Danthine, New SNB Member, Says Crisis Will Force Model Rethink
Jean-Pierre Danthine, who joins the Swiss central bank’s board next year, says the financial crisis will force a rethink of the economic models he worked with during his lifelong academic career.
“The enormous progress that we have made in monetary theory has led to excellent control of inflation,” he said in an interview with the Swiss daily Le Temps today. “Today, this progress looks only intermediary. It leaves a gaping hole, that of interaction with the financial world.”
The 58-year old professor of economics and finance will get a hands-on chance to address those shortcomings when he joins Philipp Hildebrand and Thomas Jordan on the Swiss National Bank’s governing board next year. Danthine, who has published on topics ranging from financial asset pricing to business cycles, joins a central bank that has run out of conventional monetary policy tools as it contends with falling prices, a contracting economy and the bailout of the country’s biggest bank, UBS AG.
“This will certainly be new for him,” said Ernst Baltensperger, professor of macroeconomics at the University of Bern and head of the SNB’s Gerzensee research foundation. “He has an outstanding reputation as a macroeconomist but he’s not particularly oriented towards monetary policy.”
Danthine will take over the part of the central bank responsible for implementing monetary policy. The SNB last month began buying Swiss franc bonds and weakening the currency to inject funds into the economy as interest rates approach zero.
Dual Citizen
“He has tremendously good judgement as an economist,” said Darrell Duffie, a professor of finance at Stanford University who spent last year on sabbatical at University of Lausanne with Danthine. “He’s able to bridge across areas and apply common sense in a way that’s perfectly suited to the climate he faces at the Swiss National Bank.”
Danthine, a dual citizen of Belgium and Switzerland, holds a doctorate in economics from Carnegie-Mellon University in Pittsburgh, Pennsylvania, and has been head of the Swiss Finance Institute since its inception in 2005. He has also held visiting appointments at CUNY Graduate Center, University of Southern California and Universite Laval in Quebec.
In academic circles, Danthine is most known for his work on real business cycle theory, which argues that fiscal and monetary policy should not intervene to smooth short-term fluctuations, Baltensperger said.
The SNB has not subscribed to that theory in recent months. It has slashed 250 basis points from its benchmark rate since October, bringing the rate to 0.25 percent my credit score. With rates near zero, the SNB resorted to buying foreign currencies to weaken the franc and directly purchasing corporate bonds in a bid to cushion the impact of the recession.
Activist?
“He certainly does not have a particularly activist monetary approach,” said Joerg Baumberger, professor of monetary economics and finance at the University of St. Gallen. Still, “he’s not an ideologue. He can also be pragmatic when necessary.”
Danthine, in the interview with Le Temps, said he expects the economy to improve by January of next year, except for unemployment.
“We will have to make sure that the turnaround happens under the best possible conditions, and that the major risk is no longer deflation but inflation,” he said.
The bank is also grappling with $38.7 billion in toxic assets it took over from UBS, as part of a government rescue the SNB helped engineer in October. Zurich-based UBS has amassed the biggest losses of any European lender from the credit crisis. Its unprecedented rescue has fuelled calls for more controls on banks and executive compensation.
Incentives
SNB President-designate Philipp Hildebrand, in a speech on Feb. 5, said the central bank, the government and banking regulators must make the financial sector resilient and sustainable, by changing compensation and performance incentives for bank executives and ensuring that the country’s big banks can no longer put financial stability at risk.
Danthine, who has published extensively for more than 30 years, has argued that bonuses are making up too big a part of executive pay, and has questioned the rationale behind a series of consolidations in the banking industry.
His research includes articles entitled “On the Consequences of State Dependent Preferences for the Pricing of Financial Assets,” “Executive Compensation and Stock Options: An Inconvenient Truth,” and “Banking: Is Bigger Really Better?”
Married to Renee-Paulee, he has two children, including a son, Samuel, who has followed him into economics and is assistant professor of economics at the University of Quebec at Montreal.
“We’re not looking at a conventional economic crisis by any means, so you need someone who doesn’t have a doctrinaire, dogmatic attitude,” Duffie said. “You need that has common sense and is open minded and has great training as an economist. And that describes completely Jean-Pierre’s ability.”