Report: Switzerland Should Learn from Stanley Fischer’s Currency Moves

Rather than buying euros in order to keep the exchange rate at a minimum of 1.2 francs, the Swiss National Bank (SNB) should have emulated Stanley Fischer’s moves at the Bank of Israel and not set a target exchange rate, a report said.

Switzerland’s Fed started buying euros hoping this artificial demand would weaken the franc, and thus narrow the gap between the cheap euros that Swiss exporters get abroad, and the expensive francs in which they pay wages at home, MarketWatch said.

Unlike the Swiss, Stanley Fischer never officially set a target exchange rate when he was governor of the Bank of Israel.

The SNB’s mistake was that it tried to rob the markets of their foundational privilege: setting prices. An alternative course was mapped during the last decade by Fischer, who is currently vice chairman of the Federal Reserve, MarketWatch said.

Faced with an excessively strong shekel, Fischer did what the Swiss would later do, announcing he would start buying foreign currency on a regular basis. However, unlike the Swiss, he never officially set a target exchange rate. Instead, he said how much he would buy — $25 million a day, which later grew to a daily $100 million — and he said foreign-currency reserves would gradually grow by 42% to $40 billion, the report said.

This worked. The shekel depreciated enough to help exports and the purchases were discontinued 18 months after their launch, with the markets generally calm even though reserves had by then exceeded their declared target by 40%, reaching $70 billion, MarketWatch said.

The difference between Fischer and the Swiss was that he arrived at the market the way the markets expect any seller to arrive at their gates: with goods. He brought the goods — cash — but he etched no price, because he knew that his role was to gauge demand and calibrate supply, but not to set the price in advance. Prices, by definition, depend on the market encounter between goods and buyers, even if the seller is the central bank itself, the report said.

The first Swiss mistake, then, was to boss the markets by capping the franc’s exchange rate, a mindset that SNB President Thomas Jordan still harbored Friday when he said the franc remains “greatly overvalued, ” thus reprimanding the markets for ignoring his orders, according to MarketWatch.

Yet beyond this financial conceit lurks a deeper dissonance, a misreading of the entire phenomenon of the euro. As long as the Deutsche mark existed the SNB was both inspired and shielded by the conservative Bundesbank, often raising and cutting the franc’s interest rates in tandem with the mark’s. All this changed with the launch of the euro, when Switzerland’s four neighbors suddenly shared one currency along with another 15 countries elsewhere, the report said.

Like everyone else, the Swiss initially mistook the euro for the healthy mark’s healthy successor. That is how they fooled themselves into pegging their good currency to the bad one that sprouted on their doorstep, deluding themselves that the euro’s vulnerability is temporary. It isn’t, MarketWatch said.

A currency used by 19 nations of whom hardly two speak the same language while each maintains its own military, taxation policy, and spending machine — is not a currency. The Greek crisis had made this failure plain, and Europe’s growing immigration crisis and political restlessness will further weigh on its union in upcoming years, the report said.