Make no mistake about it, central bankers loath speculators, especially those within the foreign exchange market. The latest evidence of their disgust came when the Swiss National Bank (SNB) chose abruptly to remove its 3-yearold 1.20-peg to the Euro. Thomas Jordan, the esteemed leader and chairman of this group, should be pilloried in the town square, at the least, and imprisoned, at the most, for causing enormous financial damages for nothing more than a whim, driven by political fear.
You may never have heard of Thomas Jordan, but he has instantly become unpopular in his home country of Switzerland and been labeled the “the most hated man in foreign exchange.” And why not? The final assessment of the exact amount of carnage will not be known for months, but the forex industry was an immediate casualty. The press did not waste any time enumerating the billions that were lost by retail forex investors and their brokerage house partners. Major banks, independent brokers, hedge funds – you name it, all staggering fro losses accumulated in just one 24-hour period.
George Buckley, an economist at Deutsche Bank, a bank that was reported to have sustained over $150 million in painful losses, summed it up best, “It’s amazing that such a stoic central bank could end up abandoning such a long held policy with such short shrift. I thought we were out of the situation where central banks surprise so significantly as this.” The “surprise” was even more brutal because SNB Vice President Jean-Pierre Danthine re-affirmed two days before the shocking announcement that the currency peg was a “pillar of our monetary policy.” Sounds like he was the odd man out or that his mother never taught him that withholding valuable information is the same as lying.
Was this rash act a premeditated attack on the forex industry?
To answer that question, you have to go back to the seventies when currency markets went “floating” after four decades of central bank manipulation following WWII. Central banks back then had even more power than they wield today, but they were not in the public eye nearly as much. Today, they are heralded as modern day rock stars, and their egos have suffered for it. They long for the past when they could fix foreign exchange rates daily, too. In fact, their combined knowledge before floating took hold was that currency pairs would move very little on a daily basis, perhaps a pip or two, but nothing like the volatility that soon became market reality.
If they could not guess correctly then, why is now any different? Anyone that has taken Economics 101 has learned that markets are the only way to balance all competing forces to arrive at exchanges where both parties are satisfied. Central bankers are supposed to be the best economists we have, but every action they take, whether by setting interest rates or artificially expanding the money supply, is nothing more than a distortion that the market has to deal with at some point or another. Putting a peg on a major currency or forcing countries to abide by a common currency like the Euro is, by definition, a distortion or manipulation of market forces. In other words, it is price-fixing with global ramifications.
When currency markets floated and volatility appeared, the defense echoed far and wide by central bankers was that rampant speculation was distorting the market. Speculators became their “Number One” enemy, to be despised at every turn and never given respite or respect. If this contention were so, then every participant in forex is guilty, including central bankers that load up their balance sheets with foreign exchange reserves in intervention attempts designed to strengthen or weaken their national currency.
And that brings us back to Thomas Jordan and his merry band of banksters at the SNB. At least Janet Yellen and her predecessors, along with the light-footed Mario Draghi of ECB fame, gradually telegraph their every anticipated move in the market, hopefully, to give market forces a chance to absorb whatever artificial attempt at price fixing that they have conjured up. The Swiss, however, did not learn from their first mistake. Back in 2011 when they instituted the 1.20-peg, they rocked the market, complaining that the Franc was far too overvalued and was harmful to the Swiss economy. Pundits far and wide heaped abuse on the conservative bankers for acting out of character.
Fast forward to today, and it is “Déjà vu” all over again, this time bowing to political pressure from their nation’s exporters. Forget that the entire Swiss populace was benefiting from lower import costs. No, it was much more important to line the coffers of a few wealthy individuals that owned and controlled the watch and chocolate trades. As each day passes, Swiss voters are beginning to realize that they have been had, once again. The problem is that central bankers are rarely held accountable by the ballot box. Were their actions premeditated, in total disregard of the immediate damage that they would cause? It is difficult to accept that no one behind closed doors anticipated the global impact that their actions would bring. Did ignorance and incompetence reign?
Jail the Banksters!
If you or I had committed an act that cost independent bystanders billions of dollars in one fell swoop, what do you think the verdict would be in a court of law? I doubt if we would ever see the light of day again, despite any good behavior. Gambling bank back offices brought on the Great Recession, but no one went to jail. Now one small group of central bankers has wreaked havoc on the foreign exchange industry, not to mention other markets or the Swiss economy. Will all of these blatant white-collar crimes go unpunished, too? Will at least a few heads roll down the cobblestones in Geneva, Zurich, or Bern? Do not hold your breath. And the beat goes on…