NEWSMAKERS

• Central bankers honour Alexander Swoboda
• Can economists and central bankers learn from each other?
• Playing politics with central bank appointments
• Mishkin quits - leaving the Board of Governors three short
• The IMF bags Blanchard
• Lomax departure sparks row
• Global Financial Regulation - The Essential Guide
• FOMC split over moral hazard
• Fazio is the dock
• Ballali dies
• Provopoulos for Bank of Greece
• Middle East financial centres and the global markets
• Smets to head ECB research
• Inflation peaks as ECB turns 10
• Mirow beats back governors for top job at EBRD
• Broadbent reappointed
• Bank of Spain claims credit

Central bankers honour Alexander Swoboda

A gaggle of central bankers and monetary academics gathered last weekend on the shores of Lake Geneva for a conference in honour of the economist Alexander Swoboda. From the central banking community were Paul Volcker, a former head of the Federal Reserve, Stanley Fischer, governor of the Bank of Israel, Jacob Frenkel, a former governor of the Bank of Israel, Jean-Pierre Roth, president of the Swiss National Bank and several of his senior colleagues from the SNB, notably Philipp Hildebrand and Ulrich Kohli.

All paid tribute to Swoboda's path-breaking contributions over the past 40 years to many aspects of central banking, monetary and exchange rate policies and what used to be called "international monetary reform".

On that last topic, there was regret that with many high-quality staff leaving, the IMF again appeared to have failed in its efforts to build credible expertise in the field of central banking and the finance sector – one of its notoriously weak areas. Maybe it's because the Fund can act only as lender of "final" resort to countries, but not as a lender of last resort to the financial system as it cannot create money. But that leaves a gap. This raised the question of whether the institutions that could create money – the central banks – were in a position to be lenders of last resort to the system. In many countries the local central bank would have to rely on swaps and loans from the Federal Reserve if its banks wanted dollars.

Some thought that "global monetarism" should make a comeback. The concept was developed by Swoboda and others in the 1970s, when they argued that in effect the Federal Reserve determined global money supplies which in turn determined global inflation rates. In the 21st century the Federal Reserve is again flooding the world with liquidity, forcing other central banks – with the notable except of the ECB – to intervene to buy dollars, thus increasing global money supplies and inflation. Thanks to this, China has become an inflationary factor in the world economy rather than a deflationary one.

Turning to the future of inflation targeting, the dominant view was that no central banks now are strict inflation targeters. Paul Volcker confessed that he had an "allergy" to inflation targets.

The central bankers clearly expected to be given a larger role in maintaining financial stability in future, but asked whether they would be given sufficient powers by the politicians. There was a big risk that they would be given responsibility without power. But several participants feared the bigger risk was of inertia setting in again, as had happened after previous crises.

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Can economists and central bankers learn from each other?

Many of the leading central banks are suffering from game-playing by politicians.

Take Tokyo, where delay and point scoring have left the central bank short of policymakers. Kazuhito Ikeo, an economics professor, is set to join the Bank of Japan’s Monetary Policy Council but only after the country’s main opposition party withdrew its earlier rejection of his nomination. The Democratic Party of Japan (DPJ) controls the upper house of the Diet, giving it the power to reject senior central bank appointments – a right it has used on several occasions in recent months to the detriment of the central bank’s reputation.

The opposition threatened to veto Ikeo’s appointment last week after news of his nomination was leaked. However, a veto would have garnered little political support.

"I don’t see what the DPJ have got to gain from rejecting him. This is likely to be viewed as being the fault of the opposition,” Colin Asher, a senior economist at Nomura, an investment bank, told Central Bank News last week. “Ikeo certainly seemed qualified and he wasn’t a former ministry of finance minister, as were some of the candidates who have already been rejected.”

The central bank’s rate-setting council has been two members short for the last three votes. Ikeo’s acceptance raises the amount of council members up to eight, leaving it still one light.

The institution is still without a second deputy governor and its rate-setting council, which is supposed to be nine-strong, was two members short for the three meetings.

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Mishkin quits -

The Fed suffered a set-back when Frederic Mishkin, a member of the Board of Governors, announced he will leave the central bank at the end of August to return to academic life.

A strong factor is Mishkin's decision to leave the central bank would have been that his two year leave of absence from Columbia University was coming to an end, implying that he would have to choose between staying on at the Fed and potentially losing his position at the Ivy League university in New York. An extension of his official leave of absence would have been possible, but would have required approval from the university's board.

In a letter to President Bush, Mishkin said he would leave the central bank “in order to resume [his] teaching position at the Graduate School of Business, Columbia University.” Mishkin took office on 5 September 2006 to fill an unexpired term ending January 2014.

During his two years at the Board, Mishkin was seen as an important intellectual force at the central bank and a close allay of Ben Bernanke, the chairman of the Fed.

He was particularly adept at making timely and academically sound speeches on critical policy issues, including asset prices and monetary policy and the framework for monetary policy.

In a speech he made in January, Mishkin gave clear signals that the Fed was preparing to act aggressively to stem the subprime crisis. The speech explained the economic rationale for the Fed’s sudden assertiveness in response to the housing and credit crunch and prepared market expectations about the timing and extent of monetary easing.

“When financial markets experience a significant disruption, a systematic approach to risk management requires policymakers to be preemptive in responding to the macroeconomic implications of incoming financial market information,” Mishkin said at the time.

Mishkin shares Bernanke’s enthusiasm for inflation targeting as the optimal framework for monetary policy. Throughout his tenure at the Board, he continued to advocate the formal adoption of the framework and attempted to encourage debate on its desirability for the Fed.

A suspicion exists that the recent plan to give the Fed an overarching financial stability role may have put this firmly on the back burner.

- leaving the Board of Governors three short

The move is a double blow as the Federal Reserve has been operating with two governors fewer than its full quota for two months.

The Senate has failed to approve a new term for Randall Kroszner and with Mishkin leaving the board, it will be reduced to four governors out of a full compliment of seven.

All this in the midst of the biggest global financial crisis for a generation. In fact Kroszner has been able to remain at the Board despite not having his term renewed, on the basis that his departure would seriously impair the Fed’s policymaking.

The US Senate decided to delay the confirmation hearings of two of President Bush’s nominees for the vacant positions – Elizabeth Duke and Larry Klane – citing concerns over the exposure of the commercial banks they currently work for to the subprime investments.

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The IMF bags Blanchard

It seems 19th Street N.W. is two-way after all. Amidst the departure of several high-ranking staff, the International Monetary Fund has announced the appointment of Olivier Blanchard, a highly respected professor from the Massachusetts Institute of Technology (MIT), as its new chief economist and director of research.

Blanchard’s appointment is a coup for the Fund. Filling the chief economist position, once regarded as one of the top jobs in international finance, has proved difficult. Raghuram Rajan (September 2003 until January 2007) served with distinction, as did his predecessor, Kenneth Rogoff.

When Rajan stepped down to return to his position as a professor at the business school of the University of Chicago, the Fund recruited widely for a replacement, with insiders suggesting that a number of preferred candidates declined the offer.

The search ended with the appointment of Simon Johnson, whose area of expertise lies outside the international financial system and more in area such as corporate governance, innovation and productivity, and long-run economic development.

Blanchard, however, enjoys a higher profile as a macroeconomist of note. His research has focused on areas of great relevance: global imbalances, oil price fluctuations, theoretical monetary economics and inflation targeting. Blanchard takes up his new position on 1 September.

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Lomax departure sparks row

Why did Rachel Lomax, the first female deputy governor at the Bank of England, decide that one term is enough? Her decision to leave when her term ends at the end of June has puzzled many, but was no surprise to the governor, Mervyn King.

There is no reason to doubt the explanation she has given – that she is keen to pursue other interests. It is not the first time that she has left what seems to many a plum job – she did the same at the World Bank many years ago when a job advising the then-president James Wolfensohn did not work out as hoped.

“Rachel Lomax has told the Bank that she is not seeking to be appointed for a second term as the deputy governor responsible for monetary policy,” the Bank said, adding that the appointment of a new deputy governor “is a matter for the government.”

What soon became crystal clear however is that the governor wanted a top economist – specifically Charlie Bean, the Bank’s chief economist – to replace her in that deputy governor slot. Indeed, far from, being “a matter for the government” the press was tipped off that the governor thought he had an “understanding” with the Treasury giving him “a veto” on appointment of future deputies. Oh dear.

Unfortunately this has led to an unseemly public dispute with the Treasury – a dispute that threatens to turn into a PR disaster.

Paul Tucker, the executive director responsible for markets, was already being cited by several media sources as a possible replacement. More important has been the strong City view that the Bank has suffered badly by not having sufficient people with top City connections and a feel for the markets at the governor’s side.

Mervyn King is very much aware of that view and indeed is determined to build better communications with the City in his second term, which starts this month. Sadly the City’s view of his failings as governor can only be hardened by this latest fracas. In fact none of the people involved can feel their reputation has come out of this unscathed.

If either Bean or Tucker gets the deputy job it will free up a place on the MPC. The FT reports that Andrew “Andy” Haldane and Spencer Dale, both bank economists, are the frontrunners. But if Tucker leaves when Bean is appointed that would free up two places to squabble over.

A nice little comms job for Jenny Scott, incoming director of communications, to sort out.

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Global Financial Regulation - The Essential Guide

Howard Davies and David Green, both of whom have worked at both the Bank of England and the FSA, where Davies was the first chairman, have a new book out: Global Financial Regulation - The Essential Guide. As international financial markets have become more complex, so has the regulatory system which oversees them. The Basel Committee is just one of a plethora of international bodies which now set standards for financial activity around the world. These groupings, and their decisions, have a major impact on markets in developed and developing countries, and on competition between financial firms. Here, for the first time, two men who have worked within the system describe its origins and development in clear and accessible terms. It is, according to the FT, “A superb account of the international regulatory system,” and you can find it on amazon.co.uk.

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FOMC split over moral hazard

Comments from regional Federal Reserve presidents have underlined a Federal Open Market Committee (FOMC) split over the central bank’s support of Wall Street, particularly its bailout of Bear Stearns.

Jeffrey Lacker, the president of the Richmond Fed and a non-voting member of the FOMC, and Charles Plosser, head of the Philadelphia Fed and a voting member, both cautioned last Thursday that the central bank’s support threatened to exacerbate the moral hazard threat.

Lacker was more vociferous in his criticism, warning that central bank lending of the sort seen during and after Bear’s collapse may well lead to more financial crises in the future.

The Richmond Fed president argued that if banks knew intervention was forthcoming, they would fail to adequately self-protect “and thus leave themselves more susceptible to runs.”

“Peoples’ expectations regarding central bank policy choices in times of stress can affect the very robustness of the system,” Lacker said. “This strikes me as a deeper form of moral hazard than what people usually have in mind. In times of financial crisis, the understandable central bank imperative is to alleviate stress. But the expectations such actions engender could very well make future crises more likely.”

Plosser said that the if Fed’s financial stabilisation policy solely focused on mopping up the damage caused by asset price bubble then it ran the risk of delaying necessary price adjustments and creating substantial market inefficiencies.

“Financial stabilisation policies, if misapplied, can effectively subsidise risk-taking by systemically important financial institutions,” Plosser said. “Such policies run the risk of increasing moral hazard and ultimately raise the risk of systemic instability rather than lowering it.”

The Philadelphia Fed president urged the central bank to review very carefully its responsibility as a lender of last resort.

“Lender-of-last-resort policies should take a lesson from what we have learned from the theory of monetary policy,” Plosser said. “In particular, policy should have important rule-like features.”

“Specifying in advance the conditions or states of the world under which the central bank will lend is an essential first step. But policy must also make credible commitments to act in a systematic way consistent with ex-ante guidelines,” he added.

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Fazio is the dock

Antonio Fazio, a former governor of the Bank of Italy, will go to court in October to answer questions over his alleged role in a takeover scandal. Francesco Frasca, the former head of surveillance at the central bank, will appear alongside Fazio.

"The defence for Fazio and Frasca expresses its disillusionment in the order to stand trial as it is convinced of their innocence."

Franco Coppi, their lawyer, told reporters. "Fazio's and Frasca's innocence is confirmed by many decisive elements of evidence."

Fazio’s resigned in December 2005 after it emerged Milanese prosecutors were investigating him as part of a wider probe into suspected fraud at Banca Popolare Italiana.

Fazio was alleged to have backed Banca Popolare Italiana’s bid for Banca Antonvenata, a rival bank which ABNAmro were also interested in purchasing. Fazio’s alleged involvement led to vociferous calls for his resignation, with politicians and commentators arguing that he was tarnishing the central bank’s reputation, as transcripts of late-night telephone calls revealed close ties to the banking industry.

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Provopoulos for Bank of Greece

George Provopoulos has been nominated to succeed Nicholas Garganas at the helm of the Bank of Greece and has resigned as chief executive of Piraeus Bank. Provopoulos is no stranger to the central bank having served as deputy governor from 1990 to 1993. He is also a professor at the University of Athens and has written a book: The Dynamics of the Financial Credit System.

Nicholas Garganas, the outgoing governor of the Bank of Greece, will retire when his first term ends this month. Garganas took over as governor of the central bank in 2002 after a six-year stint as a deputy. At 71, he is the oldest member of the European Central Bank’s Governing Council.

Garganas was criticised in Greece for failing to halt a walkout by central bank staff over plans to reform the country’s pension system. The strike led to the closure of the country’s stock exchanges and its arm of the eurozone’s TARGET payments system.

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Ballali dies

Daudi Ballali, the former governor of the Bank of Tanzania who was sacked in January, has died at a hospital in Boston, Massachusetts. The cause of death was not revealed.

Ballali was fired and charged with corruption after an audit by Ernst & Young, one of the big-four global accountancy firms, reported that the central bank had made more than TSh133 billion-worth ($116m) of improper payments to 22 companies in the country, many of which were alleged to be fictitious. The payments were made in 2005.

Ballali spent almost a decade at the helm of the institution, serving from 14 July 1998 until 8 January. Benno Ndulu, a former deputy, replaced him as governor.

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Middle East financial centres and the global markets

City minister, Kitty Ussher MP, is will top the bill at “Middle East Financial Centres and the Global Markets” conference, which is part of the Chatham House City Series 2008 taking place on 26th June at Bloomberg Studios in London. Nasser Al Shaali, CEO, Dubai International Financial Centre Authority, Dr Abdel Aziz Abu Hamad Aluwaisheg, Director, Economic Integration Department, The Cooperation for the Arab States of the Gulf and Jane Dellar, Managing Director, Bahrain Financial Services Development will also be speaking. For details email conferences@chathamhouse.org.uk.

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Smets to head ECB research

Frank Smets, the deputy director general of the European Central Bank’s research department, is to replace current head Lucrezia Reichlin, when she leaves the institution in September. He has written papers on US imbalances, optimal monetary policy, inflation and business cycles.

Reichlin became director general of research in March 2005. Her research interests include macroeconomics and applied time series analysis. Recihlin told Central Bank News that she would join the London Business School as a professor in September.

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Inflation peaks as ECB turns 10

European Central Bank (ECB) marked its tenth anniversary with a ceremony and concert on Monday. Unfortunately, eurozone inflation also marked the occasion by rising to its highest level since the central bank was founded. But nobody wanted to let that spoil the party, and the focus of speeches from the likes of Jean-Claude Trichet, the president, José Manuel Barroso, the president of the European Commission, and Angela Merkel, the German chancellor, was very much on the euro’s success.

Carlo Azeglio Ciampi, formerly Italy’s president and a former governor of the country’s central bank, said that the establishment and achievements of the ECB warranted a sense of pride.

“The bitter insight by Thomas Mann at the beginning of the 1920s that ‘the old Europe that experienced all kinds of suffering, but has not learned any lessons from it’ is always with it,” Ciampi said. “But this time it has been shown to be false. The success of the euro is proof of this.”

Hear. Hear.

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Mirow beats back governors for top job at EBRD

Thomas Mirow, the state secretary of the German Finance Ministry, will replace Jean Lemierre as head of the European Bank for Reconstruction and Development, the development bank for most of Central and Eastern Europe.



Mirow beat off stiff competition for the role with Gyorgy Suranyi, a former governor of the National Bank of Hungary and Zdenek Tuma, governor of the Czech National Bank, among the candidates.



But Mirow was always considered favourite for the role. As with the top jobs at the International Monetary Fund and the World Bank, candidates from certain countries – in the case of the EBRD, France and Germany - are considered shoo-ins for any head role.



“I am greatly honoured to be joining an institution that has achieved so much in so few years since the collapse of the Berlin Wall,” Mirow said: “The region where the EBRD works still faces many challenges and I am convinced that it has the skills, the experience and the determination to help the region meet those challenges.”



The development bank said that Mirow’s appointment comes at a time when the institution is looking to shift the focus of its activities further east and south east. Mirow is also thought to be in favour of the EBRD’s proposals to commence operations in Turkey. In October last year the Czech Republic became the first country to opt out of EBRD funding.



Lemierre leaves the development bank after an eight-year stint at the helm. He was thought to be keen to serve a third four-year term if the bank’s shareholders agreed to his vision of how the institution should be managed. Mirow will succeed him on 3 July.

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Broadbent reappointed

Jillian Broadbent, the only woman on the Reserve Bank of Australia’s nine-strong rate-setting board, is to serve a third five-year term. Wayne Swan, Australia’s treasurer, said he was pleased to announce the reappointment, which will leave Broadbent on the board until May 2013. “Ms Broadbent has an extensive background in economics and finance as well as in leadership positions in the corporate sector,” Swan said.

Broadbent, who joined the board back in 1998, is a director at Coca-Cola Amatil, a beverage company, and Woodside Petroleum, an energy supplier.

“Ms Broadbent's extensive credentials against the selection criteria make her an excellent candidate for this Board appointment, and I am confident that she will continue to make an outstanding contribution to the Board's deliberations,” Swan said. Bank of Spain claims credit High fives all round in Madrid, where the

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Bank of Spain claims credit

High fives all round in Madrid, where the Bank of Spain’s approach to supervision helped ensure that the recent global financial turmoil had limited impact on the country’s banking sector, Miguel Fernández Ordóñez, the governor of the central bank, has said. Ordóñez highlighted two key characteristics that he believed had supported financial stability:

• The central bank’s strong role in accounting rule-making for the banking sector, which had meant rules took into account supervisory sensitivities while remaining consistent with IFRS [International Financial Reporting Standards];

• Its prudent approach to bank regulation: “One example has been our stance on off-balance sheet investment vehicles,” the governor said. “We have not prohibited the development of investment vehicles, but we told banks that if they set up Special Investment Vehicles, these should be consolidated with the group, and therefore be subject to capital requirements and provisions. Under these conditions, no such vehicles were set up.”

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