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The “Art of Central Banking” in yesterday and today’s crises

di - 27 Giugno 2013
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Table 7. FedReserve and Eurosystem balance sheets 2012: a comparison

Fed (bln USD), Q4
Eurosystem (bln euros), 28 Dec ‘12
Official reserve
Treas. and GSE securities
Loans to banks
Total assets

Sources: FedReserve flow of funds; ECB Bulletin

Eurosystem’s lending has, in more recent times, greatly increased under Draghi’s presidency, doubling in one year time. In particular, long-term-refinancing-operations (LTRO) take a large part of “loans to banks” (1035.8 bln). And it’s only of a few months ago the ECB decision to embark in an “unlimited” purchase of Treasury securities of “peripheral” euro-area countries, under certain conditions (the Outright Monetary Transaction-OMT program): a controversial move, seen by most observers as a smart step to save the euro, by others as a sign of politicization of the ECB, away from the Bundesbank imprint. (in our scheme, we might say “a smart step towards discretion”, while the BB critical attitude would be “a defence of the rules”).
To comment on this decision would bring us to consider the peculiar twist that the financial and economic crisis has taken in Europe, becoming a crisis of government debt and, as a consequence, of the euro itself. In front of the current Sovereign crisis, an interesting question is whether the OMT should be seen as consistent with a sound monetary policy conduct. We know there are different opinions and we shall not dwell upon them. But, as just said, it is possible to see in the debate an echo of our “rules” versus “discretion” alternative.
Should the central bank always comply with the rule of maintaining only top quality assets in its  balance sheet, or should it have the discretion to buy  volatile or unsafe assets for the sake of a superior goal?
Has a “clean” balance sheet a specific meaning in a world of “fiat money”, where central bank liabilities are not convertible into a commodity (gold)?
Why to focus on “peripheral” countries only, if OMT are to be made for monetary policy purposes?
Is the goal of OMT program to save the euro, or to bail out a State, or both?
Is central bank independence at risk?

A simple quantitative analysis of central banks policies in the Great Depression and in the recent Big Contraction shows how the framework of their activities has greatly changed, and how different from the interwar period their reaction has been. Rules have given room to discretion, and activism is particularly visible in Anglo-Saxon central banks, partly because their banking industry has been hit more severely. The Eurosystem seems to have kept a more restrained attitude, has been more inclined to tilt towards the monetarism of the main central bank in Europe; even though, under a deepening recession in euro-area countries, new policies are now being pursued.
In the light of all this, is central banking an art? I am not hesitant to say yes. It almost never – even under the gold standard – went on an automatic pilot, and I don’t see signs it could go that way. A central banker, in spite of any personal belief, cannot be a “mainstream” economist. Not being a “science”, central banking needs “opinions”. This is, of course, a potential threat to its independence: but to consider this point would require another seminar.

Bagehot, W., Lombard Street, John Murray, 1931 (first ed 1873)
Bank of England:
Bank of England Annual Reports
Bank of England, Monetary Policy Framework
Banca d’Italia, I bilanci degli istituti di emissione, Laterza, 1993
Bureau of Economic Analysis:
European Central Bank Bulletins
European Central Bank, Monetary Policy Strategy
Federal Open Market Committee, Statement on Longer-Run Goals and Monetary Policy Strategy, 29 Jan 2013
Federal Reserve Bulletins
Federal Reserve Flow of funds
Federal Reserve, Banking and Monetary Statistics 1914-1941, 1943
Hawtrey R., the Art of Central Banking, Longmans, Green, 1932
Historical Statistics of the United States, Cambridge, 2006
International Monetary Fund, World Economic Outlook:
Mitchell B.R., European Historical Statistics, Macmillan, 1981
Office of Management and Budget:
Neuman M., Monetary Stability: Threat and Proven Response, in Deutsche Bundesbank, Fifty Years of the                                                              Deutsche Mark, Oxford, 1999
Ricardo D., The Principles of Political Economy and Taxation, Dover, 2004 (first ed 1817)
Sayers R.S., Central Banking after Bagehot, Oxford, 1957
Sheppard D.K., The Growth and Role of UK Financial Institutions, Methuen, 1971

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