Friday, January 16, 2015

Mohamed El-Erian: Implications of the SNB Decision Extend Far Beyond Switzerland

Mohamed El-Erian correctly observes (via FT)
You need only look at the immediate reaction of the foreign exchange markets to the Swiss National Bank’s announcement on Thursday that it was dismantling its one-sided currency peg against the euro to get a sense of the momentous and surprising nature of the decision.
The Swiss franc initially surged some 40 per cent higher against the euro before partially retracing, while Swiss stocks immediately fell by 10 per cent before partially recovering.
The implications of this historic policy turnround extend well beyond a period of bumpy economic and financial adjustment for Switzerland itself. They risk destabilising some other countries and decision-making in the neighbouring eurozone will become even more complicated and contentious.
Confirming the historical lesson that large currency moves tend to break things, they also highlight the extent to which central banks, operating in a world of growing economic and policy divergence, are struggling to maintain the paradigm of low market volatility that is central to their efforts to generate higher economic growth...
[C]entral banks have sought to repress market volatility as a means of encouraging risk taking that would then boost asset prices and thus encourage greater household consumption (via the wealth effect) and corporate investment (via animal spirits).
The SNB’s decision is further evidence that central banks are finding it harder to implement a policy of volatility repression that already was being challenged by the growing divergence in policy prospects between the eurozone and the US.
All of which leads to a simple but important conclusion that is relevant both to Switzerland and many other economies. The post-2008 period of excessive reliance on central bank policies needs to give way to a more comprehensive policy response that deals with the fundamental shortcomings in supply responsiveness, demand and debt overhangs. The longer that is postponed, the greater the risk of abrupt policy moves that accentuate the related probabilities of policy mistakes and market accidents.


  1. policy mistakes and market accidents.???

    Art as collateral: an expert view

    According to a recent report in the New York Times, not only are more banks lending against art as collateral; some are even starting to create collateralized debt obligations with art as the underlying asset.

    But is this really possible? A collateralized debt obligation is a structured asset-backed security. It pools fixed income securities (for example, mortgages, loans and credit card debt) and repackages these into ‘tranches’ which are sold to investors.

    The cash flow these assets generate is paid to investors according to the tranche in which they have invested: the senior tranches are safer for investors and have a higher credit rating; the lower tranches are the first affected if the cash flow proves insufficient to pay all the investors.

    It is hard to see how art would fit into this picture. Art does not supply cash flow, but it could serve as collateral for a loan that could be included in the bundle of fixed income securities pooled in a CDO.

    Janet Tavakoli, president of Tavakoli Structured Finance and author of several books on CDOs, says she is unaware of any art CDOs at this time, but she has certainly seen art being used as collateral for loans. Last year, for instance, Goldman Sachs came to the aid of hedge fund manager Stevie Cohen, head of SAC Capital Advisors, with a loan backed by Cohen’s $1 billion art collection.

    “The financial market is in a bubble. When financial bubbles burst, art prices plummet. Goldman Sachs is always looking for a way to lay off risk on someone else,” says Tavakoli.

  2. like volatility (and business cycle) was caused by bad luck. or bad weather.

  3. When are the morons going to realize that you CAN'T centrally plan an economy? Did the 20th century teach these dingbats nothing?

  4. "excessive reliance on ... policies needs to give way to a more comprehensive policy" mmmm kay