Maybe Swiss Central Bank isn't really crazy

OF the Swiss National Bank's decision to abandon its euro peg, Thomas Jordan, the bank's leader, drily noted that "If you decide to exit such a policy, you have to take the markets by surprise." And boy, markets couldn't have been more surprised if he'd hired Russian currency traders to jump out of a cake in their birthday suits. But this surprise has not been met with shouts of wild glee. Many eastern European homeowners suddenly have to repay their mortgages in now-much-more-expensive Swiss francs. Currency markets are in turmoil, banks are losing millions, and foreign exchange trading houses are flirting with insolvency. Paul Krugman, among other economists, says that it is abandoning its commitment to fight deflation, losing institutional credibility with markets, and in the process making it harder for other central banks to make credible commitments.

All this is true. And yet, currency pegs are very hard to commit to. It's not that the peg was a bad idea -- back when the euro crisis was in full swing, it was probably the best way to keep scared global money from swamping Switzerland's currency and destroying many of its export industries. The problem with pegs is that they're hard to maintain and also hard to let go of without ... well, a lot of financial chaos. With trouble in Russia and the European Central Bank trying to stimulate its lackluster economies with a round of quantita- tive easing, the peg was about to make life even more difficult for the SNB -- and it apparently decided that financial chaos was preferable to the alternative.

From an economist's perspective, seems like the wrong decision, not because of the chaos, but because, this just

as Krugman notes, this is going to be hell on the exporters. But as Tyler Cowen points out, the SNB is not privileged to make its decisions in the rarefied air of a university office. It doesn't just need to think about maintaining insti- tutional credibility with markets; it also needs to think about preserving the institution's political capital, protecting the bank from meddling politicians who might take away the bank's independence, and start doing things even less in line with modern macroeconomic best practices:

Bureaucrats hoard and indeed extend institutional capital because they know how important it is to maintain the quality of significant institutions, such as central banks. Without such capital, semi-independent central banks would soon cease to exist, to the detriment of us all. Outside academics, however, rarely can see the importance of this factor, because they have less experience running political institutions. When smart central bankers -- which yes includes the Swiss -- are apparently doing the wrong thing, it is because they are seeing more variables of the problem than we are. They either cannot do "the right thing," or doing that would be too costly in terms of the country's longer-term institutional prospects.