Exclusive: Ex St. Louis Fed President Weighs in on the SNB’s Actual Mistake

Analysts far and wide are calling foul over the surprise announcement by the Swiss National Bank. To find out if

“Shock puts question over Swiss credibility” headlines a Financial Times piece. “Swiss Shock Tarnishes Central Banks” condemns the Wall Street Journal. “This is a huge hit to their credibility,” Deutsche Bank rebukes. Analysts far and wide are calling foul over the surprise announcement by the Swiss National Bank.

William Poole, photo courtesy of the Cato Institute

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The WSJ article goes on to explain that the move is “particularly troubling because central-bank surprises such as these are few and far between…” Reuters draws attention to Deputy Jean-Pierre Danthine reiterating the SNB’s steadfast support for the peg in a televised interview less than three days before it was abandoned. “In a case like this,” responded President Thomas Jordan, “the communication cannot be changed before the decision is made public.”

To find out if the raised pitchforks are warranted, I turned to former chief executive and president of the Federal Reserve Bank of St. Louis, William Poole. As many of you might be aware, the St. Louis Fed is widely regarded as the most public-minded and informative regional Fed, so if anyone is authorized to weigh in on the SNB’s alleged oversight, it’s him.

Mr. Poole asserts that the Swiss bank’s mistake wasn’t ending the peg suddenly, rather, it was starting the peg at all:

What is your overall opinion on the way that the SNB handled itself?

“There is a long history of attempts to peg the exchange rate ending in tears. Soros cleaned up against the UK in the early 1990s, for example.”

That crisis, known as Black Wednesday (sound familiar?), occurred when Britain was forced to withdraw the pound from the fixed European Exchange Rate Mechanism (ERM) after it was unable to keep the pound above its agreed floor. Largely, they couldn’t prop the currency up because George Soros short sold the sterling faster than the Bank of England could buy. This “broke the Bank of England” and threw the country into recession.

How could the SNB have avoided this volatility while still aligning the public to their stance in a more gradual manner?

“I would have preferred that they had thought through the issue at the outset, and not have started the peg.”

He reiterates that it’s “not possible to avoid the problem, once on the pegging course. It always ends this way… Gradualism,” in his opinion, is also “not possible.”

With respect to them toeing the line right up until the last minute, what is your opinion on Jean-Pierre Danthine reiterating support for the peg roughly 60 hours before they dropped it?

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“Once a government/central bank starts down this road it has no choice other than a surprise withdrawal. Consider the way the U.S. went off the gold standard August 15, 1971. A prior announcement or even suspicion creates massive capital flows.”

Indeed, readers familiar with the Nixon Shocks will know just how unsuccessful a resumption of dollar-to-gold convertibility was after Nixon’s not-so-temporary suspension.

In terms of the market overreacting, shouldn’t the SNB have predicted this might happen?

Mr. Poole sticks by his anti-peg guns. In his view, it’s “not clear” that the market is overreacting, but what he does know is that exits are “always messy.”

How did you push for public engagement during your presidency at the St. Louis Fed?

“I continued a tradition that was well-established when I arrived at the St. Louis Fed. The tradition goes back at least to President Darryl Francis.”

Darryl Francis was president and chief executive officer of the St. Louis Fed between 1966 and 1976. It was Mr. Francis that expanded the research department’s work and made sure it was readily available to the public.

What suggestions would you have for regulators going forward?

“As for regulation, the market ought to welcome much higher bank capital requirements in exchange for much less detailed oversight. Unfortunately, I have not heard any prominent bank leaders take this position. Bank ‘leaders’ are not leading on regulatory issues.”


William Poole was the eleventh chief executive of the St. Louis Fed. In 2007, he served as a voting member of the Federal Open Market Committee, bringing his District’s perspective to policy discussions in Washington. Poole stepped down from the Fed on March 31, 2008. He is currently senior fellow at the Cato Institute, senior advisor to Merk Investments and, as of fall 2008, distinguished scholar in residence at the University of Delaware.

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