Lorenzo Bini Smaghi

LBS’s many fans on this Blog will want to read about the controversy surrounding his continued membership of the ECB’s Executive Board. If he does not step down Nicolas Sarkozy is threatening to block Mario Draghi’s accession to the Presidency. The Financial Times account is here.

Silvio Berlusconi has called on him to step down, although no definite decision has been taken to offer him the post as head of Banca d’Italia in succession to Draghi.

According to the Corriere della Sera LBS had ‘no comment’ about the issue on leaving the palazzo Chigi. However, La Repubblica quotes him (on leaving a conference in the Vatican) to the effect that he cannot be removed before the end of his eight-year term. He underlined that ‘personal independence is one of the doctrines on which the independence of the Bank rests.’

39 thoughts on “Lorenzo Bini Smaghi”

  1. The title of the FT article is “Berlusconi moves on ECB row with France”. Actually I think this older Reuters story tells it better. Apparently Frankfurt has received a legal opinion that using threats (or browbeating) to cause a board member to resign would violate the independence of the ECB … but using inducements does not. No joking.

  2. .
    Slightly off topic …………..

    Greek 2-Year Government Bond Yield Surges Past 30%
    http://www.bloomberg.com/news/2011-06-16/german-government-bonds-advance-as-stocks-slump-amid-greek-default-concern.html

    Noonan Concerned Ireland May Be Engulfed by Fallout from Greek Debt Crisis.
    He said he “fears” the country could be engulfed by the Greek debt crisis, as he sought to calm investors’ concerns that the government will seek to impose losses on senior bank bondholders.

    “People are nervous,” Noonan said in an interview on Bloomberg …
    http://www.bloomberg.com/news/2011-06-16/noonan-says-ireland-fears-adverse-consequences-from-greece-s-debt-crisis.html
    .

  3. Let’s be grateful that the antics of LBS make it so hard for us to take him seriously. Could anybody make the case for reform of the ECB more compelling?

  4. A cross terrier can often seem like a great idea to mind the house. But after he has terrorised a few maiden aunts and bitten the neighbours children and the postman, the idea of his continuing presence is no longer compatible with harmonius community existence.

  5. I hope is does not leave us.
    The man is refreshing.
    Central bankers who pretend to be altruistic should be banned from public discourse.
    The future ECB president should also be transparent in his approval of financial buggery – Greek style.

  6. We should offer our “ami” in france out total supprt on this issue. One must stick by one’s neighbours.

  7. sarky`s looking at the numbers with Mario Dragi President elect for the ECB he is thinking with two Italians on the ECB govering board thats bad France losing influance if he can put a bit of pressure on get rid of LBS and how about how about putting a French man in he`s place it balances ECB governing board up with Trichet retiring in the autume

    so France loses the ECB president but gains a governing board member, Italy loses a governing board member but gains the ECB president

  8. sarky`s looking at the numbers with Mario Dragi President elect for the ECB he is thinking with two Italians on the ECB govering board thats bad France losing influance if he can put a bit of pressure on get rid of LBS and how about how about putting a French man in he`s place it balances ECB governing board up with Trichet retiring in the autume

    so France loses the ECB president but gains a governing board member, Italy loses a governing board member but gains the ECB president

  9. Presumably if he does go, we’ll get an odious frenchman instead, someone supine to M. Sarkozy? Appointed by a democratically elected official or career bureaucrat taking their turn after going through the ranks making the right faces at the right people.

    There must be a better way to staff so important an institution?

  10. Quick to stress the importance of (and encourage) changes to member states’ constitutional frameworks… but now poor Lorenzo is all in a fluster about the sovereignty and independence of unelected bureaucrats. Ain’t that cute?

  11. @hogan
    seems that the French were masters of European diplomacy / duplicity
    they aligned with others to form powerful blocs with lots of influance with the arrival of Sarkovy this has changed to form a divide and conquer attitude as this has multiplied other countries are starting to see this in its naked form

  12. So, just to clarify: An unelected member of one of the most central and systemically important institutions in the world, who is paid from the public purse and charged to act in the public interest, and who is doing active damage not only to that institution but also by extension to the wider European and world economy, and whose removal is being sought by not one but two Central European premiers…. currently can’t be removed from his position.

    Whose bright idea was it again, to make the ECB an independent organisation?

  13. How about that he steps down and the ECB appoints a proper economist whose research interests aren’t constrained by political fudge…not merely an apologist for how things are. Even a French Dr Pangloss would be a large improvement on LBS, who is increasingly more of a ‘Comical Ali’

  14. @clintideal
    Doesn’t it though?

    The massive kudos the french had for opposing the attack on Iraq has withered away with no gains to show for it. They are in danger of isolation in Europe and their economy is still stagnant.

  15. Until recently, French nationals headed the ECB, IMF and WTO.

    Why not wait until a term is up rather than having to give way to political demands from one of the big countries?

    @ ObsessiveMathsFreak

    Whose bright idea was it again, to make the ECB an independent organisation?

    Excellent question!

    Given the fiscal track record of most politicians, direct responsibility for monetary policy maybe a good thing!

    The horsetrading between the 17 countries would likely be good fun.

    It’s strange that the concept of independent central banks caught on. There maybe some value after all in being a slave to a defunct economist.

    We have our own boomtime Central Bank as a template for the non-independent and when an ‘independent’ view from Dame Street on the night of Sept 29, 2008, could have scuppered the harmony, the two chiefs were in team spirit, singing the mantra ‘resilient.’

    This comment may merit being consigned again to the camp of ‘nattering nabobs of negativism’ (William Safire) by defenders of the status quo.

  16. @ All

    Mainly national horsetrading.

    ECB executive board 5 men and one woman (though her photo isn’t there on the link). Governing Council 20 men and one woman. General Council as of end 2010 26 men no women.

    Board of Central Bank of Ireland (from memory), 9 men and one woman.

    As the ‘best person for the job’ is not an issue, how about, the next apoinment should be female.

  17. @ All

    This matter is hardly central to the resolution of the euro crisis, but LBS has a point. Leaving aside the argument that the institutions of the EU should be other than they are – which is a different question – and the capacity of LBS – which is a matter of opinion – the independence of the ECB is the central issue.

    LBS is fully within his rights. The irony of the situation is, of course, the fact that if he gives in – on getting a suitable alternative post in particular – his action will be seen as one of opportunism rather than principle.

  18. @ Peter

    I suspect an Opus Dei conspiracy. Dan Brown’s latest book deals with the issue…

  19. I wonder if Mr Bini had twigged long ago that his position was at risk and his bleatings were designed to make him look more ecb than the ecb themselves in an attempt to save his job.

  20. We have our own boomtime Central Bank as a template for the non-independent and when an ‘independent’ view from Dame Street on the night of Sept 29, 2008, could have scuppered the harmony, the two chiefs were in team spirit, singing the mantra ‘resilient.’

    You present a false dilemma. The entire Irish, Greek, and Euro crisis was all done under the aegis, watch and indeed approval of the ECB. This independent bank was arguably even more reckless and destructive than the ICB owing to the scope of its remit. We should not have to choose between these two extremes.

    For all the faults of political control of Central Banks, if the politicians had control the ECB would have printed money and this crisis would have been sorted by now. As it is, the main obstacle to overcoming the difficulties in Greece and the Eurozone is the European Central Bank, which is currently operating according to its own set of warped principles, totally against the public interest.

    My question still stands: Why in a democratic society should and institution of such central importance be governed by persons unaccountable to the democratic process? It is clear to all by now that the ECB is operating solely for the benefit of the financier classes. This situation has arisen because of the independence of the bank, as that very independence allows it to ally itself with any interest it pleases, and dismiss both its duties and the public good at will without gainsayment. This is no way to run a central bank.

    There must be a clearout of bankers and economists from the ECB board. The public must have direct and meaningful representation within the organisation. If not, then we must for the sake of our democracies return to national central banks and indeed national currencies. We must not be ruled by bankers.

  21. What is most amusing about this spat is that Lorenzo appears to have forgotten that he was only appointed in the first place because he is Italian. Now, he is being asked to leave for the same reason.

    It is typical of his double standards that he now portrays himself as independent.

  22. He was at the Vatican visiting the Vatican Bank. naturally. A follow up on the Ambrosiano. I would suggest he avoid “hanging around” the Black Friar’s Bridge.

  23. @ObsessiveMathsFreak Says

    “This independent bank was arguably even more reckless and destructive than the ICB owing to the scope of its remit.

    …if the politicians had control the ECB would have printed money and this crisis would have been sorted by now.”

    It is more than a little ironic that you blame a ECB, a civil service organization with a clearly defined and limited mandate, bound by an explicit prohibition of monetary financing in the Treaty, for not ignoring its mandate and monetizing public debt.

    So, in your opinion, an accountable and responsible central bank should have completely ignored the rules imposed on it by the political process and take the political process in its own hands?

    If it was so obvious to everyone that monetary financing was the way out of the crisis, then a quick change to the ECB’s mandate in the Treaty would have done the trick. I don’t recall a single EU country suggesting that.

  24. @Jake Watts:

    I would suggest he was visiting the Vatican in order to brush up on how to give his ‘ex catherdra’ speeches a little more of an ‘infallibility’ air.

  25. @Anonymous.

    The ECB is the most culpable institution in this whole sorry mess. Worse than the Irish banks, worse than the Irish regulator, worse that the Greek government, worse than Sarkozy.

    The reason is simple. It was the only single institution with a full overview of how bad the system was. Yet instead of offering leadership and proposing a well thought out long term solution, it aligned itself 100% on the side of bank bondholders first and then bank and State bondholders. And it decided that by inference that screwing taxpayers in all countries with difficulties was the way to go.

    There was a good long term solution which should have been implemented in late 2009/2010.

    1. Put in EU wide depositor protection in all EZ banks, insured centrally through ECB.
    2. Insist that State debt must not be burdened with bank debt, thereby insulating State debt from bank failures.
    3. Put in a structure for State default based on debt/GNP %. Of the default %, the EU to accept burden of 25% (transfer union) , while 75% be a mandated default borne by bondholders.
    4. Seperate retail banks from investment banks, with retail banks being funded from deposit savings only.
    5. Put in a bust bank resolution system, again based on definite criteria.
    Allow all banks to mark State debt at par, until a State defaults.
    6. Introduce limited capital controls to prevent bank runs from periphery to core.
    7. In forcing adherence to deficit reduction, insist that that higher level earnings and saving were targeted, not low paid workers. The reason being that targeting low paid workers has a much bigger negative impact on growth.

    The ECB could have attempted to properly analyse the situation and propose solutions. But in the worst case of regulatory capture of all time
    it sided with the large creditors and acted as a debt collectors sheriff.
    In doing so, it has effectively destroyed the euro and possibly the EU itself.

    As for the future of the ECB. There is none.

    To paraphrase King James, when he was offered supper on the evening of his defeat at the Battle of the Boyne:
    ‘After the breakfast I have been served today, I have no stomach for a supper’.

    And after the dog’s breakfast served so far by the ECB, nobody wants to know what they are going to serve for supper.
    The ECB is a thoroughly discredited institution.

  26. So, in your opinion, an accountable and responsible central bank should have completely ignored the rules imposed on it by the political process and take the political process in its own hands?

    The ECB did completely ignore the rules imposed upon it. It allowed unsustainable credit bubbles and lending practices to grow to such unprecedented levels that they now threaten the stability of the entire eurozone.

    Trying to argue that the ECB is being responsible now by following the rules is like arguing that a drunken parent is being responsible for getting their children up in the morning after it was they who kept the infants up all night with their revelry. This situation arose as a result of the ECB ignoring its own mandate. It’s not going to be solved by the ECB suddenly becoming a born again responsible rule keeper.

  27. @ ObsessiveMathsFreak

    An ‘independent’ judiciary is an essential pillar of a democracy but that is not to imply that parliament has no ultimate authority.

    It suggests that day-to-day political interference in operations is viewed as a negative.

    In Ireland, the county managership system at local level, separates the day-to-day operational function from the aspiration of accountability; the one area left to elected representatives (irrespective of conflict of interest) is in land rezoning and interference in planning issues – – hardly a record to be proud of.

    The Fed has a dual mandate – – price stability and employment; the ECB has only price stability.

    The ECB has been modelled on the Bundesbank and there have been examples in the past of presidents and directors being forced off the latter’s board.

    It is misleading to suggest that the ECB is unaccountable and could for example ignore a motion of censure by the parliament or the majority of EMU members.

    Governments appoint all the 23 members of the governing council.

    Draghi will likely be appointed president-designate next week by acclaim.

  28. @Joseph Ryan

    You have a wildly inflated understanding of the ECB’s mandate.

    “Put in EU wide depositor protection in all EZ banks, insured centrally through ECB.”

    – The ECB has _no_ role in deposit insurance. There exists an EU directive that says each country must have one, but the details are left for the national level. The ECB has no authority to insure deposits.

    “Insist that State debt must not be burdened with bank debt”

    – Again no business of the ECB to insist on such things. (And here I have a pretty good idea of what you might say next, ie that the ECB has been insisting on many such things. But you would be wrong. The only thing the ECB has been insisting on is consistent application of its collateral rules. And that it can insist on.)

    “Put in a structure for State default…”

    – Yet again an issue where the ECB has no role, not even a power to make proposals.

    “Seperate retail banks from investment banks,…”

    – Not necessarily a bad idea, but one in which powers lie fully at the national level. Nothing for the ECB here.

    “Put in a bust bank resolution system,..”

    As in the previous item.

    “Introduce limited capital controls…”

    Likewise.

    I’m not saying that there are no worthy ideas on that list. The fact just is that the ECB has no mandate on any of them. Not even to propose. Any proposals for EU legislation must come from the EU Commission which guards its right of initiative pretty fiercely.

    @ObsessiveMathsFreak

    “The ECB did completely ignore the rules imposed upon it. It allowed unsustainable credit bubbles and lending practices to grow…”

    The ECB had and has no powers or instruments to intervene in national-level credit bubbles. Financial supervision was, and still is, fully in the hands of national authorities. The only thing the ECB could do is to give warnings in various speeches, which it did.

    That there was a power vacuum was widely understood, but there was no political consensus in the EU on how to fill it. There was no way the ECB could have just decided to step in and start operating on a political battlefield.

    The crisis changed the politics and the EU managed to establish the ESRB (European Systemic Risk Board), which has powers to make recommendations on supervisory/regulatory issues.

  29. @Anonymous
    “The only thing the ECB has been insisting on is consistent application of its collateral rules. And that it can insist on.”
    I don’t believe you can say any such thing. The SBP today reports on two letters sent to Mr. Lenihan “urging Ireland to apply for the bailout from the EU and IMF just days before the government announced it was applying for assistance”

    It now also appears that the ECB is insisting that there should be no burden-sharing with Anglo and INBS senior unsecured bondholders. This is not a collateral matter, surely?

  30. @hogan

    It is precisely a collateral matter. That’s just about all the ammunition the ECB has. How else could the ECB urge Ireland to do anything?

    The content of the letter to Lenihan is not difficult to guess. Remember that half a year earlier the ECB had waived its collateral rating threshold for Greek bonds on the explicit basis of Greece having agreed to an EU/IMF program.

    Think about it: what could have been in the letter to Lenihan? Nothing else than a reminder that Ireland’s credit rating was fast approaching the ECB’s rating threshold and that unless Ireland signs up an EU/IMF program, there would be no waiver forthcoming and hence Irish bonds might soon be loosing their eligibility in the ECB’s liquidity operations.

    Needless to say, Irish sovereign paper loosing its eligibility would have been the end of the Irish banking sector.

    So the government blinked and signed up to an EU/IMF program and immediately afterwards the ECB issued a waiver. Incidentally, the waiver has not yet become effective, as Irish bonds still meet the eligibility threshold.

    So yes, it was about collateral.

  31. @hogan

    Sorry, I overlooked your last paragraph. The bondholder issue is probably not primarily a collateral matter but rather deals with the ECB’s counterparty policy – ie that counterparties have to be financially sound.

    Although it could also be a collateral issue if Ireland committed, as part of the program, not to default on bondholders. A violation of program terms could provide a basis for the ECB to withdraw the threshold waiver.

  32. @Anonymous
    “Needless to say, Irish sovereign paper loosing its eligibility would have been the end of the Irish banking sector.”
    Well, most Irish paper is held outside Ireland; I don’t believe Irish banks hold a significant amount of it. So, go ahead, shoot your own horse M. Trichet.

    “counterparties have to be financially sound.”
    Anglo will be sounder with more capital. Burnng creditors make it more sound, not less. Like with the fuss by the rating agencies and the ECB over ‘old’ Greek bonds should they be force-exchanged for ‘new’, it makes no sense.

    No, it is the act that the ECB objects to and the reason for it is the large amount of bank debt the ECB holds. Perhaps they would have to disclose this and it would make uncomfortable viewing how closely tied they are to the banking sector. The ECB has never broken down how many corporate and how many sovereign bonds it bought, but its balance sheet shows assets of 477 bn euro (item 7.1 http://www.ecb.int/press/pr/wfs/2011/html/fs110614.en.html ) in addition to repo operations…

    Hey, perhaps the ECB are owed Anglo bank bonds after all?

  33. @hogan

    “Well, most Irish paper is held outside Ireland; I don’t believe Irish banks hold a significant amount of it.”

    Well then the ECB has no cards to play, has it?

    In reality, the Irish banks have plenty of sovereign risk paper as collateral. Govt bonds, Nama bond, government guaranteed bank bonds etc.

    “No, it is the act that the ECB objects to and the reason for it is the large amount of bank debt the ECB holds.”

    I’m not sure what you mean by that. The bank debt the ECB holds is in general pretty well collateralized. It is difficult to imagine the ECB suffering a big loss on that.

    The 477 bn you refer to has little to do with Ireland. The first 135 bn contains the ECB’s covered bond program and securities markets program. The remaining 343 bn of it is national central banks’ own portfolios which typically are very well diversified.

  34. @Anonymous:

    You have a wildly inflated understanding of the ECB’s mandate.

    Anonymous
    Does the ECB mandate include a threat of economic war? Because that is what they have threatened this country with. A central bank threatening an immediate implosion of the banking system.
    In many countries the top people in such an institution would be in cells next to DSK.

    And I did not anticipate todays headlines in the Sunday Times which saw the a report of an ECB threat of economic war on Ireland before writing my comments.

    I don’t care what is in the ECB mandate, I simply watch what they do, more importantly what they don’t do and very importantly what they say and how they say it.
    Before today, I still had somewhere an idea of a central bank acting responsibly though there was plenty evedence to the contrary.
    After today, I can finally remove that idea.

    The ECB is a dangerous, dysfunctional institution. It is also finished and looking for a way out. A scapegoat.

  35. @Joseph Ryan

    “Does the ECB mandate include a threat of economic war?”

    If you want to call it that way.

    The Treaty mandates the ECB only to lend against “adequate collateral”. And whether you like it or not, the issue of the ECB maintaining its lending to Irish banks boils down to what constitutes “adequate collateral”.

    “I don’t care what is in the ECB mandate…”

    I would advice you to care. I don’t think a society in which civil service ignores its mandate and starts to invent missions for itself can function very well.

  36. 24th June
    Well, Draghi has been appointed and LBS given the nod to go to the Banca d’Italia.

Comments are closed.