Financial markets: Solvency can wait, for now deal with liquidity

Sep 15th 2011, 16:12 by G.I. | WASHINGTON

[Greg Ip] CENTRAL banks are once again coming to the financial system’s rescue. In a move coordinated with its counterparts in America, Japan, Switzerland and Britain, the European Central Bank today announced it would make special, three-month dollar loans to euro-zone banks to cover funding needs over the year-end.

This has delivered a shot in the arm to European stock markets, and bank stocks in particular. European banks regularly borrow in dollars to make dollar loans and finance dollar-denominated inventory. But concerns about the banks’ solvency should their holdings of peripheral sovereign debt sour have prompted the American money market funds and others who lend to the banks to pull back. European banks have lost access to $700 billion in dollar funding in the last year, according to this excellent analysis in today’s Wall Street Journal.

Today’s operation is a bandage, not a cure.

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Central banking and the crisis: Emergency manoeuvres

With developed economies in dire straits, central bankers have taken the tiller. Not all of them are happy about that.

Aug 13th 2011 | from the print edition

[Greg Ip]

COMETH the hour, cometh the central bankers. On August 8th the European Central Bank (ECB) began buying Italian and Spanish bonds in an effort to stop the sovereign-debt crisis from crippling two of the continent’s largest economies. And a day later America’s Federal Reserve made an unprecedented commitment to keeping interest rates at more or less zero for two more years to keep a stalling economy out of recession.

In both cases the dramatic steps were taken in the face of political failures to get to the heart of the problems at hand. The fact that they took both banks well outside their normal zones of operation was underscored by the internal dissent both moves faced, dissent rarely seen in the consensus-driven world of central banking.

The initial market reaction was positive, at least on one side of the Atlantic. Yields on Italian and Spanish bonds fell sharply relative to Germany’s. In America Treasury yields fell and stocks rose—but not for long, as equity markets fell again on August 10th. No one should see this as a fundamental turnaround. The ECB’s earlier bond-buying hasn’t saved smaller countries from punitively high government-bond yields; the Fed’s previous interventions haven’t spurred a robust recovery. The big issues of America’s stagnant economy and Europe’s debt crisis remain in the hands of elected politicians who still seem inadequate to the task. But at least central banks have shown themselves ready and able to act.

The entire article is linked here.

The global economy: Another year of living dangerously

Turmoil in the Middle East and disaster in Japan arouse economic angst. Central banks must not make it worse

[Greg Ip] Mar 24th 2011 | from the print edition

THIS was supposed to be a stress-free year for the global economy. By January the financial crisis had faded and Europe’s sovereign-debt crisis seemed less acute. America’s economy was resurgent. Investors piled into equities and sold some of the government bonds they’d bought for troubled times. If there was a worry, it was that emerging economies would grow too quickly, inflating commodity prices.

The year without crisis is not to be. First, Arabian upheaval put oil markets on edge. Then earthquake, tsunami and a nuclear accident clobbered the world’s third-largest economy. How much of a setback to growth do these twin crises represent? And how should economic policymakers react to them?

The entire article is linked here.

Central banks: A More Complicated Game

The West’s financial crisis has shaken public confidence in its leading central banks. Yet it has also led to an expansion of their duties and powers

Feb 17th 2011 | WASHINGTON, DC | from the print edition

[Greg Ip] IN TWO days, two prominent central bankers, one on each side of the Atlantic, headed for the exit. Few people were surprised when Kevin Warsh tendered his resignation from the Federal Reserve on February 10th. Rather more people were taken aback when rumours started to fly that Axel Weber would stand down as president of Germany’s Bundesbank and thus rule himself out as the next president of the European Central Bank (ECB), a job for which he had been the front-runner. The rumours were confirmed on February 11th.

The timing was coincidental. Yet the two men have something in common. Both were uneasy about changes in the way that central banks conduct themselves—specifically, about the unprecedented forays into financial markets by the Fed and the ECB. Mr Weber publicly opposed the ECB’s decision last May to start buying the bonds of member countries’ governments. His colleagues, he believed, were intruding dangerously into fiscal policy. Mr Warsh, similarly though more quietly, fretted that the Fed’s policy of quantitative easing (QE)—the purchase of government bonds with newly printed money—was fomenting new imbalances in the global economy and steering the Fed into treacherous political waters.

Since the financial crisis in 2007 central banks have expanded their remits, either at their own initiative or at governments’ behest, well beyond conventional monetary policy. They have not only extended the usual limits of monetary policy by buying government bonds and other assets (see chart). They are also taking on more responsibility for the supervision of banks and the stability of financial systems. Their new duties require new “macroprudential” policies: in essence, this means regulating banks with an eye on any dangers for the whole economy. And their old monetary-policy tasks are not getting any easier to perform. Central banking is becoming a more complicated game.

The entire article is linked here.

Global monetary policy: The central bankers’ burden

 Deflation is not imminent but the rich world’s central banks must be ready to do what they can to fend it off

Jul 15th 2010

[Greg Ip] FOR people who pride themselves on being boring and cautious, the rich world’s central bankers have in the past few years proved to be a flamboyant bunch. Responding aggressively to financial panic, recession and the threat of deflation, they lowered short-term interest rates close to zero and many then plunged into the realm of the unconventional, buying government debt and extending vast new loans to banks. For the most part, they have avoided the rancorous disagreement that now consumes the debate over fiscal policy.

That consensus is fraying.

Is there a Greek moment in the Fed’s future?

Up against the wall

May 10th 2010, 16:45 by G.I. | WASHINGTON

[Greg Ip] THE dilemma in which the European Central Bank found itself this year borders on tragic. As Charlemagne notes, it had, up to this point, had a very good crisis, showing itself as creative and forceful as the Federal Reserve in responding to the market mayhem while remaining a worthy custodian of the Germanic monetary discipline it had inherited.

Then it faced a Hobson’s choice of abandoning that discipline or risk seeing the entire euro experiment collapse.

Ben Bernanke’s reappointment: The very model of a modern central banker

The original article is linked here.

GREG IP

Aug 27th 2009 | WASHINGTON, DC
From The Economist print edition

An academic background stood the chairman of the Federal Reserve in good stead during his first term. Political skills may be more important in his second

AP

 

AS THE financial crisis gathered force in August 2007, Jim Cramer, a hyperbolic market commentator on cable television, hurled the worst epithet he could muster at the chairman of the Federal Reserve: “Bernanke is being an academic. It is no time to be an academic!” By August 25th this year, when Barack Obama nominated Ben Bernanke to a second, four-year term, what had once been an epithet had become a source of strength.

Central banks:The monetary-policy maze

 The original story is linked here.

 

Apr 23rd 2009 | WASHINGTON, DC
From The Economist print edition

 

 

The simple rules by which central banks lived have crumbled. A messier, more political future awaits

Illustration by Derek Bacon

 

IN THE world that existed before the financial crisis, central bankers were triumphant. They had defeated inflation and tamed the business cycle. And they had developed a powerful intellectual consensus on how to do their job, summarised recently by David Blanchflower, a member of the Bank of England’s monetary policy committee, as “one tool, one target”. The tool was the short-term interest rate, the target was price stability.

This minimalist formula fitted the laissez-faire temper of the times. A growing array of financial markets could price risk and allocate credit efficiently. Central bankers had merely to calibrate their interest-rate tools and all other markets would automatically adjust. Central banks still cared about financial stability and full employment, but could argue these were best served by stabilising prices—without, if you please, interference from politicians.

 

The financial crisis has upended all that.