professor Ernst Baltensperger, Thomas Jordan’s academic supervisor said:

“To fight against the market has no prospect of success. Using quantitative easing in a recession makes sense, it is a method used even in prior crisis. But now we do not see a crisis, the SNB should reduce liquidity… (source)

Thanks to feedback after the article appeared on Zerohedge, we added some comments of non-Germanic central bankers.

Paul Volcker, former Fed chairman

In 2010 Paul Volcker, Fed chairman between 1979 and 1987, spoke about the risks of QE2:

Paul Volker voices doubt about the ability of additional easing to aid the economy. He also has concerns about inflation. (Inflation: Don’t you think that’s something Volker ought to know about?) (source)

Chinese were no big friend of the American QE2. It created over-investment in China, the results can be seen in the slow current growth. May be it is the fear of a new US Quantitative Easing, that Chinese leaders currently do not start any big stimulus program.

Dallas Fed Richard Fisher

Dallas Fed’s president Richard Fisher said:

“What good would it do to put still more out there since what we’ve already put out there is not having much effect on employment?” “further Fed action could actually hurt a recovery already only at stall speed by fueling uncertainty “if people feel we are going too far.” (source)

Richmond Fed’s Jeffrey Lacker

Richmond Fed’s Jeffrey Lacker thinks that the Fed’s abilities are limited:

“There are a lot of people overestimating the extent to which monetary policy is capable of having any sustained effect on growth or labor markets,” (source)

Krysztof Rybinski, former deputy central bank governor of Poland

Krysztof Rybinski was deputy governor of the central bank of Poland between 2004 and 2008. He started his career as computer scientist. As opposed to modern central bankers he does not seem to follow economic theories, which scientifically cannot be proven.

“Krzysztof Rybinski – formerly of Poland’s central bank – launches the Eurogeddon fund to profit should the worst predictions for the eurozone come to pass. It sounds a bit late to the game, but Rybinski thinks current policies assure worsening conditions. He’ll be shorting European index futures and sovereign paper like Italian bonds, while going long gold, greenbacks, and Treasurys.” (source)

We have posted an illustrated wrap-up of Rybinski’s thoughts here. According to Rybinski the european leaders and central bankers do the following mistakes:

1) treating an insolvency problem as a liquidity event
2) wasting two years only to take a useless medicine with bailouts
3) using the central bank to do a job that belongs to government
4) allowing cheap loans to increase the risk of collapse of the banking sectors in Spain and Italy
5) wasting time on impractical ideas at crucial moments when time cannot be wasted
6) conceiving a banking union which will not cure but rather spread infection (source)

Summary

There are only a few central bankers who are able to understand that bailouts and money printing lead to ever longer lasting and deteriorating problems, instead of solving the issue by some defaults and doing a clean restart after it.

The older central bankers experienced the inflationary periods in the 1970s in detail, whereas the younger ones seem not to grasp what inflation means. Modern central bankers seem to think that monetary inflation will not lead to price inflation in the long-term. This might be true in countries where asset prices need to de-leverage after the bust of real-estate bubbles.

But it is certainly not true in states like Germany, Finland or Switzerland, that did not have a real-estate bubble till 2008. With current low employment and the aging population, qualified personnel who speaks the local language will get rare. PIMCO’s Bill Gross might be right saying that soon employees want to get a part of the cake and not only the stock holders. This essentially implies wage inflation, the enemy of the 1970s.

About George Dorgan

George Dorgan (penname) predicted the end of the EUR/CHF peg at the CFA Society and at many occasions on SeekingAlpha.com and on this blog. Several Swiss and international financial advisors support the site. These firms aim to deliver independent advice from the often misleading mainstream of banks and asset managers. George is FinTech entrepreneur, financial author and alternative economist. He speak seven languages fluently.

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