Believe it or not, the Fed could do worse.
The Federal Reserve will meet Tuesday to weigh another round of shock therapy for a torpid economy. Investors are wondering what the Federal Open Market Committee will say about a possible second round of so-called quantitative easing. Economists widely expect the Fed to buy, say, $1 trillion of Treasury bonds over a period of months.
Yet for all that, there are central banks that are even more feckless than the Fed. While the Fed’s plan to restore the economy through low interest rates and other stimulative moves is far from certain to succeed, at least it’s not the most obviously wasteful policy option.
That distinction, such as it is, goes to “currency intervention” — the star-crossed practice in which central banks commit scarce national resources to holding down the value of their currency. The idea is to bolster the economy by making exports cheaper and more competitive, while doing the opposite for imports.
But in doing so, officials essentially play chicken with the $4 trillion-a-day foreign exchange market, and almost inevitably lose.
Despite the program’s poor track record, it continues to appeal to central bankers at a time of stressed finances and weak growth.
“What we have here is a multilateral race to the bottom,” said Dean Popplewell, chief currency strategist at foreign exchange broker Oanda Corp. in Toronto. “The question is who can do it with the least kerfuffle.”
Here are three central banks that have both raced for the bottom and caused a kerfuffle, much to their citizens’ dismay.
- The Bank of Switzerland. It spent around $200 billion between March 2009 and this past June in a bid to hold down the Swiss franc’s appreciation against the euro. How did that work out? The swissie appreciated 10% during that span anyway. “Those are some serious paper losses,” said Popplewell. “You’d have to say their big picture strategy hasn’t worked out.”
- The Bank of Japan. It has spent almost $800 billion since 1977 on currency intervention that “seems to have had little lasting effect” on the value of the yen, a 2007 report to Congress concluded. But try try again. And so it is that this month Japan intervened for the first time in six years in a move that was almost universally derided as doomed to fail – particularly since any Fed announcement of QE2-related action would likely send the dollar lower against all currencies.
- The Central Bank of Brazil. It has wasted large sums in a forlorn bid to hold down the value of the real over the past year. But setting an example all central bankers are surely taking note of, Finance Minister Guido Mantega said last week the government won’t let that stop it from making the same mistake over and over again. “We won’t just stand here and watch this game,” he said. But the moral of this story might be: Don’t just do something, stand there.