Ben Bernanke made no news on policy with his testimony to Congress on Wednesday but he did set out very clearly why there is no news on policy. He repeated several times that the apparent strength of the labour market is not consistent with the apparent weakness of final demand.
“The decline in the unemployment rate over the past year has been somewhat more rapid than might have been expected, given that the economy appears to have been growing during that time frame at or below its longer-term trend; continued improvement in the job market is likely to require stronger growth in final demand and production.”*
The eurozone financial system remains under pressure. But the results of the European Central Bank’s second offer of three-year loans will provide cheer to residents of the Eurotower.
The total amount of bids was higher than in December, and the net increase in liquidity was around 50 per cent higher than the €210bn injected in December.
The ECB has just released the results of the second offer of three-year loans.
€529.5bn will be winging its way to the accounts of eurozone banks tomorrow, when the operation is settled.
The ECB’s exposure to peripheral sovereign debt and a host of other assets of dubious quality has sparked concerns about the central bank’s solvency.
The concerns are misplaced. Central banks cannot go bust. The vast majority of the ECB’s obligations are denominated in euros and so, in the case of losses, the central bank can simply print more money.
But money printing on a grand scale could spark inflation. And, while the ECB and the eurosystem central banks have a capital buffer of €80bn, this is relatively small when the size of the eurosystem’s balance sheet, which stands at a whopping €2.7trn even before tomorrow’s offer of three-year loans, is taken into account.
When the Federal Reserve dared to suggest some policy fixes for the troubled US housing market, it was not thanked for its efforts.
A white paper on housing published in January, followed a couple of days later with a speech by New York Fed president Bill Dudley on the same topic, provoked an onslaught of criticism from lawmakers.
Orrin Hatch, a Republican senator for Utah, said in a letter to Fed chair Ben Bernanke the paper contained “a number of policies that are clearly in the province of fiscal policy”.
For former Federal Reserve governor Randall Kroszner, now an academic at the University of Chicago’s Booth School of Business, the outcry demonstrates just one of the potential pitfalls central banks will face in their attempts to prevent crises.
The afternoon session here in New York is a panel on fiscal policy: a subject that central bankers always say they can’t talk about but nonetheless talk about all the time.
New York Fed president Bill Dudley’s speech makes two broad points:
How far would the European Central Bank under Mario Draghi go in cutting interest rates?
The ECB president has taken care to rule out little in the way of possible steps were the eurozone crisis to deteriorate again. But Benoît Cœuré, the ECB’s new French executive board member, has hinted at one limit. In a speech delivered in the US a few days ago but just published on the ECB’s website, he warns of the potential costs of reducing interest rates to zero, or even pushing them into negative territory.
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ECB’s big bazooka
Next week’s main event is, of course, the European Central Bank’s second offer of cheap three-year loans.
Attention is fixed on whether the take-up will be greater or less than in December, when the central bank loaned €489bn.
The main paper at today’s US Monetary Policy Forum in New York, organised by the University of Chicago’s Booth business school, is about housing.
Written by Michael Feroli of JP Morgan, Ethan Harris of BoA Merrill Lynch, Amir Sufi of the Booth school, and Kenneth West of the University of Wisconsin, it’s a comprehensive breakdown of the channels through which the housing bust continues to affect the recovery and well worth a read. Not only for its assessment of the housing market, but also on the implications for policy.
Sir David Lees, chairman of the Court of the Bank of England since 2009, has been re-appointed to the role, the Treasury announced on Friday.
Sir David’s term expired in May, but he has now indicated he will step down from Court at the end of 2013, once he has overseen the transition of the Bank’s new responsibilities and personnel (Sir Mervyn King, Bank governor, is due to step down mid-way through next year).
However, not everyone has the same level of confidence as the chancellor and the prime minister do in Sir David’s firm stewardship of what is expected to be the central bank with more sweeping monetary and regulatory authority than any other in the world.
The Bank has come under fire in recent years for its poor corporate governance, with parliament’s influential Treasury select committee among those calling for root-and-branch reform. For many critics, that includes the scrapping of the Court, which Treasury committee chairman Andrew Tyrie described as “a 19th-Century structure for a 21st-Century institution”.
It is not difficult to see why. Here is Sir David being questioned by Mr Tyrie as part of it inquiry into standards of corporate governance at the Bank on March 15, 2011: