Lorenzo Bini Smaghi is going to leave the ECB's Executive Board at the end of this year. This is bad news for two reasons: First, he is an "intellectual heavyweight" as the FT correctly points out (unsurprisingly, Bini Smaghi is Chicago-trained). Second, the reason why he has to exit the Board reminds us that nationality still matters in the conduct of monetary policy. Bini Smaghi must leave since France insists on a less Italian-dominated Board, given Mario Draghi's presidency since Nov 2011. Benoît Coeuré - a Frenchman, of course - will take his place. I do not argue that Coeuré is less able than the average Board member. Yet, given that Bini Smaghi was one of the Board's most able members, it seems clear that the selection process does not sort between "competent" and "less competent" decision makers, but between nationalities - evidently able to sort out the most effective policymaker, while leaving others in place.
The most interesting statements by a central banker are probably those he makes when leaving office. Accordingly, the FT took advantage and promtly interviewed Bini Smaghi. Mr. Weidmann should listen carefully to what he has to say: "[...] not deciding, or postponing decisions, is not an option and leads to worse outcomes." Decision makers shall not "hide behind lawyers to avoid taking action." Wooha! Eat this, Bundesbank.
Bini Smaghi is in favour of QE. I like that. He also favors the ECB as Lender of Last Resort (LOLR) to sovereigns. In a short policy note, I recently made the distinction between potentially insolvent and illiquid sovereign, and only supported the ECB as a LOLR to the latter group. Now this is Bini Smaghi: "If the issue is not one of insolvency but rather illiquidity, then the ECB has room for action - one could even say that the ECB has a duty of action." For the former group, I'm still in favor of haircuts and of the ECB to act as the Owner of Last Resort (OLR) to the European banking sector. I'm pretty sure that Smaghi wouldn't buy in as he still opposes Private Sector Involvement (PSI). He is quite honest: "No central bank in the world would consider the default of its sovereign desirable or possible."
I also disagree with another point he makes: "[T]he lender of last resort function is typically characterised by constructive ambiguity. Central banks try to avoid committing themselves in advance on the specific conditions in which they will intervene. [...] Central banks should use as much constructive ambiguity as possible and avoid committing to act – or not to act – at a time of high uncertainty." How can he say that? Modern monetary policy boils down to the control of market expectations. The expectation channel is key! Also when it comes to the LOLR-function. Without a credible commitment to a potentially unlimited swap line - exchanging sovereign bonds for central bank liabilities -, the ECB actually has to purchase sovereign bonds in significant amounts. Also QE will prove ineffective, if the ECB refuses to control/determine market expectations.
Nevertheless, thank you for your service!
