ECB Word Salad Hubris
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The Speech by the ECB's Isabel Schnabel, advertised on the official ECB twitter stream
caused a characteristically grumpy outburst from me. Savor the ECB's tweet in all of its glory:
We will not tolerate changes in financing conditions that go beyond fundamental factors and that threaten monetary policy transmission.
Also,
In December of last year, we made clear that we would not tolerate price adjustments that would undermine the transmission of our monetary policy
So now central bankers know what "fundamentals" are in all asset prices, and "will not tolerate" bond prices (aka "changes in financing conditions") that deviate from their idea of "fundamentals." And I thought they had an inflation mandate, and a short-term interest rate "tool."
The contrast between the vision of detailed machinery that central bankers think they know how to control and any actual scientific knowledge of the monetary and financial system is gaping. The one thing I actually know as an "expert" is how little anyone else actually knows. Nobody really knows what the "monetary transmission mechanism" is to start with, let alone how "financing" conditions affect it. And if Ms. Schnabel knows reliably how to distinguish prices from "fundamentals" I know a lot of hedge funds that would pay her a whole lot more than the ECB does!
As one way to see that gap, I compiled the following list of central-bankerese from her speech. At a minimum, if you want to be a central banker, learn to talk like this. As a human, ask yourself if anybody actually knows what any of this word salad actually means, let alone if the ECB has the technical knowledge to control it. (Some, of course, is just complex euphemism.) If I knew more computers it would be great fun to program up an AI that can replicate a central banker. It shouldn't be that hard, because nobody knows what any of this means!
Your central banker word-salad vocabulary list:
vulnerability to fragmentation risks
disruptive and self-fulfilling price spirals
financing conditions
wedge
national borrowing conditions
fragmentation
sudden break in the relationship between sovereign yields and fundamentals
non-linear and destabilising dynamics
market liquidity or speculative market behaviour in the form of self-fulfilling market dynamics
markets find it difficult to price risk
uncertainty is so high that risk premia become indeterminate
Market dysfunction
liquidity conditions
demand for bonds outpaced supply..., giving rise to disruptive market dynamics and drastic price swings.
specific risk factors that may spur multiple equilibria and self-fulfilling market dynamics
financial contagion
financial stress
destabilising capital flows
domestic and external imbalances
Markets started to price risk more in line with fundamentals
adjustments were taking place in a rapid and, at times, disorderly fashion
Risks of a destabilisation of inflation expectations
disorderly repricing
[a comment on this one: is there a world in which everyone knows they'll lose 1% per day but just sit still? All repricing is "sudden" and "disorderly!" Finance 101.]
underlying vulnerabilities
financial market fragmentation
public risk-sharing through a permanent fiscal tool at European level,
[watch your wallets]
destabilising market dynamics
market developments
*********
Update:
The real content of this speech is, "The ECB is going to stop buying Italian bonds. But we still don't like high Italian interest rates--or at least we don't like for the Italian government to have to pay high rates, or get to work fixing its finances. So get ready, we might go back to buy more Italian bonds. But we won't say so out loud quite yet."
I am reminded of centuries of central banks defending currency pegs with resolute promises, word salads about market disfunction and so on, resolutely promising to do whatever it takes...all right up to the moment that they cave in and the actual "fundamentals" take hold.
BTW, the Fed, the Bank of England, the IMF, and others (I don't speak Japanese) are just as guilty -- I regret that Ms. Schabel happened to be at hand while my years long annoyance at central-banker speak happened to explode.
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