On January 15, the Swiss National Bank (SNB) shocked international markets by abandoning the 3-year-old exchange rate floor of 1.20 Swiss Franc (CHF) per Euro (EUR). Put simply, this means that the SNB stopped spending billions of Swiss Francs to buy euro-denominated bonds.
The market reaction was brutal, punishing the Euro and every foreign exchange and options trader on the wrong side of this trade. Some forex trading firms will go under. Foreign exchange trading desks within banks are, of course, part of ongoing unwilling taxpayer largesse.
In a few short weeks, Israel's Prime Minister, Benjamin Netanyahu, and his Finance Minster in his coalition government, Yair Lapid, have succeeded in doing what once seemed impossible; transforming his nation's central bank's once stellar reputation into a comedic farce.
On Saturday, European officials stunned Cypriots (and many others) by announcing a rescue package for their country that involves a levy on all bank deposits. The news is spreading far and wide, causing quite a bit of controversy in the process.
Central banks should be respected. And they can certainly counter air pockets, but not forever. Either fundamentals will improve or asset prices will fall. Which outcome we eventually see depends in large part on whether other government entities finally step up to their policy responsibilities.
The world economic recovery continues, but it has weakened further. In advanced countries, growth is now too low to make a substantial dent in unemployment. And in major emerging countries, growth that had been strong earlier has also decreased.
An open "politicization" of finance came out as a consequence of governments and central banks stepping in, in the sense that the dynamics of financial asset prices is now determined directly in the political sphere.
Just like central banking, economics wants to speak politically, but doesn't necessarily welcome a response. In Krugman, it sometimes comes across as condescension. At the Fed, it can appear more sinister.