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Guns, ammo and forint: The paranoid style in central banking

Citing a host of fears, National Bank of Hungary is arming itself with 112 handguns, 200,000 bullets

By James Saft

(Reuters) — The National Bank of Hungary's decision to arm itself with actual weapons demonstrates that tough times breed bizarre and extreme responses.

Citing a host of fears, from bombs, to migrants, to terror, central bank Governor Gyorgy Matolcsy explained to Parliament the bank's decision to buy 112 handguns and 200,000 bullets.

And you thought the zero lower bound left central banks without ammunition.

It shouldn't be too much of a surprise: The same global conditions that produced Donald Trump, a legitimate U.S. presidential candidate, also gave rise to a central bank of a European Union member preparing itself for what sounds like a siege.

To be fair, other central banks, notably the Federal Reserve, have police forces, both to safeguard their premises and persons and also cash and other valuables.

Yet Matolcsy's citing of the risks of migrants is suggestive of a mental map not usually seen in developed market central bankers.

The issue of physical security from migrants has never before been raised, even obliquely, in any discussion of the ways and means of central banking as far as I know.

One wonders exactly how many bullets might be needed to hold the terrorists or migrants off until other, better armed, Hungarian authorities can come to the bank's aid. The mind boggles.

Hungarian Prime Minister Viktor Orban, to whom Matolcsy is closely allied, has pursued a highly restrictive and heavy-handed policy on Syrian and other refugees and migrants, attracting international criticism, so citing migration should be seen in this context.

So call it the Paranoid Style of Central Banking, if you like, recalling historian Richard Hofstadter's famous 1964 work putting the rise of Barry Goldwater into the historical context of exaggerated U.S. fears of, among others, foreigners and Catholics: "extremism in the defense of liberty is no vice".

One irony here is that paranoia around central banking is usually directed, not outward by central bankers, but inward towards the institutions themselves, which some eccentric observers often accuse of being in the thrall of one cabal or another.

And Hungary's central bank under the Orban dispensation has a track record of unusual initiatives, from spending $108 million on fine art to allocating more than $700 million of its profits to fund the teaching of schools different to what it calls "outdated neoliberal" economics.


Hungary attracted much criticism in recent years for the politicization of its central bank, a factor cited by credit ratings agencies when they took its debt to "junk" level ratings in 2011.

Funnily enough, five years down the road, policies of financial repression intended to force banks to hold Hungarian debt have worked well enough that now there is a reasonable likelihood that the country could be upgraded soon.

There have even been arguments that Hungarian assets are now seen as a relative "safe-haven" in comparison to some other European debt issuers.

Turkey, another country on the periphery of the euro, has had its own experience with paranoia in matters of monetary policy.

Though the central bank itself, while responding to political pressure amid a plunging lira by keeping interest rates lower than where they otherwise might be, has not espoused odd views, it has been subject to them courtesy of President Tayyip Erdogan, who has posited the existence of "an interest rate lobby" and labelled supporters of high rates "traitors".

The real lesson from Hungary, one which hopefully won't be read elsewhere, is that political and economic dislocation make room for ideas and tactics which, for good and ill, are in opposition to what we all thought the rules of the game were.

All of the verities of globalization, and the Davos view of affairs, are under attack.

We do, after all, live in a world in which there are negative interest rates on about a third of global developed market sovereign debt, the 500 euro note is being withdrawn by the ECB, and Ray Dalio, the manager of Bridgewater, the world's largest hedge fund, is now saying helicopter drops of money from central banks direct to people is a growing likelihood.

Politics and economics seem subject to a growing variety of tactics and beliefs, not all of them encouraging.

Paranoia doesn't have to become a trend, but we shouldn't be too surprised it if does.

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