Monday, January 19, 2015

Bill Mitchell — SNB decision tells us that the crisis is entering a new phase

Switzerland – home of the secret bank vaults, which house treasures stolen from people (particularly the Jewish victims) by the Nazis during WW2 and ill-gotten cash by capitalists who wish to evade scrutiny of prudential and tax authorities of their domiciled nations. Now it is the canary, which has just sung to tell us that all the hubris about Eurozone recovery cannot cover up the reality that the crisis is not yet over and requires root and branch reform to the policy ideology that exposes the floored design of the monetary union. The – Decision – last week (January 15, 2015) by the Swiss National Bank (SNB) to both break the peg of the Swiss franc to the euro and cut its interest rate on sight deposits to -0.75 per cent signals the surrender by that nation to the reality surrounding its borders. The interest rate decision was required after it decided to scrap the exchange rate peg, given that it didn’t want a credit crunch killing the domestic economy. The appreciation of the exchange rate, which has been held artificially low by the peg, will already undermine domestic spending. The SNB said its decision as reversing its previous “exceptional and temporary measure”, which “protected the Swiss economy from serious harm” as the exchange rate became overvalued. But the decision itself was rather extraordinary given it was seemingly so surprising for most and central bankers are meant to be cautious types. 
But the decision has a logic that is easily understood by those who are not trapped within the Euro Troika narrative.…
Bill Mitchell – billy blog
SNB decision tells us that the crisis is entering a new phaseBill Mitchell | Professor in Economics and Director of the Centre of Full Employment and Equity (CofFEE), at the Charles Darwin University, Northern Territory, Australia


Michael Norman said...

Mitchell says...

"The SNB has no need to be concerned about these paper losses given it is the currency-issuer. Unlike a private bank, the SNB could operate with permanent negative capital."

But rightly or wrongly, it obviously bothered them. You can even say, got them to panic.

And how does Mitchell know that there isn't some Swiss law precluding the SNB from having negative equity?

I could easily see the same panicky, irrational moves by the Fed here if their balance sheet showed negative capital.

Philippe said...

"The SNB is [a corporation] under special regulations. About 55% of its shares are owned by public institutions like cantons and cantonal banks. The remaining shares are traded on the stock market. They are mostly owned by private individuals."

Dan Kervick said...

No positive equity requirement, Mike. But just like in the US, the statutes require that in the case of negative equity, the disbursements to the public sector stop:

First, central bank losses can clearly have a substantial economic impact. Thus, regulatory specifications set out that, in the event of annual losses, the profit distribution to the Confederation and the cantons must be reduced or, indeed, discontinued altogether if a
positive distribution reserve or a positive balance sheet profit is not available. The SNB is aware that this can give rise to distressing shortfalls in Confederation and cantonal finances. At the same time, however, we should not forget that without the SNB’s decisive monetary policy over the past few years, Switzerland might possibly have endured considerably greater economic damage. In this respect, it is important to recognise that the SNB’s earnings performance can never be regarded as the yardstick by which the success of its monetary policy is measured, and that the SNB does not have a mandate to make profits.

Neil Wilson said...

"And how does Mitchell know that there isn't some Swiss law precluding the SNB from having negative equity?"

Because there is no law without enforcement, and the SNB can write out negative equity with one single accounting journal.

The national bank act prevents the central bank from being liquidated by anything other than an Act of the Federation. So the famed private shareholders can do nothing.

And even a neo-liberal central bank is unlikely to bounce its own cheques.

The SNB will not have taken this action without discussion with the politicians first. They are required to do that under the act, and of course Real Politik suggests that anybody who bucks the elected representatives will be invited to retire at their earliest convenience.

So both halves of the government sector back this move, out of a shared sense of ideology.