Guest Post: Former Central Bankers Step Up Against The Central Banks

Submitted by George Dorgan of SNBCHF blog,

There are already three former European central bankers who criticize more or less openly the European Central Bank (ECB).


Axel Weber, former president of the Bundesbank

Axel Weber quit the Bundesbank in February 2011 when he realized that his tough monetary stance would not allow him to become president of the ECB. Later he took a new job at UBS, where he is supposed not to utter too much critics against the establishment.

Juergen Stark, former chief economist of the ECB

Juergen Stark left the ECB in September 2011 in protest against the ECB monetizing of debt.  The current role of Juergen Stark is different. He decided to make his opposition against the ECB public. Juergen Stark spoke with the Manager Magazin last month.

“I see the need for consolidation in the euro area. Weaker states would have to leave the monetary union. What matters is that the Franco-German axis hold. The integration of the core must not be lost. Otherwise we get a political and economic disaster of historic proportions.”

In March he criticized the ECB and accused her of provoking inflation.

 ”Both the policy and the central banks have succumbed to the temptation to treat all problems of the world flooding the markets with liquidity. It is historically proven that “any particularly strong expansion of the central bank balance sheet leads to inflation in the medium term”.

At the end of July he called Draghi’s plan to save the euro at any cost  ”a violation of European law”. He said furthermore:

 ”It is not the task of a central bank – at least not a modern central bank, as we understand it in Europe – to finance governmental functions or to give money directly to states.”


Otmar Issing, former chief economist of the ECB

Another European central banker has voiced his opposition even more strongly. Otmar Issing worked for eight years in the Bundesbank and changed 1998 into the board of the ECB and remained there till 2006. He is called one of the “fathers of the euro”. In 1998 he called the the euro “a very courageous experiment.”  Now he realizes that this experiment might fail soon.  He will publish soon a book with title “How to save the euro and enforce Europe”.

Some of his opinions are:

“More and more bailouts, and everybody says, the dose should be increased further. This is wrong. The political union of Europe as a solution to the problem? Do you really think anyone wants more integration of Germany into Europe, if it means that Germans must pay even more to other countries?”

He claims that Spain and Italy had many years of cheap money before the financial crisis, but did not use this period effectively.

“Spain and Italy need to solve their problems themselves, as they caused them. During the years of monetary union Italy had  always slow growth – an expression of bad policies. The global financial crisis has only accentuated the issues. Italy has so far done nothing to reform the labor market. The only exception are the Portuguese, they reform their country, they stick to agreements. What should the Portuguese think if other states constantly obtain exemptions from ?

“The euro will survive, but not with all members”, he adds.

More details on Otmar Issing’s new book can be found here.


Kurt Schiltknecht, former chief economist of the SNB


The next former central banker who is criticizing the central banks, is the chief economist of the Swiss Nationalbank (SNB) in the 1970s. In 1978 the SNB stipulated a cap for the franc, at that time against the German mark and was successful.  Schiltknecht was member of the socialist party (SP), what made his election into the rather conservative Swiss National Bank more difficult. Interestingly he is now the main advisor for monetary policy to the right-win politician Christoph Blocher of the Swiss People’s Party (SVP). Both Schiltknecht and Blocher were opposed to the early SNB interventions in 2010, but were in favor of a EUR/CHF floor in Summer 2011, more details on Blocher’s homepage.

Here a selection of Schiltknecht’s critical voices against today’s SNB leaders:

[Capital controls in the 1970s:] we tried, with negative interest rates, with investment bans and such things, to influence the movement of capital. But these measures have never worked at all. (Source, more details here)

Pegging the Swiss franc against the euro is far more dangerous than pegging it against the stable German mark, as the SNB did in the 1970s.  (Source)

In June 2010, when the SNB intervened at EUR/CHF 1.40, he said:

 ”It has been well established that these interventions have ultimately brought nothing huge. The market has not received a clear signal, the SNB has intervened too soon and has pumped too much money in the market. They have probably noticed that we are moving towards inflation.”  (Source)

In August 2011, when the franc was trading near parity to the euro, he opted for the first time for interventions:

In difficult times, you have to give the market a clear signal, where the exchange rate should be. The SNB should not target a single exchange rate, but a basket of currencies. (Source)

The SNB did not listen to his statement, when she set the floor. If she had used a basket as reference, then the strong fall of the franc against the dollar since September 2011 would be less accentuated. The USD/CHF exchange rate would be lower, the franc less cheap for Americans and other parts of the world.

Schiltknecht confirmed his August 2011 proposal of a currency basket in April 2012:

Faced with declining confidence in the economic policy of the euro countries it could be advantageous to define an exchange rate target for a currency basket. In this basket could be included also countries, whose economic policies are more stable than the ones in Europe and in the USA. This could help to minimize the risk that an unpredictable and uncontrolled development in the euro area would have a devastating impact on Swiss monetary policy. Pegging the franc to a currency basket would be more useful than removing the peg completely.  In current uncertain times the SNB must  do everything so that the Swiss franc is not dragged down into the vortex of weak currencies.


Georg Rich, former chief economist of the SNB

Schiltknecht was not the only central banker to disapprove the SNB interventions in June 2010. Georg Rich was until the end of 2001 Chief Economist of the SNB. In 2010 he asserted:

“Until spring [2010] I totally agreed with the National Bank policy. In May, however, it was scary to me, as the SNB bought up such an extensive euro sums. ” (source)


The SNB intervened in May 2010 for 77 billion francs, but in 2012 she had to increase currency reserves by 59 in both May and June and by 41 billion francs in July.


Ernst Baltensberger,  Thomas Jordan’s academic supervisor

Also in summer 2010 Professor Ernst Baltensberger, Thomas Jordan’s academic supervisor said:

“To fight against the market has no prospect of success. Using quantitative easing in a recession makes sense, it is a method used even in prior crisis. But now we do not see a crisis, the SNB should reduce liquidity…  (source)



All these older central bankers experienced the inflationary periods in the 1970s in detail, whereas the younger ones seem not to grasp what inflation means. Modern central bankers seem to think that monetary inflation will not lead to price inflation in the long-term. This might be true in countries where asset prices need to de-leverage after the bust of real-estate bubbles.

But it is certainly not true in states like Germany, Finland or Switzerland, that did not have a real-estate bubble till 2008. With current low employment and the aging population, qualified personnel who speaks the local language  will get rare. PIMCO’s Bill Gross might be right saying that soon employees want to get a part of the cake and not only the stock holders. This essentially implies wage inflation, the enemy of the 1970s.