We live in an era where central bankers have taken centre stage in economic policy. There has been a clear shift as elected politicians have stepped back and unelected technocrats have picked up many of the reins. Some of this is not a little incestuous, as politicians spending promises benefit from the QE bond buying of the central bankers who were given permission to do it by politicians, sometimes literally the same one. For example, the UK Chancellor Rishi Sunak, who gives the Bank of England Treasury backing to buy UK bonds is the same person whose decisions benefit from it. Along this road they have become like the Masters of the Univers” described by Tom Wolfe in the Bonfire of the Vanities.
Next comes the issue that they invariably end up marking their own homework. Central banking research is used as both an explainer of and a justification for central bank policies. Imagine you are a PhD researcher at a central bank, what sort of report do you think might do terminal harm to your career prospects? You would, of course, be praised whilse your desk finds its way to an underground cellar that never gets visited by the tea trolley.
There is another curiosity, which is that they are allowed to express things about markets they know nothing about. For example, the present head of markets, Sir Dave Ramsden, is a career civil servant (mostly at HM Treasury). Before him came Charlotte Hogg, who rather publicly demonstrated how little she knew before departing under a cloud. On such a scale it’s hard to know how poor Nemat Shafik was, because she was of course moved on early to avoid embarrassment.
Actual corruption
This has come from the US Federal Reserve and let us remind ourselves of the scale of its operations via last night’s balance sheet update, which came in at US$8.5tn, so you would hope that those making the decisions would be unimpeachable.
Washington, DC — Today, United States Senator Elizabeth Warren (D-Mass.) took to the Senate floor to call out the culture of corruption among high-ranking Federal Reserve (Fed) officials. Recent reports of ethically questionable financial activity by high-ranking Fed officials – including Federal Reserve Vice Chair Richard Clarida and two regional Fed presidents – have raised deep concerns over conflicts of interests and have undermined public confidence in the Fed. (Senator Warren, 5 October)
What did they do?
Last month, it was discovered that during the economic turmoil of 2020, as the Fed was called on to take extraordinary measures to support our economy, Robert Kaplan, president of the Federal Reserve Bank of Dallas, made multiple million-dollar-plus stock trades.
It was also disclosed that, in the same time period, Eric Rosengren, president of the Federal Reserve Bank of Boston, made multiple purchases and sales relating to his stakes in real estate investment trusts and other securities.
A new report last week revealed that a third key Fed official – Vice Chair Richard Clarida – also traded between $1m and $5m out of a bond fund into stock funds, exactly one day before Fed Chair Powell publicly suggested possible policy action that would significantly affect bonds and stocks.
I am sure that you can see the problem, but here it is spelled out.
Surely, he understands that the Fed officials’ trades run afoul of agency guidelines, which state that officials should, quote, “avoid any dealings or other conduct that might convey even an appearance of conflict between their personal interests, the interests of the [Federal Reserve] System and the public interest”, end quote.
That is a critique of Fed Chair Jerome Powell on whose watch this has taken place. It does not add that his own personal portfolio is with Blackrock, which is the same firm that does quite a bit of buying for the Federal Reserve.
Soft corruption
For this we can move to Europe and note this from the ECB Twitter feed on 15 October.
Historically, the ECB and national central banks across the euro area have focused on communicating with expert audiences.
Indeed, which its chief economist Phillip Lane did with great enthusiasm.
European Central Bank Chief Economist Philip Lane has come under scrutiny for selectively briefing a group of large financial institutions in a series of private calls.
Mr Lane, a member of the ECB’s influential Executive Board and the former governor of the Central Bank of Ireland, made dozens of these calls this year to the likes of Goldman Sachs, JP Morgan and Deutsche Bank, according to a report in the Wall Street Journal. ( Irish Independent)
The newspaper went on to highlight what it thought was the problem.
The news has raised concerns that Mr Lane is favouring big market participants by giving them privileged insight into the ECB’s decision making during a time of unprecedented central bank intervention in financial markets.
Of course this came with a barrage of official denials that anything material was said. But if so what was said then? Why were they there? Also, it raises a future moral hazard should Mr Lane later join the board of any of these organisations.
For the ECB it was a case of singing along with Britney.
Oops, I did it again
I played with your heart, got lost in the game
Oh baby, baby
Because there had also been this.
The ECB tightened its communication rules in 2015 after one of its executive board members at the time, Benoît Cœuré, told an audience of hedge fund managers, academics and finance officials at an event in London that it planned to front-load its asset purchases. An internal error meant the information was only made public the morning after the event. When the remarks were published, the euro fell sharply. (Financial Times)
The rules have since been tightened again, although many may not be entirely reassured as the person doing the tightening is President Christine Lagarde.
A French court has found International Monetary Fund chief Christine Lagarde guilty of negligence but did not hand down any punishment.
As French finance minister in 2008, she approved an award of €404m ($429m; £340m) to businessman Bernard Tapie for the disputed sale of a firm. (BBC News)
She was considered too important to be actually punished.
Before we move on let me bring things right up to date.
PRAGUE, 12 Oct (Reuters) – Slovak central bank governor and European Central Bank governing council member Peter Kazimir has been charged with bribery, but denies wrongdoing and will defend himself against the charges, Kazimir and his lawyer said on Tuesday.
Comment
I thought I would bring things to the UK and the man to look at here is the one I have christened the ‘absent-minded professor’ or Deputy Governor Ben Broadbent. Earlier this week there was some unhappiness with his behaviour surfacing in social media.
One other point I would note is that Ben Broadbent has given about 1 speech in the last 18 mths, but somehow found time to have a round table lunch at MS last week with a bunch of HF PMs. Not exactly open and transparent communication. (@bund_boy)
They mean Morgan Stanley and HF is hedge funds. So plenty of time for them, but virtually none for those who pay his salary. It certainly hit a raw nerve, because look what happened next.
LONDON, 13 Oct (Reuters) – The Bank of England will no longer hold off-the-record briefings between policymakers and individual private sector firms, it told Reuters on Wednesday, as scrutiny over the links between central banks and finance grows.
Actually, in a development you could not make up, as people would consider it too extreme, Reuters was given it as an exclusive!
We can go deeper, because I have long thought it was wrong that Ben Broadbent was made a deputy governor. This is because he was an external member at the Bank of England, which brings with it the hope of independence. This is likely to be sorely tested by a large salary and an increasingly attractive RPI linked pension. That is before the issue of him being yet another former Goldman Sachs employee.
Originally published by Notayesmanseconomics’s Blog and reprinted here with permission.
