Modern central bank losses stem from three balance sheet changes
“So it's a it's a triple threat. It takes all three as it turns out. You can't kill off the profits of the banks back in the seventies, late seventies, you know, through the Volker shock. You can't kill it off just through reserve remuneration. And then you add in that balance sheet size. But to get it to go negative, you've really gotta also give it this legacy of the GFC of QE and of the COVID. What we would call, like, almost like a maturity mismatch on the central bank's balance sheet.”
Banque de France was France's first major bank bailout
“What bank was that? It's a leading question. The central bank. The first bank failed out French history of any notoriety was the Banque de France. And so our book is gonna explain why, you know, these issues around independence really aren't just limited to operational functions that economists who write down simple monetary models like the study, they're really related to the all the functions of a central bank.”
Gold standard credibility was weaker on the periphery
“And I will just say where as some people like to put a lot of emphasis on, maybe we should go back to the gold standard, look at all stability. You're not gonna find me in that camp because if you're an emerging a market economy, it was very difficult to stay on gold. And you can see this because we collected literally millions of observations of bond data and we collected paper bonds and gold bonds and essentially you can back out what economists call currency risk. And what we actually find is that even after gold standard adoption, these risk premiums were quite large, meaning markets never fully thought that these commitments to gold were credible.”
The gold standard emerged partly by accident via Isaac Newton
“You know, famously, you know, Isaac Newton was the master of the mint gets the ratio wrong and England tips off of by metallic standard onto a gold standard and that starts a chain of events we'll talk about in just a moment. It tips on to gold accidentally and then it starts pulling its most important trade partners on to gold through these kind of network effects, right? These network externalities.”
Limited voting franchise made the gold standard politically viable
“I have this view and I think others hold this view that particularly Barry Eichengreen that you could maintain the singular focus on price stability when the franchise was limited. And when that changes, that changes the ability to have this anchor really work in the way you want it to. And so we can't go back in time and just say put the gold standard in place because we also have democracies where the franchise is much more extensive than it was historically.”
Volcker's credibility lets today's Fed hike less aggressively
“Just look at the the changes, right? A lot of the reason the Fed could raise rates so little is because Volcker existed. The counterfactual of not having Volcker was we didn't have the credibility revolution in central banking yet. And so the credibility and central banking revolution in this country really kind of starts with Volcker and being tough on inflation. And so what do we know happened recently? We know like with the COVID shock, markets started anticipating what the Fed was gonna do and they started doing the work for the Fed already.”
Central bank losses threaten political independence, not solvency
“Central banks like to report positive profits or non negative profits in part because they are ultimately very concerned about the political perceptions of running losses. And in part that then fundamentally relates to questions around independence. And once you get to questions about independence, that raises the specter that monetary policy will have some other purpose other than just to achieve a mandate like the Fed has or many central banks have to maintain price stability.”
