Saturday, January 17, 2015

Dude, where's my credibility? Swiss bank edition

having in effect thrown away its credibility – in today’s world, the crucial credibility central banks need involves, not willingness to take away the punch bowl, but willingness to keep pushing liquor on an abstemious crowd – it’s hard to see how the SNB can get it back.- Paul Krugman

 It’s stupid to throw away 3 1/3 years of credibility.  I won’t even say “hard-earned credibility,” as it was pathetically easy to peg the SF for 3 1/3 years. - Scott Sumner

There is a school of thought, and its the mainstream one, that a central bank can manage its currency on expectations and credibility alone.  The theory goes basically like this- if the Swiss Bank promises to prevent the Franc from appreciating above the 1.20 mark against the Euro then you would be a fool to sell your Euros for 1.19 Francs since as soon as the SNB gets wind of this transaction they will print Francs and buy Euros until the exchange rate hits 1.20 again.  Armed with perfect knowledge of future price moves (in this case only in one direction) exchanges should never threaten the peg.  The single obstacle to overcome then is to convince the market that you are truly and surely going to stick to that peg, come hell or high water.  Once the market believes you you just sit back and listen for the accolades. 

The SNB set a ceiling to its value relative to the Euro more than 3 years ago, in that time it has basically doubled its balance sheet in nominal terms in moves that exceed (again nominally) the amount it expanded its balance sheet from 2006 to 2010 when the world was in some serious fucking turmoil.  I don't want this blog to have tons of cursing in it (I need my supply for every day life) but I want to stress what so many seem to gloss over.  2006-2010 was absolutely craziness at times.  The "recovery" of the last few years has been extremely tame in terms of volatility, and yet the Swiss bank has added more "assets" to its balance sheet than during the most economically stressful time in the past 80 years.

In fact as of late 2014 the SNB was STILL expanding its balance sheet, sure that little spike looks pidley in comparison to the other moves but it represents tens of billions of dollars (or Francs, or Euros) worth of purchases.

So here is my question- if for 3 years the Swiss has pumped seemingly unending amounts of Francs into the system to defend its half-peg why didn't they have any real credibility?  If a CB is truly in control of its own currency then how freaking long does it take and how many HUNDREDS OF BILLIONS OF currency units does it have to go through to generate the mythological track where markets don't even test their resolve?  This is a rhetorical question, this post is simply to point out that everyone who says the Swiss have given up "credibility" have frankly failed to establish that they every had any, and are simply working on the assumption.  Their models are suspect, their predictions are suspect and their analysis is suspect. 

Things are happening in this world (I didn't even mention the negative interest rates) that have never been tried before, we cannot coast on old assumptions that sounded right, the evidence that they are wrong is small, but growing. 


  1. Tyler Cowen agrees with me


    More concretely, I am not persuaded by the view that a kind of sheer internal commitment to good outcomes, however sincere, can sustain a peg or nominal target. The outside world always impinges on the logic of commitment, and thus capital is required. This is also why I do not agree with Scott Sumner’s claim that a truly credible Swiss target, eliminating the need to expand the SNB balance sheet to make it stick, is possible circa January 2015 or for that matter anytime soon."
    - See more at:

  2. Frances Coppola as well