E5-Regio1_Fulbright_1-13

Pointing the way on currency issues

Professor Volker Wieland met up with Fulbright fellows.

Volker Wieland’s Fulbright travel grant came at the beginning of what is now a long professional and personal focus on the United States. In 1988, he received a scholarship for the State University of New York at Albany to complete his Masters in Economics. After returning to Germany briefly, he then spent another ten years in the States. After gaining a Ph.D. from Stanford University in 
1995 Wieland was recruited by the Federal Reserve, where he rose to the position of Senior Economist in the Division of Monet­ary Affairs. In 2000 he was appointed to the Chair of Monetary Theory and Monet­ary Policy at Frankfurt’s Goethe University. Wieland was one of the masterminds of the innovative, interdisciplinary House of Finance in Frankfurt and his expertise is sought after the world over. For example, he has not only advised the German Fed­eral Government and the European Central Bank (ECB), but also the central banks of Chile and Finland.

The task of the central banks was also one 
of the topics at the meeting “DE Magazin Deutschland” organized between Wieland and four current members of the Fulbright U.S. Young Journalist Program. Christina Arrison, Euna Lhee, Jonathan Rabb and Deenah Vollmer talked with Wieland among other things about differences between the Fed’s and ECB’s monetary policy. Both central banks have massively expanded the provision of liquidity with the aim of supporting the economy. While Fed made greater use 
of direct purchases of government and real estate debt instruments, the ECB focused 
on expanding cheap credit to banks by 
loosening collateral requirements. However, Wieland also emphasized that the two in­stitutions pursue different objectives. The ECB’s first goal according to the Maastricht treat is to keep the price level stable, whereas the Federal Reserve Act states that the Fed shall not only combat inflation but also unemployment. “Combatting unemployment is a key argument in the Fed’s announcement not to raise the main interest rate until at least mid-2015 and thus being prepared to accept a weakening of the U.S. dollar. Although I personally feel the point in time chosen is too late,” comments Wieland, who advocates a stricter form of monetary policy. “However, as long as purchases of federal debt are 
justified by the task of stabilizing inflation 
and unemployment assigned to the Fed, the charge of monetary financing of the government is not quite correct. Furthermore, the Fed does not buy up bonds from individual federal states in order to reduce their finan­cing costs in a budget crisis as in California.”

In this context, how should we judge the ECB’s controversial decision to buy an unlimited volume of sovereign bonds issued by EMU member states in crisis? “A key problem behind the euro crisis is the widespread lack of trust in the ability or willingness of certain crisis countries such as Spain or Italy to service their debt in the long run. Sovereign bonds purchases by the ECB are one way to calm the market temporarily, but ultimately the fiscal problems need to be solved on the national level,” says Wieland, because otherwise these purchases entail the risk of higher inflation. There are also grounds, he feels, for criticizing the Fed’s easy monetary policy before the crisis, “because the Fed’s policy of low interest rates fueled the U.S. property market boom.” The U.S. real estate crisis arose in a manner quite comparable to the property bubbles in Ireland and Spain, where the construction boom driven by cheap credit also de-stabilized the financial system. “Actually, the global financial system should spread such risks as widely as possible so that potential losses can be absorbed more easily. Here, the system failed: The risks were concentrated, above all owing to the opaque securitization of loans.” However, terms such as “toxic” assets do not, he feels, add analytical edge to the debate: “Securities that bear risk are simply part of the banking business. And creditors should not automatically enjoy protection.” While the global financial system’s controls were insufficient, “excessive restrictions may prevent the financing of promising innovations with uncertain returns. Actually, the U.S. subprime crisis also serves to show that excessive political intervention in the market can bring about negative outcomes.” In the form of Fannie Mae and Freddie Mac, in particular, two semi-government institutions supported politicians’ well-meaning desire to support home ownership. “The interest rates on the loans approved did not adequately reflect the actual risks, however.”

Wieland doubts that the U.S. financial market reforms, for example the stricter regulation of banks’ dealing for their own account, will suffice to prevent another severe crisis. “In my opinion, it is more important to introduce stricter capital adequacy ratios for banks, precisely in order to better protect the money in people’s accounts.” So who would be liable if the protective mechanisms fail? Volker Wieland and the Fulbright fellows discussed the example of Iceland in this context. In 2008, Iceland was sent reeling by a banking crisis; the country’s three largest banks collapsed. Wieland finds it made sense that government refused to save the banks and thus spared its cit­izens having to pay an even heftier bill: “Taxpayers should only be liable as the very last resort.” Anyone assuming risk should be made responsible for the corresponding losses – in the case of risky transactions by a bank, the latter’s shareholders and, should this not suffice, the bank’s creditors. As regards Iceland however, Wieland notes critic­ally that its citizens initially benefited from the lax bank regulation there and the associated investments, whereas the costs of the banking industry’s collapse were primarily borne by foreign private investors, based, for example, in Germany.

Volker Wieland believes that one of the key tasks of journalists is to ensure there is transparency in such difficult crisis situ­ations. He considers it exemplary that after five years the complete transcripts of the Fed meetings are released to the public: “We should introduce the practice in Europe, too.” In this context, he likewise welcomes the change at the helm of the Federal Reserve in recent years, as “compared to Alan Greenspan, Ben Bernanke puts much greater emphasis on transparency and open communication on monetary policy. I think that is a positive development.”

VOLKER WIELAND is one of the most 
reputable experts on monetary policy in Germany. This is borne out by his appointment to the leading committee that advises government, the Council of 
Economic Experts. From March 1, 2013 onwards, Wieland will be a member 
of the Council for at least five years. 
German Federal Economic Minister Philipp Rösler praised Wieland on 
the occasion of his nomination for the Council as being “an expert on macroeconomics, monetary theory and monet­ary policy with a strong national and 
international reputation.”