Monday, March 05, 2007

Ben Bernanke, Super-Central Banker (we hope)

When I was a youth, in addition to stamps and coins I used to collect comic books. As my collection expanded from the Marvel Comics I loved like The Fantastic Four and The X-Men to the DC Comics like Batman and Superman I learned that initially Superman couldn't fly, he jumped, as in "able to leap tall buildings in a single bound." I guess the authors figured that people wouldn't believe a man could fly. But this habit of disdain for the implausible faded and eventually Superman began to fly.

Over the weekend I learned, yet again, that this disdain for the implausible no longer exists. Look, up in the sky. It's a bird, a plane. No it's Ben Bernanke, Super-Central Banker, able to leap the impossible in a single speech.

What am I writing about? I'm referring to Ben Bernanke's recent speech on Globalization and Monetary Policy, in which he raises the concerns of other (obviously un-super) Central Bankers that the Fed's ability, given the accepted policy of globally open capital markets, to control monetary conditions in the US has been lost, or at least, seriously impaired.

But, fear not ye lesser mortals, sayeth the Super-Central Banker, the fact that the dollar is a freely floating currency whose value is continuously determined in open, competitive markets means that the Fed retains its control over monetary conditions in the US.

Why is this important? Let me cede the floor to an obviously lesser Central Banker, swervyn Mervyn King, whom I had the pleasure of meeting a few times in the late 90s:

Perhaps the key difference between the world of Bretton Woods and the world today is the size and volatility of private capital flows. Then, as now, it was recognised that no system could ensure the compatibility of:
(i) Domestic monetary autonomy;
(ii) Stable exchange rates;
(iii) Free capital mobility.

This "impossible trinity" has been at the heart of the debate on the international monetary and financial system for many years. A sustainable system must sacrifice one of these three objectives.

In that case it's good that the things a Super-Central Bankers asserts as facts, like the freely floating,
continuously determined in open, competitive markets value of the US$ are so just by virtue of him saying it. For if the US$ did not float freely but was, for instance, subject to intervention by other Central Bankers attempting to maintain stable exchange rates, then the US would not have domestic monetary autonomy.

Yes, it's a good thing that the Japanese, Chinese, and oil exporting Middle Eastern nations don't intervene to maintain stable exchange rates for if they did we might come to wonder about the claims of our resident Super-Central Banker.

But wait, didn't our main man and the most recent ex-Goldman director turned Treasury Secretary recently visit the Chinese to implore them to let the Yuan, which has risen a whopping 6.5% against the US$ in the past 5 years, float more freely? Were you aware that the average price of $/JPY in the 21st Century is 115.13? Did you know that the Saudi Riyal is, in practice, fixed to the US$ at 3.75 per (in theory it is fixed to the IMF's SDR.)

Hmm, I'm starting to get confused because it seems to me that the US$ exchange rate with three of our major trading partners is pretty stable. Either the impossible trinity is no longer impossible or our Super-Central Banker is, well, er, um, WRONG! The Fed, to the extent US$ exchange rates are stable, has lost a degree of domestic monetary autonomy.

What would it mean if the Fed lost domestic monetary autonomy? Why it would mean that, for instance, bonds yields would fall when they would, with more autonomy, rise. It would mean that, instead of being able to drain liquidity from the ever growing derivatives bubble, liquidity would continue to flow and the bubble would continue to inflate. It would mean that the unregulated capital markets are OUT OF CONTROL and headed for a meeting with reality.

Fortunately, we have lost our disdain for the implausible. Superman can fly, financial professionals would never let narrow self-interest interfere with their important social functions as intermediaries, and Super-Central Bankers can do the impossible.

I feel better already (gulp!).


jeff poppenhagen said...


It appears to me that central banks on the other side of the Pacific are struggling with the flip side of this and the likely outcome is that the pegs are going to have to be busted soon, releasing us from our monetary straightjacket. N'est pas?