Krugman on Swiss peg

Switzerland: QE Too
by Krugman

OK, arrived in Hong Kong, and IT is working a lot better. So let me weigh in a bit more on the Swiss miss. Basically, my take is the same as Brad DeLong’s: what we have here is a central bank that let itself be bullied by the balance sheet bugaboo brigade. 

The way to think about the franc peg, I’d argue, is to view currency intervention as essentially a form of quantitative easing. What we mean by QE is open-market operations in which the central bank buys stuff other than the usual purchases of short-term government debt. This could be long-term assets, it could be private-sector debt, or it could be foreign securities. Obviously the channels of influence depend to some extent on which route you choose, although remember that the Fed was accused of waging currency war when it was only purchasing domestic assets, and the main clear effect of Abenomics so far has run through the exchange rate. But the main point is to think of any kind of non-Treasury-bill open market operation as a form of QE. 

This in turn helps us put the explicit exchange rate target into the right slot: it was about making QE effective through commitment, so that you got the maximum impact on expectations. Actually, the success of the currency program suggests that other central banks might want to try things like setting a ceiling on some long-term interest rate. 

But back to Switzerland: they had a policy that was working, so why did they stop? And the answer, Brad and I both suspect, is that the SNB, like the Fed, faced constant pressure from finance types saying “Your balance sheet is too big! Debasement! Inflation! Unnatural monetary acts! Francisco d’Anconia!” But unlike the Fed, the SNB lacked the intellectual self-confidence (and perhaps the institutional strength, seeing as how it’s partially privately owned) to stand up to that pressure. 

The irony is that having been bullied into worrying about its own profitability, which is not what central banks should do, the SNB ended up imposing huge losses on itself. But that’s neither here nor there for Swiss national interests. The main thing is that the credibility essential to getting traction at the zero lower bound has been dissipated for Switzerland, and damaged for everyone else.