A Conversation With Three Central Bankers

In Madrid on Monday I moderated a discussion on global finance organized by the Aspen Institute Espana. The speakers were Paul Volcker, Agustin Carstens (head of the central bank of Mexico, and a candidate to succeed Strauss-Kahn at the IMF), and Henrique Meirelles (until recently head of the central bank of Brazil, now in charge of preparations for the Rio Olympics). In due course I might be able to post a link to a recording. Meanwhile, three things struck me as notable.

First, none of the speakers had much time for the idea that Greece's debt would have to be restructured. Paul Volcker's impatience with this idea especially surprised me. He is usually willing to be outspoken and has no particular reason (unlike Carstens, for instance, a serving rather than former central bank chief) to avoid controversy and choose his words carefully. He usually says what he means. His point was that a modest restructuring would make no great difference to Greece's fiscal problem--it has to get to a primary budget surplus regardless--and so was probably not worth the risk. Yes, I suggested, but who said anything about a modest restructuring? An immodest restructuring, together with "internal devaluation" (lower wages) and further fiscal tightening, still seems to me the least bad of the terrible alternatives that Greece and the EU are now contemplating. The central bankers weren't having it.

Second, there is a new conventional wisdom on asset prices and monetary policy. I asked how far, if at all, central banks should take asset prices into account in setting interest rates. Until recently the conventional view was that interest rates were the wrong instrument: it would take more than an increase of, say, half a point to make a difference if an asset-price bubble was inflating, and if prices in general were stable, a bigger increase in rates would be inappropriate in any case. Also, as Alan Greenspan always emphasized, you did not know a bubble was a bubble until after it burst. At that point, monetary policy could deal with the consequences.

Better late than never, that orthodoxy seems to be dead. Interest-rate setting should take asset prices into account, all three panelists said. True, that might not be enough by itself: other instruments should also be called upon (stricter loan-to-value regulation of mortgages, for instance, in the case of a house-price bubble). But the idea that bubbles could not be identified except with hindsight, or that it was enough to mop up the damage afterwards, seems to have passed into an earlier era.

Third (this came came not from the panel but from conversations in the margins of the event), Spanish business leaders are furious at the way the self-inflicted ruin, as they see it, of Greece, Portugal, and Ireland has impugned their economic reputation and blighted their economic prospects. They think this a travesty. Spain's case is quite different, they insist. (So it is, up to a point.) They are especially annoyed, I was told at some length, by the way the FT and The Economist have covered their difficulties. One told me he hoped that the Wall Street Journal, which had been "less biased", would take over the FT. That was harsh, I thought.

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