Archive for February 13th, 2015

Recent history of finance policy committees in India and why most meet dead ends..

February 13, 2015

As I was reflecting on this post on regarding crony committeeism in Indian finance policy, came across this post by Ajay Shah.

It nicely lists the several policy committees in India from 1998 onwards. He says lot of these committees had interesting ideas to begin with but met dead ends later:

(more…)

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Should central banks worry about bottom line?

February 13, 2015

Barry Eichengreen and Beatrice Weder Di Mauro write on the topic.

They say bottom line is the last thing central banks should be worried about. Unlike traditional banks, CBs can remain functional with losses:

Around the world, central banks’ balance sheets are becoming an increasingly serious concern – most notably for monetary policymakers themselves. When the Swiss National Bank (SNB) abandoned its exchange-rate peg last month, causing the franc to soar by a nosebleed-inducing 20%, it seemed to be acting out of fear that it would suffer balance-sheet losses if it kept purchasing euros and other foreign currencies.

Similarly, critics of the decision to embark on quantitative easing in the eurozone worry that the European Central Bank is dangerously exposed to losses on the southern eurozone members’ government bonds. This prompted the ECB Council to leave 80% of those bond purchases on the balance sheets of national central banks, where they will be the responsibility of national governments.

In the United States, meanwhile, the “Audit the Fed” movement is back. Motivated by growth in the Federal Reserve’s assets and liabilities, Republicans are introducing bills in both chambers of Congress to require the Fed to reveal more information about its monetary and financial operations.

But should central banks really worry so much about balance-sheet profits and losses? The answer, to put it bluntly, is no.
To be sure, central bankers, like other bankers, do not like losses. But central banks are not like other banks. They are not profit-oriented businesses. Rather, they are agencies for pursuing the public good. Their first responsibility is hitting their inflation target. Their second responsibility is to help close the output gap. Their third responsibility is to ensure financial stability. Balance-sheet considerations rank, at best, a distant fourth on the list of worthy monetary-policy goals.

Equally important, central banks have limited tools with which to pursue these objectives. It follows that a consideration that ranks only fourth in terms of priorities should not be allowed to dictate policy.

Not sure whether previous examples will work this time. Earlier CBs could work with losses as no one really cared who they were. Now CBs are all over the place and anyone reporting or expected to report losses is going to face huge political ramifications. CBs after fighting for so called independence for many years have just lost it. By trying to be a replacement to Finance Ministry, they have exposed themselves to all kinds of pressures. It will actually be interesting to see how markets react to any major CB reporting losses.

The bottom line is not really in terms of balance sheet. It simply is CBs have become way too big and powerful for anyone’s comfort. Efforts should be made to make them as anonymous as they once were..


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