Matthew Lynn, one of the better finance journalists out there, has a column up over at Bloomberg News about the fact that, as of October this year, there will need to be a new boss at the European Central Bank. The term of Jean-Claude Trichet, a Frenchman, is due to expire. Lynn runs through all the various choices currently deemed available, and says they are, for various reasons, bad. For instance, if an Italian gets the job, this will piss off the Germans, already seething at the cost of trying to protect Ireland and Greece. If the job goes to a German, that will annoy the “peripheral” countries worried – rightly – that membership of the currency bloc means, effectively, rule by the most powerful economy. And so on.
But then again, this sort of issue reminds me of why the eurozone was a doomed venture in the first place. Far from removing all this nationalism, the issue of who gets to run the single currency remains fraught with geo-political tension, for the very simple reason that no genuinely popular pan-European polity exists. As we have seen in various referenda, European voters have, time and again, voted No to things such as the European Constitution, only to see their legislators switch a few items and then ram such items through national parliaments. There is widespread public cynicism about much of the current European “project”.
By contrast, while there is always a fair amount of speculation leading up to the choice of chairman of the Federal Reserve system in the US, I don’t recall seeing debates about whether the job should go to a Texan, or Californian, or Floridan, etc. Debate normally is based around general fitness for the job. One thing that does come out of the Bernanke experience, it seems to me, is that it is wrong for a central banker to have a purely academic background, as Bernanke does, and not to have any hands-on experience in running an actual private sector bank.
Of course, one prime requirement of a central banker is to be able to perform the role of legalised counterfeiter without smirking too much on camera. The issue of whether we should have central banks at all, is another matter.
I don’t know much about the European Central Bank, and as an American I don’t have a dog in that fight. But if I may pre-emptively hijack this thread, I would like to focus on Johnathan’s comment that the “Bernanke experience” demonstrates that “it is wrong for a central banker to have a purely academic background”. I couldn’t agree more, and the overall performance of the US Fed proves this. Of the 6 Federal Rerserve Board members appointed by the President, only 3 have any private sector experience whatsoever, and for one of those that “experience” consisted of a very brief period of practicing law in a career dominated by academia and political appointments. Similarly, among the Presidents of the 12 regional Federal Reserve Banks (all of whom serve on the Board of Governors of the Fed), only 3 have any private sector experience. All of the others worked their way up the ranks of the Fed, mostly serving as staff economists or regulators. Whatever else one says about our quasi-private Federal Reserve system (and we’ve discussed that quite a lot here), I think it’s clear that the process of selecting its leadership is seriously flawed, at both the federal and regional levels.
Actually, you do kinda have a dog in the fight. The EU looks jealously towards the dollar as the standard currency of the world. With the hammering the US’s financial reputation is taking at the moment, things are becoming ripe for a switch. If that happens, things will get very interesting for the US and not in a good way.
Of course, China is a much stronger contender for that at the moment so possibly the actions of the EU will end up being irrelevant anyway.
Richard, a year ago I would have been much more concerned about the possibility of the euro replacing the dollar as the world’s reserve currency, which as you say wouldn’t be good for the US. No longer. The dollar is in bad shape, to be sure, but the euro is worse. After the bailouts of Greece and Ireland, Portugal is tottering and if it falls Spain will surely follow. The euro won’t survive that, at least not in its present form, and it certainly will be in no position to challenge the dollar’s hegemony. And the renminbi isn’t convertible enough, or in widespread enough use, to pose any serious threat in the foreseeable future. So while I suppose that I do, in some sense, have a dog in this fight (in that overall world economic health does affect me), it’s certainly not in the sense that you mean. I have more pressing worries.
If we’re going outside of the central bankers, (is that the correct rhyming slang?), as Lynn suggest to find a new boss for the ECB then surely one man’s credentials leap out.
As a Minister in a country that was in Europe but not part of the Euro, he ran the Treasury with steely fiscal discipline but in a way that ensured riches for all and substantially increased the strength of the currency. Indeed, he famously abolished the boom and bust cycle.
I refer of course to the great Gordon Brown. Why should we be the only country to enjoy his economic genius? Surely it’s only fair to spread the wealth to the whole of Europe.
(Oh, and he’s out of work at the moment so they might get him cheap.)
Laird, true enough viz Europe. Which is why I hedged towards the Chinese. You have more knowledge than I on the subject it seems so I’ll yield to your statements yet I wouldn’t necessarily count the Chinese out yet. With as much debt of the US’s that they own, if it’s a game of poker, their hand consists of half the deck.
Whilst I have you on the hook for a moment, I wonder if I might prevail on you and Midwesterner to revisit your excellent article “Money supply, the stimulus & where is the inflation?” http://www.samizdata.net/blog/archives/2010/06/money_supply_th.html . I have referred people to it many times. It is now six months and a day old. I still think it’s relevant but I am wondering if you guys have developed any new perspectives in the meantime.
Re: My smited comment (which should appear soon). That’s seven months and a day, of course.
Since it is so difficult to determine the competence of a banker until long after the event, I’ll settle for one that seems lucky. On that count, I propose Bob Diamond.
This has he added benefit that it will send the left into apoplectic rage.
Of course, China is a much stronger contender for that at the moment
Seriously?
That’s my impression. I’m always up for being educated differently.
Whose promisory note are you going to take? The drug dealer or the junky who’s up to his eyeballs in debt to the drug dealer?
Wonder how much money was expended to fund this? Your rejoinder, succinct as it is may offend some but that doesn’t make it any less true.
Richard: China has a high savings rate, but a banking system that makes Ireland’s look like a model of prudent management. (This is what you get when banks make loans on the instructions of government, and are not permitted to write the loans off when the borrowers fail to pay what they are theoretically committed to, and indeed are often required to throw good money after bad). When it collapses, it will not be pretty. The temptation on the part of the government will be to inflate away the mess. A lack of debt to anyone else will mean that they can do this without it impacting the rest of the world hugely, but the potential for this to happen makes me think that it is really, really unlikely that the renminbi is going to be a useful currency for anyone else.
Michael, that’s interesting. Do you think then, that the dollar will maintain its dominance or is there another currency ready to jump in?
The ECB’s helm? Someone should get a firm grip of its scuttle cocks and give them a good twist.
Richard, that was Midwesterner’s article; I merely helped with a pre-publication critical review. But thank you for your kind comments, and I’ll see if there’s any interest in revisiting it.
Richard, apparently you’re not alone in thinking that the Chinese currency will assume a larger role in global economic affairs: I see that the World Bank is issuing some yuan-denominated bonds. It will be interesting to see how this develops.
Re. the RMB as a dollar alternative: perhaps there’s something I’m missing here, but if the RMB was to be a global reserve currency, wouldn’t the Chinese have to start paying for their imports in RMB, and then run a large current account deficit for several years? Otherwise foreign holdings of RMB would remain negligible, and thus it would never be a reserve currency, as there simply wouldn’t be enough of it sloshing around to pay for even a tiny fraction of global trade.
The basic principle of “central banking” is corrupt – it is to create money (from nothing) and lend it out to the connected.
When one strips away all the fancy langauge and double talk, the above is what is left.
However, this does NOT mean that who heads a Central Bank (of the Federal Reserve) is unimportant.
That is like saying (as a young libertarian claimed to me on New Year’s Eve) that Eisenhower and Obama were the same – both Presidents of the United States, both did not keep the Federal government restricted to its constitutional role, both got on well with the media……
In reality is matters a great deal who is the head of a central bank – it matters because they may hand a lot of money or only a little money.
Both is corrupt – but the former is much more harmful than the latter.
How BIG is the credit money bubble (the distortion of the capital structure), how much subsidy is there?
And (when the thing comes crashing down) – do big enterprises (such as banks) get bailed out or not?
Just saying “all central bankers are criminals – so it does not matter who the head of the central bank is” misses all this.
It is like saying that two men are the same – because they both invade and rob your home.
But the first one only takes some cash you left on the table.
The second smashes up everything he does not take, and rapes your wife.
The two men are NOT the same.
I briefly watched Bloomberg television today.
A representative of a big financial company was on (the sort of man who makes thousands of Pounds a week).
He said that 2011 would be fine – because the Obama Administration would be guided by “Paul Volker and Larry Summers”.
L.S. announced he was going ages ago – and P.V. announced he was going some days ago.
Yet the big shot (with his zillion Pound wages) clearly did not know that.
What is wrong with the city?
Richard,
I don’t think fundamentals have changed since that article. We are still in the calm between the ‘printing’ ‘inflation’ and the consumer price ‘inflation’. There was some discussion of money supply in this thread. I am quite busy for the next two or three weeks but after that may find time to write on reserve currencies in general and China’s role in particular.
James,
I also may be missing something, but couldn’t RMB be used to buy up foreign assets ie land, natural resources, even companies, and then the receivers of those RMB could either buy from China or trade in them? It seems at least possible to me that sellers who trust the Fed/Treas less than they trust China’s central bankers may like that alternative.
Watching Indian English language television (NDTV) is a useful warning to those people who think “the emerging nations will save us” (by this they presumably do not mean Brazil, whose new President is an ex-terrorist Red [remember the lady is an ex terrorist but NOT an ex Red – she remains a Red], or China whose regime has evolved from Maoism to a form of Nazi ideology).
“Food inflation” (the price of various basic food going up) is an obsession on NDTV.
The idea that government should not be in the business of setting the prices for products does not occur to them.
Nor does the idea that government should stop creating lots of new money – which it lends out to the banks, and then borrows back in order to hand out in the form of new income schemes (which are supposed to soon cover HUNDREDS OF MILLIONS OF PEOPLE).
Sorry but however good the G.D.P stats look – India is not going to save the world.
Perhaps the future lies with China, state control and private companies, a mixture of formal socialism and pragmatic (but fanatical) nationalism – including racial nationalism.
I hope not.
Mid: that’s a good point. However, they’d have to buy a helluva lot (trillions, I’m guessing – how many USD are in circulation around the world today?) to get enough liquidity to make it a viable global reserve currency. And if they kept running current account surpluses, supply would be continuously drying up.
The Chinese currency is largely backed by USD, Yen, Euro, and South Korean Won (the one, ho ho, I would feel most happy holding). Its not that simple but clearly an argument that we should switch from USD to Renminbi on the grounds that it is a ‘harder’ currency needs to take this into account. Of course, if they switched to holding high quality real assets instead, and promised redeemability of Renminbi against these assets at a fixed rate, it would be a pretty decent currency. The truth is that there are precious few obviously attractive assets to invest in at the moment.
Those candidates sure run the whole gamut from A to B, don’t they?