Tuesday, June 14, 2022

ECB word salad hubris

The  Speech by the ECB's Isabel Schnabel, advertised on the official ECB twitter stream 

caused a characteristically grumpy outburst from me. Savor the ECB's tweet in all of its glory: 

We will not tolerate changes in financing conditions that go beyond fundamental factors and that threaten monetary policy transmission.


In December of last year, we made clear that we would not tolerate price adjustments that would undermine the transmission of our monetary policy

So now central bankers know what "fundamentals" are in all asset prices, and "will not tolerate" bond prices (aka "changes in financing conditions") that deviate from their idea of "fundamentals." And I thought they had an inflation mandate, and a short-term interest rate "tool." 

The contrast between the vision of detailed machinery that central bankers think they know how to control and any actual scientific knowledge of the monetary and financial system is gaping. The one thing I actually know as an "expert" is how little anyone else actually knows. Nobody really knows what the "monetary transmission mechanism" is to start with, let alone how "financing" conditions affect it. And if Ms. Schnabel knows reliably how to distinguish prices from "fundamentals" I know a lot of hedge funds that would pay her a whole lot more than the ECB does! 

As one way to see that gap, I compiled the following list of central-bankerese from her speech. At a minimum, if you want to be a central banker, learn to talk like this. As a human, ask yourself if anybody actually knows what any of this word salad actually means, let alone if the ECB has the technical knowledge to control it. (Some, of course, is just complex euphemism.) If I knew more computers it would be great fun to program up an AI that can replicate a central banker. It shouldn't be that hard, because nobody knows what any of this means! 

Your central banker word-salad vocabulary list: 

vulnerability to fragmentation risks 

disruptive and self-fulfilling price spirals 

financing conditions 


national borrowing conditions


sudden break in the relationship between sovereign yields and fundamentals

non-linear and destabilising dynamics

market liquidity or speculative market behaviour in the form of self-fulfilling market dynamics

markets find it difficult to price risk

uncertainty is so high that risk premia become indeterminate

Market dysfunction

liquidity conditions 

demand for bonds outpaced supply..., giving rise to disruptive market dynamics and drastic price swings.

specific risk factors that may spur multiple equilibria and self-fulfilling market dynamics

financial contagion

financial stress 

destabilising capital flows

domestic and external imbalances

Markets started to price risk more in line with fundamentals

adjustments were taking place in a rapid and, at times, disorderly fashion

Risks of a destabilisation of inflation expectations 

disorderly repricing 

[a comment on this one: is there a world in which everyone knows they'll lose 1% per day but just sit still? All repricing is "sudden" and "disorderly!" Finance 101.] 

underlying vulnerabilities

financial market fragmentation

public risk-sharing through a permanent fiscal tool at European level,

[watch your wallets] 

destabilising market dynamics

market developments



The real content of this speech is, "The ECB is going to stop buying Italian bonds. But we still don't like high Italian interest rates--or at least we don't like for the Italian government to have to pay high rates, or get to work fixing its finances. So get ready, we might go back to buy more Italian bonds. But we won't say so out loud quite yet."

I am reminded of centuries of central banks defending currency pegs with resolute promises, word salads about market disfunction and so on, resolutely promising to do whatever it takes...all right up to the moment that they cave in and the actual "fundamentals" take hold. 

BTW, the Fed, the Bank of England, the IMF, and others (I don't speak Japanese) are just as guilty -- I regret that Ms. Schabel happened to be at hand while my years long annoyance at central-banker speak happened to explode. 


  1. Well ... the critics can't (really) attack you if they don't know what you (really) mean!

  2. Thank you! This is delightfully and scarily true for all central bankers!

  3. Well, according to Wikipedia, she studied at Mannheim, the Sorbonne, and UC Berkeley. Which is at fault, or is this classic learning-by-doing? :-)

  4. Lol…Wedge… lmao

  5. Oh Prof... you are so much going to Twitter Jail...:-) :-) how dare you challenging a central bank bureaucrat?

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  7. What she is actually saying is: we will not let italy go broke. Our most important mandate is good financing conditions for our member state! If that goes hand in hand with low inflation, fine, if not, then not.
    Of course, this is a clear breach of the ECB treaties.
    I am curious what the Federal Constitutional Court of Germany will say about this.

  8. Then probably you should also look at Schnabel’s recent VoXEU column partly responding to your post on climate change and central bank — another huge plate of word salad.


    1. That's here:


      It's from a different world.

  9. Umm, English as a second language? Look I gave it a rip. Each word used has a meaning, the problem is that sequence in which they are used renders them absurdly meaningless.

  10. Let me know when you want to build that program. If you believe that suspended Engineer from Google, you can create a halfway sentient Central Banker that passes the Turing Test by intentionally confusing anyone it comes across.

    Definitions and their underlying conceptual framework matter. I complain about this in the AI sphere: no one knows what intelligence is yet there's this mad rush to create it simply for the ex-ante productivity gains and easy management style.

  11. I was full of salad after only ten paragraphs. Roughage really does apply to word salads too!


  12. On the other hand, you frequently hear academic economists say things like "this seemingly small increase in the Fed funds rate will reduce inflation if everyone thinks it will reduce inflation. Or, "This central bank policy will work if everyone thinks it will work." So, couldn't it be that this vague and ambiguous "Central Bankerese" is actually a fairly well thought out effort to not really say anything but, at the same time tell everyone what they want to hear?

    1. "... will reduce inflation if everyone thinks it will reduce inflation."

      Yeah, that one's new to me. The only way I can make sense out of this is that if everyone believed there will be no inflation they would voluntarily hold more money, the money needed to finance government deficits. If true, there'd be more and more money printing coming, forever.

      Why should people believe in no inflation under these circumstances? Wishful magical money thinking.

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  14. I would love to hear your view on this recent ECB press release :-)


    1. OMG. The link is a press release "ECB takes further steps to incorporate climate change into its monetary policy operations." Among other things it will only buy "green" bonds and demand lots more "disclosures." Any time I think the US regulatory system is screwed up, I just need to look over the ocean. There is such a thing as too much independence. Political oversight is messy, but completely unaccountable technocrats going off on their own crusades is worse.

    2. It’s getting even better here:


    3. The link is very interesting. The ECB has abandoned the pretense that it is regulating "climate financial risks." The ECB is at least being honest -- it is taking on climate policy directly, picking winners and losers as it were, allocating capital to its vision of what needs subsidizing and what needs strangling in the name of climate.


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