Having Their Cake
Informal notes on a dual messaging success: “Is the ECB Sabotaging Itself?” Wall Street Journal, 9 January 2015
I shared a brief Alen Mattich (WSJ) piece on Facebook yesterday. Titled “Is the ECB Sabotaging Itself?” the brief post framed a pensive black and white headshot of European Central Bank President Mario Draghi.
One reader’s reaction? “Cryptic.” My description, in reply?
“Layer cake.”
On that note, I’ll share a few informal notes as a preview to next week’s ECB presser, with the add that we still have nine days to go and developments are still afoot.
One key focus of my early January writing has been “Draghi and politics” — more specifically, Draghi’s attraction to things federal, to supranational designs and to the application of “themes of America” to the 21st century European case. Draghi, (like Ben Bernanke, Larry Summers, and Greg Mankiw) had an influential professor named Stanley Fischer during his PhD years at MIT. Each has gone on to reflect Fischer’s influence in his own way, but each grapples — enthusiastically or not — with the idea that global organizations, incentives and alliances get to go over the top of countries when situations demand. Draghi, perhaps most of all (IMO), admires the American experiment very much and is more impressively well read on its beginnings than many might realize.
Draghi’s own supranational urge seems to be influenced by the American experience, as a diverse nation unified around an ideal. He expresses his leanings toward the idea of a more perfect union in a number of comments and speeches, notably his lecture at Harvard’s Kennedy School on 9 October 2013, and his address at the University of Helsinki on 27 November 2014.(1)
In introduction to the former, he warmly referred to the time of his studies in Cambridge, Massachusetts as “the happiest time of my life.”
Supranational thoughts, and systems which bring disparate entities into unity are not just about solutions and outcomes. They are also about methods and processes. Disruption that is considered necessary to achieve fully functioning systems may be put in place in ways i. more managed ii.less surprising via a supra framework than if they were to emerge naturally, from ground level, as they would in a “free market” abstract. More often than not, arguments called ideological are really just about how much time you want to take for a change that you already know is coming. Some are gradualists, appreciating wider discretion in their play with words and timeframes. Some are not; they embrace a rules preference which might at times accord repairs via jolt or surprise. Both, however, see use in a federal level (US) or supranational level (Europe) context to achieve system shift efficiently: to create a situation where European political unity supports a European single money and vice versa, even as the recent past had a lot of different divisions and moneys. More on that later.(1)
In my own observation, Draghi loves politics. A lot. Moving pieces on a chessboard, and figuring out his opponent’s next moves excites him rather than hinders him. He is a skilled politician and a serious economist at the same time. This is important to understanding what’s being messaged around Europe QE.
In the Mattich piece, a “layer cake” of two messages via one set of words, investor/systemic tiers are told that politics is the way forward, the brilliant delicious futuresauce that keeps the present stable and well. The public is told that politics is holding things up. That it is evidence of dysfunction, even a will to crisis.
Two very different layers. One cake.
In asking if an ECB that waits instead of acting, or acts in only partial ways, is “sabotaging” itself, Mattich gets a lot done in few words. He tells the investor tier, which is already well informed that QE is not about sparking lending to the real economy, of a proposed, precise level of sovereign bond purchases the ECB is contemplating.
Were I building a probabilistic model which incorporated the ECB as a new entrant/major sovereign buyer, I could instantly create a number of scenarios for how my clients might proceed. I know that the capital key will feed one scenario, but I also know that Germany — its yields quite settled in the zero band — does not need the action and can appear to be cooperative by designing an alternate distribution, one which will perhaps include the ultrasafe itself — US Treasuries, on the argument that a non-Europe ultrasafe is needed to back up Europe peripherals. More on that later as well.(2)
Germany is mentioned to “tip” the systemic tier regarding Germany’s continued productive, and stubborn, involvement. If Germany was mentioned as pliant, the narrative would be too unbelievable to work.
Germany is the primary “breadwinner” here, or insert your own word, and absent their full involvement, the ECB’s action may be perceived as less or even not credible.
The ceiling on the amount is very helpful to “Zachary Quinto in Margin Call” types worldwide, and certainly to Euro area banks. It allows them to model which sovereigns will receive support at a crucial time (a bank buying sovereign debt is a bank supporting sovereigns, for all intents) what the behavior of the euro will look like (QE sends it down; US dollar goes up, almost regardless of data out of US) and it gives an idea of what portfolio rebalance avenues would be favorable(or destabilizing) once the sovereign debt market is enabled greater leverage opportunity.
QE is a technical helper to the SIFI tiers (and to debt-issuing countries) on a lot of levels, and it represents a fundamentally political act of a supranational entity acting over and above countries in the name of each country’s shared benefit.
As a parent might for her/his children.
Were this parental role to be taken by a single country? It would have to be Germany. But you won’t buy that, so instead, it’s the ECB. Germany is peppered throughout Mattich’s piece as a model of stubbornness to give confidence that they are indeed involved in what’s going on. Practical, pragmatic, managed, not too quick or easy, but here you go, you can plan around this.
Is QE far more psychological than hydraulic, as Mattich mentions? Dr. Summers mentioned this view openly at Brookings on Sept 30th within a Hutchins Center program focused upon policy choices at the Zero Lower Bound. The investment tier is signaled by QE of what the market will look like going forward; in a sense so is the non-investment tier — but differently.
The outer tier/public narrative is less focused on flows and facts and more focused on “hope and soothe” themes, on easily digested battles of one versus other. It is a sentiment-focused narrative, based upon the observation that sentiment drives economic actors at all levels. It is another level of forward guidance.
The idea that an unlimited QE would signal success and solution is valid, but consider what it would also signal. That the ECB had unlimited authority to act, perhaps without German blessing. While I do see that some have such a vision, (more on that fun topic later, (3)) …You don’t want to tell the markets this right now because they may not find an ECB ex — or over- Germany concept credible at the moment.
The idea is to maintain stability as the situation is assessed — to extend the timeframe and discretion of shift, and keep everyone playing on the same team. For now and for a foreseeable time.
If you’re a communicator like Draghi, you choose words and visuals that perform that function.
Narrative two (public) goes something like this in Mattich’s piece. “QE is going to increase lending to the real economy, like magic, and the Germans are being ideological and mean and holding it up because, you know, they have a balanced budget fetish. But the good guys will win and we will get it. But if it fails we will blame it on somebody.” Or so I paraphrase. The sentiment is encouraging, and valid or not, a scapegoat stands at the ready.
The ECB might be sabotaging itself. Or it might be acting operationally as appropriate to maintaining system stability, an unwritten but still definite mandate shared by all major central banks.
Which layer of the cake did you see?
Be sure to join in on 22 January for the first ECB presser of 2015, and a possible announcement about a capped QE, sovereign purchases included. And other steps, perhaps, toward a “more perfect union?”
Notes
(1) To include overview of Dr. Robert Mundell (25 November 1994) The European Monetary System 50 Years after Bretton Woods: A Comparison Between Two Systems and recent speeches by Dr. Stanley Fischer (11 October 2014, IMF) and Dr. Mario Draghi (9 October 2013, Harvard University and 27 November 2014, University of Helsinki)
(2) As noted in (1) and additional to be confirmed, including The Dollar Trap, (2014) Dr. Eswar Prasad. Investigating the role of an ultrasafe asset in maintaining systemic stability within a ZLB era. Stability and the elevation/preservation of the ultrasafe are linked; may be said to force gradualism, extended timeframe and discretion in policy action.
(3) As noted in (1) and additional to be confirmed.
Twitter: @WaterandWool
Image Sources
Banner: http://www.craftybaking.com
Image Two: Getty Images, via Wall Street Journal.
Image Three: www.nationsonline.org
Image Five: Wikimedia.org/wikipedia/commons
