Daily Archives: January 9, 2012

Claire Jones

Philipp Hildebrand has quit as chair of the Swiss National Bank less than three weeks after government and central bank investigations cleared him of any wrongdoing.

Knowing what we now know, it does not look as though either investigation was tough enough. And neither, as the central bank and Mr Hildebrand have already acknowledged, were the rules on senior officials’ financial dealings.

Both factors have damaged the credibility of the central bank, which Mr Hildebrand noted in his parting remarks is its greatest asset.

To rectify that, the onus should fall on central bankers in Switzerland and elsewhere to show why, when making investment decisions, they have opted for anything other than handing over the management of all of their assets to an outside party. Read more

In economic policy nowadays, the unthinkable suddenly becomes the inevitable, without pausing for long in the realm of the improbable. (See this piece in The Economist.) Nowhere has this been more true than in central banking, where the recent huge expansion in the size of balance sheets would have seemed inconceivable as recently as 4 years ago.

Markets have not only accepted this use of the printing press with equanimity, they have become increasingly dependent upon it. Most economists are also very relaxed about it, frequently describing it either as  inconsequential, or even as entirely irrelevant. But how can a policy intervention which has underwritten the liquidity of the entire western banking system be described as irrelevant?

I do not share the alarmist view that an explosion in central bank liabilities must inevitably lead to higher inflation. That basic monetarist link has already been shown to be invalid, at least over short periods, and at least when a liquidity trap is in operation. However, the recent use of central bank balance sheets has been so unusual and potentially so profound that the underlying economics deserves much more careful examination than it has been receiving lately. I intend to do this in a series of blogs in coming weeks. In this, the first in the series, I will ask how we reached the current predicament.

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