Ok, well former trader Richard Breslow is out with his latest and he’s got a thing or five he wants to tell you about central banks and markets.
What you’ll read below is in many ways similar to the notion that excessive policymaker transparency is fostering dangerous feedback loops in markets by effectively making it impossible for anyone to form a long-term view. This concept was expounded most effectively and most eloquently late last month by Deutsche Bank’s Aleksandar Kocic.
The only difference would seem to be that Breslow believes a return to normalcy (where “normal” means rebuilding the fourth wall between markets and policymakers) is possible. And it’s important to differentiate between “desirable” and “possible.” Yes, two-way markets make price discovery possible and markets ceased to function in that capacity years ago. So it is unquestionably desirable that we return to a state of affairs where markets can function properly.
The problem now is that the state of exception has become permanent. There is no real way out of this. Maneuverability is limited and if inflation or deficit spending forces the Fed’s hand, volatility will return. But that’s not the problem – the problem is that volatility will return with a vengeance. Breslow seems to acknowledge that, but also seems to think there’s some middle ground whereby gradual but consistent tightening can somehow be pulled off while preserving enough transparency to keep things from falling apart completely.
That is probably a dubious assumption and that doesn’t even take into account the fact that, as Stephen Poloz learned recently, even if you do manage to reclaim some semblance of independence from markets as a central bank without tanking everything and driving up volatility, you still risk undercutting the economy. You cannot be the only hawkish central bank in a world that’s in the thrall of competitive easing regime and the currency war that comes along with that.
