What Were They Thinking?

Porsche makes powerful cars and there have been many cases in which after an accident involving a Porsche, the survivor or survivor’s family sued the auto-manufacture with claims that its cars are too powerful for ordinary people or roads. There is no doubt that many drivers of elite cars like Porsche and Ferrari have no idea how powerful these cars are and then, in cases of unfortunate accidents, they have been painfully made aware of it. This is so with many other machines too. When their operators did not have any idea about their true power then the results had been catastrophically destructive.

greenmanThis should apply to Central Bankers too. The monetary policies of central banks affect tremendous number of people – both within their host nations’ boundaries and outside. We wonder if members of the Governing Board of Swiss National Bank were aware of the power that they held? After their decision to remove the euro floor, we are not sure if they did.

Imagine you are an ordinary tourist visiting Switzerland for couple of weeks for skiing etc. Let’s say you started your trip on Monday, January 12. Before going on this visit, you had budgeted all the expenses and planned accordingly. Now suddenly, mid way through your trip, you find out that everything is going to cost 15% more. Not something that many ordinary people can tolerate. Your choices are either to cancel the trip or pay the higher amount either way it is a financial and emotional loss.

On the other side are Swiss businesses. Foreign tourists spend more than CHF 17 billion. Much of that amount is spent on small businesses. A 15% increase in franc will force a lot of them to either reduce prices drastically or forgo the business. Either way it is going to impact the bottom line.

Then there are many foreigners who, for one reason or other, were tethered to the franc. During the financial crisis, many Poles and Hungarians borrowed in francs because they were lured by franc’s stability and dependable monetary policies of SNB. Most of these Eastern European currencies tumbled after SNB’s decision and now suddenly all those franc-borrower are in deep financial trouble.

Obviously, the SNB has very strong reasons for its decision and many economists can justify them. But that still does not alleviate this manufactured human suffering and members of the Governing Board of SNB should have known the havoc they were about to wrack.

Since 2007, franc had been appreciating against the euro. It rose from 1.68 euro in December 2007 to 1.007 in August 2011. That is why they established the floor of 1.20 euro, 20% above the then prevailing exchange rate. Notwithstanding their statement, “While the Swiss franc is still high, the overvaluation has decreased as a whole since the introduction of the minimum exchange rate.”, the reality hadn’t changed since 2011. The franc was kept at a lower exchange rate because of SNB’s floor. Every body and I mean every body who knew anything about forex, knew that the moment the floor is removed the franc will rise to the 2011 level if not higher. That is what happened and the people at SNB knew that or should have known that.


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