SNB tweets to ponder

It’s funny how faculty who work at universities with large endowments can’t understand the decisions of the Swiss National Bank…

That one is from me.  In this kind of status-driven, bureaucratic environment, the incentive is to extend your cushion, not run it down and have to print up new money to replenish it, thereby receiving egg on your face and appearing dependent and outside the rules of the game.  You’ll do better understanding the SNB by reading Pierre Bourdieu on social capital than portfolio theory or the literature on optimal seigniorage.

I will note that university endowments are somewhat of a puzzle too (pdf) — for instance why don’t schools spend them down more, as a kind of crude political business cycle theory might suggest?

(On the other hand, just try dropping your items into a Swiss recycling bin on a Sunday.)

There is at least one big difference here: the SNB doesn’t want a balance sheet which is as large as possible, because that means both assets and liabilities.  Colleges and universities are far more likely to wish to maximize their endowments, which do not (one hopes) come with offsetting liabilities.  The “endowment” of a central bank has more to do with political chits, favors, and public impressions, backed by extreme solvency but not too big a target either.

Paul Krugman makes some good and interesting points about the comparison with Hong Kong; in my view influence capital in Hong Kong has been (ultimately) determined externally for a very long time, first Britain now China.  That gives the territory some special feasibility properties for a wide variety of issues.  Krugman is falling into a kind of sophisticated “public choice” mistake that is more frequently committed by libertarians.

In none of these cases am I suggesting that the current incentives are optimal from a social point of view.  And here is an earlier post on central banks and capital.  It is not that a partially privately-owned, cantonally owned SNB is maximizing raw seigniorage, a view which has come in for some rebuttal as of late.  Rather the partial private ownership helps account for what kind of legitimacy needs to be produced and what kinds of rules that legitimacy requires.

C’mon people, read your Gramsci!


it is strange to see Krugman say HK Currency Board is similar to Swiss one, as HK's currency board explicitly use market force to adjust the the equilibrium exchange rate to the pegged rate, while Swiss rely on the "credibility" built on pure faith of market participants. I think these are two kinds of very different system, and based on different types of expectation management strategy~

One point to add is that the HK system makes the "true" market very not observable, it makes changing the peg rate a difficult job, and any change in the peg will require any total overhaul of the regime....

SNB used market force when it needed to until it decided (for reasons we may well learn soon) not to do so anymore.

Krugman is no longer a world-class economist. He is a political activist and must be viewed as such.


But what if the SNB, looking over its shoulder at Greece et al., thought Euro devaluation (vs. dollars, gold, yen, whatever) was coming anyway no matter what it did.would it really want to acquiring a boatload of soon to be devalued Euros just before this happened? It had to buy Euros to keep the Franc down, and it couldn't sell them for something more likely to keep its value without further depreciating the Euro and hence strengthening the Franc, requiring ever more purchases of Euros. And this need to buy Euros was only going to accelerate as the Euro started falling as it purposes a looser monetary policy as favored by Southern Europe. Maybe they just figured they might as well bow to the inevitable before they accumulated a horde of worthies Euros rather than after (and spending all the political capital and further enraging their conservative critics as elsewhere discussed).

Or not?

Does anyone seriously believe a looser monetary policy on the part of the EU means Euros become 'worthless'?

SNB could buy dollar assets anyway.

No. Not worthless as in zero value but worth less as in less valuable than it was. Unfortunately autocorrect (or my own typos) did me in here!

There is actually no need to apologize. It is only a tendentious reading of your comment that allows one to "think" you are claiming all the Euros the SNB was buying or would have had to buy would be come "worthless". If the Euro drops by 10% versus the CHF, it can be said that 10% of the Euros the SNB bought became worthless.

I'm not going to read Gramci since it will be trying to fit a square peg into a round hole. As for HK vs CH, it could well be that one caved in while the other has not yet, so people make up theories according, after the fact.

"It’s funny how faculty who work at universities with large endowments can’t understand the decisions of the SNB"

Seems like a pretty blatant exercise in ex post reasoning. If it was so clear, it wouldn't have been so shocking (in the objective sense, the market reactions were very large).

Agree. It was a shocker.

If the SNB wants a smaller balance sheet, it's hard to imagine a worse decision than the one that occurred last Thursday. Tight money leads to bigger balance sheets (as a share of GDP.)

The only link I could find to support this claim is by Scott Sumner, found here: It is point #2 of this piece.


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