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I chaired an interesting and lively seminar for the Financial Services Club at Pewterers' Hall yesterday evening on Central Bank Independence and the Future of the Euro.
Professor Panicos Demetriades, now University of Leicester, was governor of the Central Bank of Cyprus during the 2013 financial crisis that saw the island nation's biggest banks forced into liquidations that imposed losses not only on bond-holders but also on depositors (mostly Russian). His Diary of the Euro Crisis in Cyprus is a 5-star page-turner, especially if you are into central banks and financial crises. It's a blow by blow description of how Cyprus was rocked by the failure of its banks, its politicians, and the ministrations of the Troika (ECB, IMF and World Bank) that have lasting implications in Cyprus, the Eurosystem and globally.
His own experience of political interference, and observations about similar problems affecting other European central banks since, have led to a further book, Central Bank Independence and the Future of the Euro, just published Tuesday. In this book he makes six recommendations for improving the governance and decision-making at the ECB to defend central bank independence from further erosion:
1. Fit and proper rules for Eurosystem central bank boards;
2. Move AML/CTF enforcement into the Single Supervisory Mechanism that was created post-crisis to harmonise bank supervision;
3. 'Europeanise' the provision of Emergency Liquidity Assitance to distance it from local politics;
4. Separate the Single Supervisory Mechanism from the ECB for both greater independence and accountability;
5. Distance national central banks from the political dynamite of bank resolutions by insisting on separate resolution authorities in each member state;
6. Greater ECB activity and profile in member states to enhance accountability and transparency to citizens.
Whether or not we agree on all these recommendations, which are fleshed out with much greater analysis in the book, it is important that there be more public discussion and involvement in central bank governance and policy-making than we've seen since 2008. This was the main point made by Joe Zammit-Lucia last night as respondent. Joe's think tank Radix has been critical of Quantitative Easing as an undemocratic redistribution of wealth that disproportionately benefits the rich. Their paper How the Bank of England Transferred Money to the Wealthy Without Clear Democratic Accountability makes its case in its title.
The wealth inequality impact of QE was something the Bank of England's own research confirmed within a few years of QE initiation, indicating that the greatest benefit acrued to the wealthiest. More recent research by the Bank of England gives a more nuanced evaluation of QE effectiveness as contributing to economnic stabilisation, employment growth, and increased wages: The Distributional Impact of Policy Easing in the UK 2004 to 2008.
I've been critical of QE as the greatest redistribution of wealth in human history by the least democratic means, but then I'm not in favour of destruction of wealth through deflation either. More than USD 15 trillion in QE has warped fiscal discipline as governments and the financial system now expect ever larger deficits at ever lower interest rates. More than 30 percent of sovereign debt is now negatively yielding. As markets don't operate in conditions of negative returns, the global financial system is becoming increasingly unpredictable and brittle. Liquidity is becoming scarce as dealers back away from being squeezed by regulatory burdens imposed post-crisis and increasing uncertainty.
What is needed, according to Joe, is an evaluation of whether there are other options available that would have less redistributive spillover effects and an enquiry into whether the QE levers should be pulled by central bankers remote from accountability or politicians who are elected to steer the nation. I would add that we also need to reintroduce market disciplines and competitive dealer markets instead of ever more burdensome regulations. We can't claim to be capitalist and defend free markets anymore if all that matters in the long run is whether you have access to government funding or central bank liquidity.
The audience helped keep things lively with informed and relevant questions from Professor Charles Goodhart (co-author of my most recent book, A Brief Affectionate History of the Financial Markets Group), David Green, who advised Cyprus during the crisis, and others.
The issues raised are important and complex. I've an Inbox of follow up emails today that tells me that we will be discussing them again before long!
Professor Panicos Demetriades, now University of Leicester, was governor of the Central Bank of Cyprus during the 2013 financial crisis that saw the island nation's biggest banks forced into liquidations that imposed losses not only on bond-holders but also on depositors (mostly Russian). His Diary of the Euro Crisis in Cyprus is a 5-star page-turner, especially if you are into central banks and financial crises. It's a blow by blow description of how Cyprus was rocked by the failure of its banks, its politicians, and the ministrations of the Troika (ECB, IMF and World Bank) that have lasting implications in Cyprus, the Eurosystem and globally.
His own experience of political interference, and observations about similar problems affecting other European central banks since, have led to a further book, Central Bank Independence and the Future of the Euro, just published Tuesday. In this book he makes six recommendations for improving the governance and decision-making at the ECB to defend central bank independence from further erosion:
1. Fit and proper rules for Eurosystem central bank boards;
2. Move AML/CTF enforcement into the Single Supervisory Mechanism that was created post-crisis to harmonise bank supervision;
3. 'Europeanise' the provision of Emergency Liquidity Assitance to distance it from local politics;
4. Separate the Single Supervisory Mechanism from the ECB for both greater independence and accountability;
5. Distance national central banks from the political dynamite of bank resolutions by insisting on separate resolution authorities in each member state;
6. Greater ECB activity and profile in member states to enhance accountability and transparency to citizens.
Whether or not we agree on all these recommendations, which are fleshed out with much greater analysis in the book, it is important that there be more public discussion and involvement in central bank governance and policy-making than we've seen since 2008. This was the main point made by Joe Zammit-Lucia last night as respondent. Joe's think tank Radix has been critical of Quantitative Easing as an undemocratic redistribution of wealth that disproportionately benefits the rich. Their paper How the Bank of England Transferred Money to the Wealthy Without Clear Democratic Accountability makes its case in its title.
The wealth inequality impact of QE was something the Bank of England's own research confirmed within a few years of QE initiation, indicating that the greatest benefit acrued to the wealthiest. More recent research by the Bank of England gives a more nuanced evaluation of QE effectiveness as contributing to economnic stabilisation, employment growth, and increased wages: The Distributional Impact of Policy Easing in the UK 2004 to 2008.
I've been critical of QE as the greatest redistribution of wealth in human history by the least democratic means, but then I'm not in favour of destruction of wealth through deflation either. More than USD 15 trillion in QE has warped fiscal discipline as governments and the financial system now expect ever larger deficits at ever lower interest rates. More than 30 percent of sovereign debt is now negatively yielding. As markets don't operate in conditions of negative returns, the global financial system is becoming increasingly unpredictable and brittle. Liquidity is becoming scarce as dealers back away from being squeezed by regulatory burdens imposed post-crisis and increasing uncertainty.
What is needed, according to Joe, is an evaluation of whether there are other options available that would have less redistributive spillover effects and an enquiry into whether the QE levers should be pulled by central bankers remote from accountability or politicians who are elected to steer the nation. I would add that we also need to reintroduce market disciplines and competitive dealer markets instead of ever more burdensome regulations. We can't claim to be capitalist and defend free markets anymore if all that matters in the long run is whether you have access to government funding or central bank liquidity.
The audience helped keep things lively with informed and relevant questions from Professor Charles Goodhart (co-author of my most recent book, A Brief Affectionate History of the Financial Markets Group), David Green, who advised Cyprus during the crisis, and others.
The issues raised are important and complex. I've an Inbox of follow up emails today that tells me that we will be discussing them again before long!
