Jens Weidmann Has Left The Building

Jens Weidmann resigned as Bundesbank President today, effective December 31.

Some years ago, when I endeavored to speculate on the “real” reason for the resignation of another central banker, an old friend familiar with the situation gently advised me to refrain. It’s never, he said, a good idea to speculate about such things. When someone cites “personal” reasons for leaving their post, best to leave the speculation and any accompanying snide commentary to people from whom such things are expected.

Tragically, my friend passed away late last year, but I’ll mostly heed his advice when it comes to Weidmann. I say “mostly” because a few things need to be said.

Do note, up front, that Weidmann’s exit comes amid a fraught coalition building process in Germany, which is marking a transition to a post-Merkel political reality. I’m not incorporating that because, frankly, I have no unique insight into the dynamics.

Weidmann’s statement, released Wednesday, made clear his long-standing reservations about the path of monetary policy remain mostly unresolved. In a letter to staff described by one mainstream financial media outlet as an “expression of frustration,” Weidmann warned that going forward, “It will be crucial… not to lose sight of prospective inflation risks.” Crisis measures, he said,

Are only proportionate in the emergency situation for which they were created. A stability-oriented monetary policy will only be possible in the long term if the regulatory framework of the monetary union ensures the unity of action and liability, monetary policy respects its narrow mandate and does not get caught up in fiscal policy or the financial markets.

Monetary policy is now inextricably bound up with both fiscal policy and markets. It seems entirely reasonable to suggest that Weidmann’s “firm personal conviction” (as he put) that such entanglements are best avoided, likely contributed to his decision to step down.

He alluded to the enduring character of crisis-era policies. He called the decision to resign “difficult” but said he’s “come to believe that more than 10 years is a good time to start a new chapter – for the Bundesbank, but also for me personally.”

To the extent Weidmann believes a staid approach to policy is no longer welcome at the ECB and that, more broadly, hostility towards a more expansive role for central banks beyond their narrow mandates makes one a pariah, he’s not wrong.

Although the market narrative du jour revolves around expectations for rapid rate hikes to combat inflation, central banks in advanced nations will never be able to “normalize” policy in any pre-financial crisis sense of the word. The pandemic sealed the deal in that regard.

The public is now at least vaguely apprised of the potential for monetary policy to work hand in hand with fiscal policy to replace incomes and avert calamitous, overnight implosions across developed economies. And, as Weidmann knows better than almost anyone, QE has always been arm’s-length monetary financing.

Earlier this month, sources said the ECB is studying a plan to launch a new bond-buying program once the pandemic QE facility is wound down. The pandemic program runs alongside “regular” QE, and as Bloomberg tried to explain, the new plan would aim to “prevent any market turmoil when emergency purchases get phased out next year [and] would replace the existing crisis tool.”

As I wrote in “Do You Remember Snow?“, that plan, if carried out, essentially means PEPP would get a few tweaks, a new name and the ECB would keep running two QE programs simultaneously. The same linked Bloomberg article said that “such an initiative would act as an insurance measure in case the scheduled end in March of PEPP prompts a market selloff of bonds from highly indebted countries such as Italy.”

It’s not just that monetary policy is “caught up in the financial markets,” to quote Weidmann’s warning. It’s that central banks are on the verge of simply commandeering them. And not in the de facto way in which we’ve all become accustomed to thinking about markets in the post-financial crisis era. But rather as a matter of stated policy.

Over time, the ECB will almost surely transition to a regime that explicitly sets out the allowable range for periphery bond spreads. The central bank already targets spreads, so despite the uproar associated with the publication of definable caps or ranges, it would hardly mark a sea change if policymakers simply instituted a band system, for example.

You’re likely to see the same thing with equities. The Bank of Japan long ago cornered the market for Japanese government bonds, and although the BoJ scrapped an annual purchase target for equity ETFs following a policy review earlier this year, it reserved the right to intervene in order to keep stocks from falling too much on bad days. The BoJ is a literal dip-buyer armed with a printing press.

As of end-March, the BoJ held 51.5 trillion yen in ETFs, with a paper gain of more than 15 trillion yen (figure above).

I’ve variously suggested that over time, central banks might begin to view equities as a public good, purchasing them and then simply distributing them to the public. That would solve the most vexing problem with central bank stock-buying — namely, how to unwind holdings given stocks don’t “mature” and thus can’t “roll off.” Such a buy-to-distribute program could run in perpetuity, ensuring stock prices generally rise, with allowances for individual companies to fail and defined bands for intraday volatility.

When it comes to facilitating fiscal policy, there’s no going back. Fiscal-monetary partnerships are the way of the future. Again, this is only “new” in some respects. QE is debt monetization if balance sheets are never unwound. The Fed’s ill-fated attempt at balance sheet runoff notwithstanding, central bank balance sheets haven’t been unwound. Nor will they be.

In his letter to colleagues, Weidmann stressed “the great importance of the independence of monetary policy.” But monetary policy has never been independent. And to the extent it enjoyed a degree of independence over the past several decades, it’s not clear we’re better off for it.

Of course, that doesn’t mean you want the Donald Trumps and Recep Tayyip Erdogans of the world making all the policy decisions, but would an Elizabeth Warren-run Fed function better or worse than a Fed where officials actively trade the same assets they’re buying, wittingly ignore systemic risks and view the perpetuation of inequality as lamentable, but acceptable, collateral damage?

Over time, you’ll likely see more officials acquiesce to the idea of fiscal-monetary unions and administered markets, not because there’s universal agreement on the merits, but rather because, as Weidmann appeared to suggest, a decade is enough time to know when resistance is futile.

In a statement, Christine Lagarde said she “immensely” regrets Weidmann’s decision.