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.


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12 thoughts on “Jens Weidmann Has Left The Building

  1. I really appreciate your insights and analysis.

    When I started seriously investing about 7 years ago, I never imagined that I would ever view investing as an activity backstopped by the Central Banks of the world.

    Now, it seems it is a fait accompli (a thing that has already happened or been decided before those affected hear about it, leaving them with no option but to accept it).

    1. What I would really like to understand is how widely held is this view (there is no going back on fiscal-monetary partnerships) among the professionals who control the trillions that are invested in stocks and bonds?
      Almost everyone or only a relatively small group?

      1. My guess is that the larger the AUM for the big pros, the more inertia is created preventing any real “bloodless” flexibility for future actions. H makes a subtle but critical observation when he posits the idea of the CB (Fed or other) buying equities to manage and distribute to the public over time. Once started, I firmly doubt such a practice could ever be allowed to stop. The BOJ, as I remember the last data I saw, controls (beneficially owns) well over half the stocks of Japanese companies — at a notable unrealized gain shown here. Trouble is, they probably can’t realize this gain because of the negative effect it would have on Japanese stock prices. It would seem they are well and truly “stuck” in a policy/strategy “tar baby” and have no real way out.

  2. The vexing thing is that a lot less of that commandeering would be necessary if we (well, the US population) still had the political will to tax the rich and to unwind some excesses when it comes to cost inflation in specific sectors like real estate, higher ed and health care…

  3. H…This one is a must read..It is really a great 30,000 foot look at the Topography of Modern Markets . Sometimes it just pays when we don’t listen to even a good deceased friend because this post benefits a lot of others who ponder these changes of the last decade and their impact on the future of investing. Thanks !

  4. I was hoping your article would not end on that last line. I’m guessing that the difference between regretting his decision and “immensely” regretting his decision, is that she wanted to convey some degree of sincerity in her statement. I just don’t know why. I don’t know enough about the dynamics there. It doesn’t seem like the two were philosophically aligned. Does Lagarde see herself as someone who forges compromises, and wants a hawkish viewpoint to balance other views? Or is she hoping that he will be less vocal in future criticism once he is a private citizen? Or something else?

  5. “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.”

    But wouldn’t the ‘public’ just sell it so they can use the money for more useful things, given it yields nothing, thus then putting even more pressure or the bond prices?

  6. At what point do we (market) account for this debt monetisation and therefore devalue the currency accordingly? This can’t go on forever whether it is done via central banks buying bonds or helicopter money or … or… it will have to impact the currency at some point.

    1. Has it not occurred to you that maybe it can go on forever? Or at least “forever” as far as you’re concerned and I’m concerned and the next two generations are concerned? All fiat money is worthless by definition. The dollar is just a shared myth. Faith is what sustains it. The idea that hyperinflation “must” ensue “at some point” is patent nonsense.

      1. Ask someone parroting that to give you a date and then listen to them stutter and fall back on something about how much purchasing power the dollar has lost over a century. Then say “But you didn’t answer my question. When is hyperinflation coming? What’s the date? What is the breaking point? Can you quantify it for me? Where is the rule?”

        All you’ll get is condescending eye rolls and sighs, except the joke isn’t on you, it’s on them, because they’ll still be waiting on hyperinflation and penning silly blog posts about gold when they’re 90. Or they’ll throw up their hands and retire in their mid-50s.

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