Grumpy Economist: ECB Verbal Salad Arrogance

Speech Isabelle Schnabel of the ECB, advertised on ECB official twitter stream

caused a characteristically irritable explosion from me. Enjoy the ECB tweet in all its glory:

We will not tolerate changes in funding conditions that go beyond fundamentals and threaten the transmission of monetary policy.


We made it clear last December that we would not tolerate price adjustments that would undermine the transmission of our monetary policy.

So now central banks know what “fundamentals” are in all asset prices and will “not tolerate” bond prices (aka “funding changes”) that deviate from their idea of ​​“fundamentals.” And I thought they had an inflation mandate and a short-term interest rate “tool”.

The contrast between the idea of ​​a detailed mechanism that central banks think they know how to manage and any actual scientific knowledge of the monetary and financial system gapes. The only thing I really know as an “expert” is how little everyone else knows. No one really knows where to start the “monetary transmission mechanism”, let alone how it is affected by the conditions of “financing”. And if Mrs. Schnabel reliably knows how to distinguish prices from “fundamental indicators”. I know a lot of hedge funds that would pay her much more than the ECB!

To see this gap, I compiled the following list of central bankers from her speech. At a minimum, if you want to be the head of a central bank, learn how to say it. As a human being, ask yourself if anyone really knows what any of those words “salad” actually mean, let alone if the ECB has the technical expertise to control it. (Some are just elaborate euphemisms, of course.) If I knew more computers, it would be really fun to program an AI that could replicate the work of a central banker. It shouldn’t be that hard because no one knows what it all means!

Your list of central banker vocabulary:

vulnerability to fragmentation risks

disruptive and self-fulfilling price spirals

financing terms


national borrowing conditions


a sudden gap in the relationship between sovereign returns and fundamentals

non-linear and destabilizing dynamics

market liquidity or speculative market behavior in the form of self-fulfilling market dynamics

markets find it difficult to assess risk

uncertainty is so high that risk premiums become uncertain

market dysfunction

liquidity conditions

Demand for bonds exceeded supply … leading to disruptive market dynamics and wild price swings.

specific risk factors that can drive multiple equilibria and self-fulfilling market dynamics

financial contagion

financial stress

destabilizing capital flows

internal and external imbalances

Markets have started pricing risk more in line with fundamentals

restructuring took place quickly and at times randomly.

Risks of destabilization of inflation expectations

indiscriminate revaluation

[a comment on this one: is there a world in which everyone knows they’ll lose 1% per day but just sit still? All repricing is “sudden” and “disorderly!” Finance 101.]

main vulnerabilities

financial market fragmentation

public distribution of risks through a permanent fiscal instrument at the European level,

[watch your wallets]

destabilizing market dynamics

market development



The real content of this speech is: “The ECB is going to stop buying Italian bonds. But we still don’t like high Italian interest rates – or at least we don’t like the Italian government paying high rates or getting to fix their finances. So get ready, we can go back to buy more Italian bonds. But we won’t talk about it out loud just yet.”

I remember centuries when central banks defended currency pegs with strong promises, verbal salads about market dysfunctions, etc., with strong promises to do whatever it takes… up to the point where they give up and hold on to the actual “fundamentals”.

Incidentally, the Fed, the Bank of England, the IMF, and others (I don’t speak Japanese) are equally to blame – I’m sorry that Ms. Shabelle happened to be on hand when my years of annoyance about talking to the central banker broke out.