The Bank for International Settlements (BIS), known as the central bankers’ bank, will get a new public face next week when it announces a new chief economic adviser, a unique job that combines the art of diplomacy with the rigorous discipline of a scientist.
It will be the seventh economic adviser to Swiss-based BIS, the world’s oldest international financial institution, and the candidate will succeed the straight-talking Stephen Cecchetti, who once compared the financial sector to cancer because it can grow so large that it suffocates and eventually devours its national host.
The choice of economic adviser is significant because it provides an insight into how central banking will evolve in coming decades as it faces the twin challenge of exiting from years of ultra-easy monetary policy and integrating financial stability into its operational framework.
From managing Germany’s war reparations to helping extinguish international financial crises and give birth to Europe’s single currency, the BIS has evolved into a truly global institution, at the core of international efforts to design and implement many of the policies that make up a new international financial architecture.
The common thread that binds all BIS advisers is a deep personal commitment to public policy. Not only were all its past advisers marked by the policy issues of their time, they put their own mark on public policy.
From its founding in 1930, the BIS was always at the heart of international finance with the history of central banking and monetary policy witnessed and documented by its Monetary and Economic Department (MED), headed by the economic adviser.
Like a calm voice of reason amidst the cacophony of financial markets, the MED publishes topical working papers, quarterly reviews of international financial developments and the prestigious BIS annual report. The MED’s work is based on data collected from central banks worldwide about the global financial system.
The MED also supports the various committees that meet at the BIS, from the world's central bank governors to the Basel Committee For Banking Supervision (BCBS), which sets global standards for banking regulation.
The more secretive part of the BIS is its banking department, which manages the assets and foreign currency reserves for central banks. Through its linked trading rooms in Basel and Hong Kong, BIS traders buy and sell foreign exchange, gold and securities on behalf of some 140 central banks and international institutions, the reason the BIS is known as the central banks’ bank.
One of the distinguishing features of the BIS is the banking operations, which gives the adviser and his staff of economists a first-hand knowledge of how financial markets are behaving real-time and how a bank operates day-to-day.
Like the BIS, the role of its economic adviser is unique.
Owned by 60 central banks, BIS has no national constituency, nor is it an international institution like the International Monetary Fund (IMF) that is responsible to member governments. The BIS resides at the intersection of economics and politics.
This autonomy gives the BIS economic adviser a certain freedom to carry out independent research that forms the basis for the “BIS view” of international economic affairs, a view that is most clearly expressed in the annual reports in late June.
The BIS annual reports gained new respect and clout after repeatedly warning of the financial imbalances that triggered the Global Financial Crises in 2007. More recently, the BIS annual reports have highlighted the dangers to central banks’ credibility and independence from the intense pressure on them to keep interest rates low and solve problems that are outside the realm of central banking.
Looking back at past BIS economic advisers, it soon becomes clear that they possessed skill sets that only few can claim:
An accomplished economist that is at ease in the rarefied air of central bank governors and commands their respect; a diplomat that policy makers trust for confidential advice; a visionary administrator that can inspire and manage a staff of top monetary economists from central banks worldwide and finally an intellectual with the guts and confidence to stand up for his beliefs and defend the BIS view.
This view represents much more than just the adviser’s opinion. It is an institutional view, developed in close cooperation with the BIS management team, currently headed by General Manager and former Bank of Spain Governor Jaime Caruana.
Among the most influential general mangers in recent years was Andrew Crockett, who led the BIS from January 1994 to March 2003. Crockett transformed the BIS into a global institution from a euro-centric body and nurtured the BIS view by allowing its adviser and economists to become more provocative in public statements and their work.
BIS management has to walk a fine line in espousing its views given that its owners are central banks and the board of directors includes the world’s most powerful central bank governors, such as Ben Bernanke of the Federal Reserve, Haruhiko Kuroda of the Bank of Japan, Mario Draghi of the European Central Bank and Zhou Xiaochuan of the People’s Bank of China.
The economic adviser relies on the support of the manager. During the 1990s, for example, Crockett provided the necessary political cover for views by staff or the economic adviser that were critical of the supervisory community or the monetary policies pursued by some central banks.
There have been seven advisers in the history of the BIS, each staying in their job for an average of 13 years so Cecchetti’s five-year, one-term stint is slightly unusual. However, he only planned to stay for one term so his decision to return to the United States did not come as a surprise.
The only other adviser to remain in the position as adviser for less than a decade was Alexandre Lamfalussy but that was only because he went on to become BIS general manager.
Following is a brief profile of economic advisers to the BIS:
Per Jacobsson: September 1931-October 1956
Swedish-born Per Jacobsson joined the newly-established BIS in 1931, becoming the first head of its monetary and economic department. Among his responsibilities was writing the BIS’ annual report, which quickly gained worldwide reputation.
In 1956 Jacobsson left the BIS to become managing director of the International Monetary Fund in Washington D.C. and remained in that role until his death in 1963.
Jacobsson set the standard for BIS economist, not only for his analysis and work in monetary economics but also for his international standing and trusted friendship with bankers, government officials and political leaders worldwide.
Jacobsson’s appointment to the IMF came as such a surprise to the BIS that there were no plans in place to replace him and it took four years to fill the vacancy.
Milton Gilbert: November 1960-December 1975
American Milton Gilbert took over as economic adviser at a time of rapidly expanding international trade and economic growth within the Bretton Woods system with the U.S. dollar the main reserve currency and thus the dominant instrument in international liquidity.
Gilbert came to Basel from the OECC, the Paris-based organization that was set up in 1948 to help administer the Marshall Plan. The OECC became the OECD in 1961. Gilbert had been director of economics and statistics at the OECC and began his career at the U.S. Commerce department and attended the Bretton Woods conference as a junior member of the U.S. delegation.
As an American with deep knowledge of Europe and international monetary affairs, Gilbert became known for pointing to growing U.S. budget deficits as the primary reason for the breakdown of the Bretton Woods system and called for a revaluation of the official gold price to save it.
Alexandre Lamfalussy: January 1976-April 1985
Hungarian-born Alexandre Lamfalussy took over the mantle from Gilbert in 1976 and added the responsibility of assistant BIS general manager in 1981. In 1985 Lamfalussy became BIS general manager and left the position of economic adviser.
Prior to joining the BIS, Lamfalussy had a career as an academic and then as a commercial banker with Banque de Bruxelles, one of the predecessors of the ING Group. He joined the Belgian bank as an economist and rose to the position of chairman of the executive board, gaining valuable insight into financial markets.
Lamfalussy remained at the BIS as general manager until 1993 when he moved to Frankfurt and became founding president of the European Monetary Institute, the forerunner of the European Central Bank (ECB).
During his time as general manager, Lamfalussy was a member of the Delors Committee, which met at the BIS in Basel and was pivotal in European monetary integration and the preparation of the Maastricht Treaty.
Lamfalussy became synonymous with European monetary and financial integration and when he left EMI, Wim Duisenberg described Lamfalussy as a person that combined the cautious nature of a central banker with a firm belief in European monetary integration.
But the BIS was also closely involved in the Latin American debt crises of the early 1980s and part of Lamfalussy’s legacy was his understanding of financial fragility. He became the main architect of the BIS approach to financial stability, which focuses on the financial system as a whole, including the risk of failures of banks and other institutions that have a systemic dimension.
Horst Bockelmann: May 1985 - April 1995
Before joining the BIS in May 1985, Bockelmann, a German, spent most of his working life with the Deutsche Bundesbank in Frankfurt. His main work at the Bundesbank was in research and statistics and at one point he was in charge of monetary analysis and became known for this work on monetary targeting. From 1972 to 1978 he was deputy head of the Research Department and then from 1979 to 1985 he was head of the Bundesbank’s Statistics Department.
Reflecting his past at the Bundesbank, Bockelmann’s writing style was clear, concise and logical, a precedent that later BIS economic advisers have followed.
In the mid-1960s, Bockelmann was seconded from the Bundesbank and served in developing countries, providing technical assistance. In 1965 he became the first governor of Guyana’s new central bank, which issued its first notes that replaced the Eastern Caribbean currency.
During his time at the BIS, Bockelmann often argued for worldwide coordination of economic policies, taking issue with such luminaries as Martin Feldstein and Stanley Fischer that believed each government should deal with their own problems.
It was Bockelmann’s misfortune to be economic adviser at the same time that Lamfalussy was general manager. Despite his new position, Lamfalussy was effectively still chief economist and the public face of the BIS, never afraid to make strong statements.
William White: May 1995-June 2008
Canadian William R. White joined the BIS in June 1994 as manager of the MED and took over as economic adviser and head of the MED a year later.
White’s career began as an economist with the Bank of England in 1969 which he left in 1972 to join the Bank of Canada. He spent 22 years with the Canadian central bank, initially as an economist, and then rising to the position of deputy governor from 1988 to 1994 where he was responsible for international developments, including foreign exchange intervention and reserve management.
After his retirement from the BIS, White deepened his involvement in public policy, helping advise German Chancellor Angela Merkel on G20 issues from 2008-2012 and is currently serving on the Federal Reserve Bank of Dallas’ board for globalization and monetary policy and is chairman of the Economic Development and Review Committee at the OECD, which makes policy recommendations to member countries.
Under White and General Manager Crockett, BIS started to take on a much more public and independent role, taking issue with its natural constituency of banking supervisors and central bank governors.
BIS economists began to question the prevailing wisdom that inflation targeting by central banks would lead to financial stability and showed that low inflation can in fact mask the build-up of financial imbalances.
The consequence of that insight was that White found himself in the delicate situation of publicly arguing that central banks should take asset bubbles into consideration when setting policy, a view known as ‘leaning against the wind’.
This was in direct contrast with the position championed by the revered Federal Reserve Chairman Alan Greenspan, who argued that asset bubbles were hard to identify and therefore central banks should just focus on cleaning up any economic damage caused by the bursting of bubbles.
In his final annual report before leaving Basel in 2008, White presciently wrote that the global downturn would be deeper and more protracted than the consensus view expects and “the effectiveness of a lowering of policy rates might be significantly reduced in the aftermath of a credit-induced spending boom.”
And White is not resting on his laurels. In August 2012 he wrote the paper, “Ultra Easy Monetary Policy and the Law of Unintended Consequences,” pointing out the dangers from the current low interest rates by central banks in advanced economies – helping lay the groundwork for the Federal Reserve’s decision to wind down five years of massive asset purchases, known as quantitative easing.
Stephen Cecchetti: July 2008-?
Stephen G. Cecchetti, citizen of both the United States and Italy, came to the BIS from Brandeis University and Ohio State University following a two-year stint at the Federal Reserve Bank of New York as director of research and associate economist at the Federal Open Market Committee. As many other prominent central bankers, Cecchetti also studied at the Massachusetts Institute of Technology.
Even before he joined the BIS, Cecchetti was thinking along the same lines as BIS economists who were exploring the consequences of financial liberalization and globalization for monetary policy.
In 2000, Cecchetti co-authored “Asset Prices and Central Bank Policy” with John Lipsky, Sushil Wadhwani and Hans Genberg, raising the issue of how central banks should view changes in equity, housing and foreign exchange markets.
The paper’s conclusion was that central banks can improve their performance by adjusting policy to changes in asset prices along with inflation forecasts and the output gap. Answering critics, who argued that asset bubbles are difficult to spot, the authors admitted that it may be difficult to spot misalignments but that is no reason to ignore them.
And in November 2007, as the global financial crises was starting to unfold, he called for derivatives to be traded on exchanges with clearing houses imposing margins based on the security’s daily gains and losses, much like capital in a bank acts as a buffer against losses.
Illustrating how such ideas can develop into public policy, Group of 20 leaders agreed at their Pittsburgh summit in September 2009 that all standardised over-the-counter derivative contracts should be traded on exchanges by the end of 2012 – a goal that is getting closer but still not fulfilled.
Under Cecchetti, the BIS has deepened its understanding of how the financial cycle - in contrast to the shorter and more commonly-understood business cycle – impacts economic growth and typically ends with crises. Dynamic economic models that integrate the financial system, something that was ignored in the past, are now being refined and tested.
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