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Rocking the Banking Boat

Changes are afoot in the tight-knit world of transatlantic central banking. The problem is, central bankers and the markets that follow their every word hate change.

In the US, Fed Chairman Ben Bernanke underwent his renomination hearings in Congress last week. The public grilling and aggressive questioning surprised some and spooked investors who feared they signaled the beginning of Congressional meddling with monetary policy.

Meanwhile, EurActiv reports that Italy is refusing to support the renomination of Jean-Claude Juncker, the ever-present Luxembourg Prime Minister, as president of the Eurogroup. The position coordinates the central bank activities of countries using the Euro, and Italian resistance may cause further problems when countries decide on a new president for the European Central Bank. In the complex wrangling of EU politics, each country seeks to have its fair share of prestigious posts. Italy feels left out from the recent appointments in the European Parliament and European Council and seems to see the Eurogroup or even ECB as a consolation prize. Though such a compromise may appease EU players, it would likely upset financial markets unaccustomed to politicized central banking.

All of this uncertainty in central bank leadership in Europe and the US is not helpful. The extraordinary intervention by central bankers during the past two years was only the first half of the plan. Arguably, the trickier part will be for central banks to divest their positions and resume their normal responsibility as interest rates nudgers. Wrangling about leadership, particularly while countries like Italy and Greece struggle with enormous burdens of debt, will only be a dangerous distraction.


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John in Michigan, US on :

Both the Poltico and Bloomberg articles mention the proposal to conduct a formal audit the US Federal Reserve. Are European central banks audited in any regular way? The audit proposal has been headed up by Libertarian/Republican Congressman Ron Paul. It has gotten a significant degree of support. I will be surprised if it passes, but clearly, Rep. Paul's proposals are no longer being dismissed out of hand. I am torn as to whether I want it to pass. On the one hand, the Federal Reserve has almost certainly gotten complacent, if not corrupt. It is time to clean house. I really like the idea that parts of government will share the blame (along with Wall St.) for the collapse of Sept, 2008. I would prefer to blame Congress, Fannie Mae and the SEC before the Fed, but there is plenty of blame to go around! On the other hand, an audit opens the door for future interference from Congress. Also, a thorough audit would reveal a great deal about the internal workings of the Fed. This would promote no end of rent-seeking behavior on Wall St. and all around the world, as investors devote resources (even more than they already do) to second-guessing the Fed, instead of finding good investments. This in turn would, it seems to me, require the Fed to radically overhaul its data gathering and analytical procedures, in order to stay one step ahead of the markets. This overhaul might render moot most of the insights gained from the audit. Rep. Paul probably hopes that an audit will reveal a series of scandals which will result eventually in the termination of the Federal Reserve itself. I am not holding my breath. Ending the Fed would certainly increase freedom, but like legalizing drugs, I fear if it wasn't handled just right, it would be disruptive and lead to a backlash that leaves us even less free. ---- Outside of the Fed audit proposal, I expect very little of substance, and a great deal of theater. During the Bernanke confirmation, over and over again you will hear the Fed portrayed as uncaring or unconcerned about "the little guy", or that the Fed is responsible for employment. This is nonsense. The role of the Fed is to insure bank deposits, and prevent inflation. Full Stop. It is the other parts of government (that's you, Congress!) that is supposed to be looking out for the little guy.

Andrew Zvirzdin on :

John, You bring up some excellent points in your comments. Let's see if I can address some of the things you mention: (1) No, European banks do not have any established "political" auditing process, just as the Federal Reserve currently has no political audit. Of course, the books are examined for fraud, but that is not what Ron Paul and others are looking for. They want to strip away some of the opacity of central banking and force the Fed to make its hand public. Most academians view this proposal very skeptically for the reasons you mention (political interference, damaging monetary credibility, etc.). (2) Although this may be just theatrics, Paul's amendment has 316 co-sponsors. And that is before any vote has taken place. The basic fact is the Fed likes having low visibility; the financial crisis destroyed that. Now, we have to see if the political furor will continue or die down. These type of protests are directly related to economic performance. My prediction is if unemployment continues around 10% through next spring and summer, you can expect to see some significant changes at the Fed. (3) Ending the Fed is simply not feasible in today's world, short of completely reorienting international monetary policy. Ron Paul's hatred of fiat money is earnest but the fact of the matter is we live in a world of fiat money. The Fed and ECB largely make that world work. Without them, the financial crisis would indeed have been worse. At least that is my opinion.

Marie Claude on :

uh, are there any frauders ? that's why we keep an army of bureaucrats buzy LMAO

John in Michigan, US on :

Just in time for Copenhagen. Nice link. One day, a hyperlink. I never give up! "Europol has therefore offered its support to the European Commission - DG Environment to safeguard the integrity of the Community Independent Transaction Log." Guarding the transaction log, I'll bet that has the criminals shaking in their boots! But Europol very powerful? Or are the national police forces still where the power remains. What do you see for the future, will there be an international (meaning EU) police force that actually takes over cases from national police (the way our FBI can take over cases from local or state police)?

Marie Claude on :

there will be a parallel system, that only clever and aware boys will manage, the others, the mobs, will have to respect the rules now it's going to be buffon opera for real soon, as Greece is bankrupted, also we all know that Greeks have a double standard of living, the ofibankrupted) and the parallel, no decleared money, on which populations ahave a better earning

Marie Claude on :

"ofibankrupted) " the official's (bankrupted) ment this is also the case for Italy and spain, where entreprenors have a double accountability

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