Falling behind with your bills? Need help with your debt? What’s that old banker’s saying?
“If you owe £100 it’s your problem; if you owe £100 million it’s our problem.”

Let me introduce you to the shady world of central bankers; the guys who are allowed to print money; the lenders of last resort.

So Who Are These Shady Characters?
First up is poacher turned gamekeeper, President of the European Central Bank, Jean-Claude Trichet. In his previous role as governor of the Bank of France he was indebted to the French justice system for clearing him of involvement in a major fraud scandal. In a neat Gallic touch the verb ‘tricher’ means ‘to cheat’.

Representing the Land of the Free (bailout) is Ben Bernanke. Big Ben is one of the clever guys, with a background in reading, writing and talking economics. He took over from Alan Greenspan, a man with a reputation for solving problems by cutting interest rates. It didn’t take long for Ben to discover the way to American hearts is by cutting interest rates at the first sign of trouble.

From the UK is all round tough guy Swervin Mervyn King whose attitude was, “if you’re going to take stupid risks, why should I help you out with taxpayers’ money?” The answer of course was that if he didn’t help out then the iron fist of Gordon Brown would increase its grip on his testicles until they become blacker than the outlook for the UK banking sector.

The Muscle Behind These Guys

Monsieur Trichet heads up the European Central Bank (ECB), the new boys on the block. The ECB started up in 1999, formed out of merger of 13 old firms, who reckoned that their combined strength would help them take on the Yanks. The ECB Governing Council is responsible for controlling monetary policy. The ECB president is required to submit an annual report to parliament but also he, or a deputy, have to report quarterly to parliament’s Monetary Affairs Committee.

Swervin Mervyn heads up the Bank of England’s Monetary Policy Committee (for more background on this bunch read MCP,PC or MPC? Inflation Explained). This committee was formed in 1997, when the Bank became independent, to run monetary policy as dictated by the government. The MPC is answerable to parliament, with members presenting the Quarterly Inflation report to the Treasury Committee.

Big Ben’s Federal Open Market Committee (FOMC) implements monetary policy for the US Federal Reserve Bank System (the collection of regional Federal Reserve Banks). The Chairman of the FOMC reports to Congress twice a year on monetary policy goals and objectives.

What Do They Control?
There’s lots of boring regulatory and supervisory stuff, but the common theme here is to maintain ‘price stability’ and, where possible, to support the governments’ objectives for employment and growth.

The ECB has the most single-minded approach, aiming for an inflation rate of below, but close to, 2% over the medium term. This ‘one-sided target’ is criticised for being less flexible than the other central banks as the focus on inflation requires a bias towards higher interest rates.

Price stability for the Bank of England is defined by the Government’s inflation target of 2% plus or minus 1%. Straying outside the 1-3% band requires the Governor of the Bank to write an open letter to the Chancellor explaining what’s gone wrong and what the Bank proposes to do about it.

The US Federal Reserve Bank has both a broader and less specific job spec. Its remit is to promote effectively the goals of maximum employment, stable prices and moderate long-term interest rates, but with no specific inflation target.

Dates For Your Diary
All the important economic releases will be noted in paddypowertrader’s Weekly Wrap. The European Central Bank and Bank of England usually hold their interest rate meetings on the Thursday of the first full week of the month. The UK decision hits the screens at midday; the European announcement follows at 12.45. The European guys don’t disclose their votes, or publish minutes, but send Monsieur Trichet to play verbal cat and mouse at a 13.30 press conference. Here the use of the words ‘vigilance’ and ‘accommodative’ generally signify any policy bias by the bank. The Bank of England usually only offers a press statement if there’s been a change in rates, but broke this tradition in September to reassure markets during the credit crisis. The minutes, and voting disclosures, are published during the third week of the month.

The FOMC hold 8 scheduled meetings a year, though it’s harder to see a pattern. The decision is announced at 7.15pm our time, and is accompanied by a statement. Minutes are released three weeks later.

Financial Muscle – These Guys Control the market
These guys can print money! Howdya like that? These unlikely godfathers control how much money is floating round the system by the use of refinancing operations; by buying or selling securities (like government or asset-backed bonds) they add to or take out liquidity from the market. By deciding the amount of money to make available they control the level of interest rates as banks bid for funds in an auction process. Funds are available on an overnight basis, but are also offered for longer periods, in weekly or monthly auctions.

Over the past two months the banks were called on to offer emergency funding. The reactions showed a stark contrast between the immediate willingness of the ECB to offer billions of Euros for various periods and the strong reluctance of the Bank of England to bail out irresponsible lenders. Both Bernanke and King had made speeches saying that it was wrong to bail out speculators and foolish lenders, but both were persuaded to do just that; the Fed went a step further and cut interest rates by 0.5%. We have articles explaining what a Sub-Prime Mortgage is and why a Credit Crunch hurts.

Is The Emergency Funding Working Or Hiding A Bigger Problem?
With equity markets around the world either at, or fast approaching, record highs I’ve got to give it to the guys in suits; in the short term the emergency funding has worked. The ECB declared that although there was strong demand at this week’s weekly financing operation the bids were lower, suggesting the money markets were under less pressure than before. Three-month money rates are well below the peak levels of September and talk of a US recession and global slowdown is having little effect on investors’ confidence.

But will we wake up one morning to find a bloodied horse’s head lying next to us? I’m a miserable old cynic and I struggle to believe that there aren’t still a few skeletons playing peek-a-boo in the cupboard. Perhaps someone is playing a good hand of poker and will get bailed out if confidence returns to the debt markets.

The Bank of England’s emergency funds remain untouched apart from one special deal with Northern Rock, but that’s because UK banks prefer the anonymity of borrowing from the ECB (see Sneaky Little Bankers). Investment banks are so desperate to get billions of pounds worth of dodgy loans off their books that they’re offering discounted loans to any willing takers.

Hold on. Low interest loans, secured on dodgy assets, where’ve I seen that before? Several of the big banks have had their share prices rewarded by coming clean with their losses, but it still leaves the question, “ Where the *#!% is it all, in a cave on the Pakistan/ Afghanistan border?”

During all this credit crunch malarkey a well-worn phrase was ‘moral hazard’ which meant it wasn’t right to bail out people who’d lost money through betting on the lame horse. This was fine and dandy when it was yacht-owning hedge funds going t*ts up, but long queues outside Northern Rock suddenly complicated matters and the gamblers on the lame horse got their money back.

In short, no knee-cappings and no concrete overcoats mean the word on the street is that these guys are a bit soft.