Boring Bernanke, Diligent Draghi

Central bankers and economists from around the world converged on Wyoming this week to partake in the Federal Reserve’s annual Economic Policy Symposium in Jackson Hole, where all awaited Fed Chairman Ben Bernanke’s Friday speech. Bernanke, lest we forget, first announced QE2 at 2010’s gathering, and many suspected he might use this year’s to announce a long-awaited (and, in our view, hardly needed) QE3. His actual speech, however, wasn’t terribly earthshattering—it was largely devoid of any new information or thinking, although media headlines speculated on the probability of additional quantitative easing based on his disappointment with employment figures and inflation-headroom. (As an aside, there was one speech we found sensible.)

The day’s more dramatic central banking news came from the one banker who wasn’t in Jackson Hole—ECB President Mario Draghi, who announced he would skip the conference to prepare for “the heavy workload foreseen in the next few days,” alluding to what is widely seen as a test of his resolve to “do whatever it takes to preserve the euro” ahead of a series of key European Union meetings this week.

First, news leaked about details of the European Commission’s much-anticipated proposal for a centralized EU bank regulator. If the regulatory scheme takes shape as envisioned, the ECB would be the sole authority to grant banking licenses and have oversight over the 6,000-odd euro-area banks—with full supervision starting in 2014. Next steps could include a full banking union, with region-wide deposit guarantees and processes for resolving failed banks.

However, by some reports, the Commission wants to extend oversight to non-eurozone banks, too—something the UK has opposed since eurozone leaders first agreed to centralize banking supervision at their last summit. With big question marks over this and other issues—like the role of national central banks—and with some nations perhaps not terribly excited about ceding more sovereignty to Brussels, heated politicking seems likely. And the targeted January 1, 2013 launch date might prove a touch optimistic.

Shortly after the Commission’s plans leaked, news broke Draghi would give the Eurogroup (the euro area’s 17 finance ministers) 24 hours to digest his bond-buying proposal before debates on it start September 4. Which means Draghi will finally reveal what, exactly, doing “whatever it takes” to save the euro will look like. At least in part. No single option has yet emerged as the favorite, but most officials seem to inclined to attach strings to any additional bond buying measures—thereby keeping pressure on aid-seeking peripheral countries to implement and maintain tough public sector cuts. Other options include sovereign bond yield caps and targets on spreads over benchmark German bunds.

All will likely have their champions and opponents—but, as ever, all eyes will likely be on Germany—former Bundesbank chief Axel Weber resigned last year over the ECB’s earlier PIIGS debt purchases under its Securities Market Programme. Philosophically, the Bundesbank sees bond-buying as de facto state financing via the printing press and outside of the ECB’s mandate of maintaining price stability (fighting inflation). So it’s no surprise that shortly after the bond-buying announcement rumors began to surface, current Bundesbank chief Jens Weidmann threated to resign as well. But even Weidman doesn’t have a vote on the ECB Governing Council and isn’t a member of the Council’s important Executive Board. And the Council overall seems dedicated to doing, well, “whatever it takes.”

More important, German Chancellor Angela Merkel (facing parliamentary elections next year) has fallen into tacit lockstep with Draghi, further strengthening the likelihood of some version of a bond buying plan passing. Still, as next week unfolds, it’s likely Draghi’s commitment to “do whatever it takes to preserve the euro” gets put to the test. But given eurozone officials’ continuing resolve to preserve the single-currency union and provide capital support where needed, some form of compromise seems likely. Not that anyone should expect terribly much from any ECB action—as we’ve long said, there’s no silver bullet solution for the eurozone. Purchasing sovereign debt—assuming it works as intended—would merely push sovereign debt yields down somewhat, buying troubled nations additional time to continue sorting through their deeper issues, like economic competitiveness and productivity.