Wednesday, June 18, 2008

Reefer Madness; central bank version

Learning by their undoing...
It's not as if central bankers really are smoking anything or need to in order to explain their current actions. As a group they blew it so badly in in the '73-74 and '78-79 oil price spikes that they are doing the opposite this time around.

But are they overdoing it? Does an excess of one type breed another?

Three-Stooges in action?
One thing seems clear and that is that the ECB is not the Fed. The second is that ECB is not the Bundesbank. With inflation ridiculously over its target ceiling of 2% at 3.7%, the ECB is only now losing patience with inflation. It is almost reminiscent of a Three-Stooges routine where they dare a bully who already has done so nine times before, to step across 'this line' one more time... So why is 3.7% so much worse than 3.6% or 3.5% when 2% was the 'top'?

Mis-fire and brimstone?
The ECB stood aside for the financial crisis and now with Jurgen Stark saying that the latest upward revision in inflation (from 3.6% to 3.7%) is alarming, the rate-hike die is seemingly cast. But just a week ago Stark was saying that no series of rate hikes is planned. Italy's Bini Smaghi says one 25bp dollop of rate hiking might be enough. So what kind of fire and brimstone is this? Something to roast marshmallows by and eat smores?

Killing us softly with their songs...instead of using firearms
For all the rhetoric central banks are really being more kind and gentle than you would think. I could not see the Bundesbank of old acting this way. The BOE that embarked on a rate-cutting path, has shocked markets with the revelation that at its last meeting it discussed a rate hike - a HIKE! In the US, Bernanke is talking about it but no one knows if he has the guts to do it.

Teach your children well
It seems that there is a lot more central bank muscle flexing than mud-wresting. They are hoping to get out of this episode with minimal action and hope to salvage their reputations by anchoring expectations with scotch tape and staples instead of welds and rivets. Interestingly, so far it even seems to be working. So much for spare the rod, spoil the child. Words can be enough if they carry weight... In the end the central banks are being more passive and understanding of the complexity of oil prices than their rhetoric would have you think... prompting the question of who is smoking what?