Money Supply

More trouble for the Bank of England’s  new macro-prudential baby, the interim Financial Policy Committee.

Yesterday, the International Monetary Fund warned the Bank not to lose sight of nitty-gritty supervision of banks in its infatuation with system-wide macroprudential tools. It urged the Bank to set “realistic goals” for the FPC.

Today, the Treasury select committee held its nose as it (just) approved one of the final two external members of the FPC and regarded the other as not sufficiently independent.

Its judgment on Michael Cohrs, former head of global banking at Deutsche Bank, members of Parliament fretted that he seemed unwilling to speak about his new role in public

We note the apparent reticence of Mr Cohrs about speaking out in speeches and statements about his work while on the FPC, and we would ask him to reconsider.

Continue reading: “The troubled FPC”

Is Mario Draghi leading an insurrection at the European Central Bank?

Speaking this morning to Banca d’Italia shareholders, Italy’s central bank governor identified ”a greater need to proceed with monetary policy normalisation so as to prevent expectations of higher inflation from becoming entrenched”.

That might have seemed a unsurprising nod towards another ECB interest rate increase by the man expected to take over as ECB president on November 1. But the term “normalisation” has become loaded in ECB policy-making circles. 

Lorenzo Bini Smaghi, European Central Bank executive board member, used an interview in today’s Financial Times to explain in detail just why the ECB is so opposed to any kind of Greek debt restructuring. In doing so, he took on directly those such as Nouriel Roubini and Deutsche Bank’s Thomas Mayer, who have called for an “orderly” restructuring, drawing on lessons learnt from the Latin American experience in the 1980s.

His messages, based on extensive scenario analysis by ECB economists, were that an “orderly” restructuring was a “fairytale,” there was no such thing as a “soft” restructuring, and the consequences of default would be catastrophic. 

There were other highlights of from the interview –

Greece is “not just illiquid, it is insolvent,” Otmar Issing, the European Central Bank’s former chief economist, declared at a press conference in Copenhagen today – thus contradicting completely the ECB’s official position. There were serious doubts about whether it would ever honour its debt obligations, Mr Issing added.

His comments  will no doubt be seen as unhelpful in Frankfurt. Mr Issing, 75, still commands much respect in central bank circles and, as a former Bundesbanker, was the intellectual heart of the ECB from its creation in 1998 until he stepped down in 2006. His comments will fuel financial market speculation that a Greek debt scheduling is inevitable, whatever the ECB says.

Still, Mr Issing’s comments also highlight the dilemma facing the ECB.