The autonomy of the Central Bank

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By PAULO NOGUEIRA BATISTA JUNIOR*

The narrative of BC autonomy has its plausibility, it appeals to common sense in a certain way. It is not totally false, but it hides essential aspects

The autonomy of the Central Bank advanced in Congress and will probably reach a decision point in early 2021. An integral part of the liberal economic agenda, the theme moves heavy interests and is an old aspiration of the bufunfa gang and their spokespersons in the media. A supplementary bill is in an advanced stage of processing: it passed the Senate and was sent to the Chamber of Deputies.

The expectation, at the moment, is that it will be voted on in early 2021.

The design is bad and should be rejected or at least significantly amended, as I will try to show. The theories on which it is based are flawed and omitted at crucial points, as we will see.

Brief description of the bill and the underlying theory

In general terms, the project follows the traditional booklet. The issue of Central Bank (BC) autonomy or independence is vast, full of subtleties and pitfalls. I will stick to the central points, without claiming to deal with all aspects of the issue and the bill.

How is autonomy guaranteed? Granting fixed, long mandates that do not coincide with that of the President of the Republic, to the president and the other eight BC directors. The BC board is today dismissible ad nutum, that is, it can be dismissed at any time by the President of the Republic. Without stability in office, it is argued, the monetary authorities will not be able to diverge, much less confront the President of the Republic.

In defense of the proposal, and to sugar-coat the pill a little, it is argued that the bill grants formal autonomy, but not independence, since the inflation targets, whose control is the central attribution of the Central Bank, are set through by the National Monetary Council, where the government has a majority, and not by the BC itself, which would only be the executing body. The BC would have the formal autonomy to define the means of achieving these goals, but not the independence to set them. In the jargon of literature, it would be goal dependentbut operationally independent.

The core of the bill, as indicated above, is the granting of fixed terms to the board. This would “shield”, in the language adopted in the project, the BC against political pressures. The theory behind this proposal is generally known, as it always enjoys wide publicity. What is presented, in fact, are not demonstrations, but a well-articulated narrative, however full of gaps and non sequiturs. The basic narrative, in a nutshell, is that the elected political power suffers from chronic myopia, showing a tendency to abuse monetary policy to achieve short-term political results, sacrificing control of inflation in the medium and long terms.

In the run-up to elections, the government would be tempted to pressure a dependent central bank to adopt excessively expansionary monetary policies through low interest rates and exaggerated credit expansion. A central bank manages, with these methods, to heat up demand, economic activity and employment in the short term, but pays the price of higher inflation later on. Usually, the real positive effects make themselves felt sooner.

Thus, a dependent central bank can help re-elect the President (or make his successor), but always at the cost of sacrificing control of inflation in the medium term. The real positive effects would be transitory; the loss in terms of high inflation, lasting. In a word, the dependent BC could serve as a form of electoral fraud.

Fallacies and omissions of chicken coop economic orthodoxy

This narrative has its plausibility, it somehow appeals to common sense. It is not completely false, but it hides essential aspects. Parodying Roberto Campos, the grandfather of the current BC president, she is like a bikini, it shows a lot, but hides the essentials. It is easier to sell it in countries where the political class is discredited, as is the case in Brazil. However, it is highly debatable, as macroeconomic issues and proposals tend to be. The weaknesses of the narrative are not difficult to bring out.

Thus, it is easier to sell in countries where the media suppresses public debate on economic issues.

Everything becomes complicated when we examine the proposal of formal autonomy with a magnifying glass. A little reflection and information is enough to show that the traditional narrative contains half-truths, false promises and significant omissions. First, political myopia exists, no doubt, but technocracy is also short-sighted. There is no solid professional consensus on how to conduct monetary policy, contrary to what is claimed or implied.

As in all other areas of the economy, uncertainty prevents the formation of stable consensus in the monetary area – what we see, on the contrary, is the multiplication of controversies and currents of opinion among professionals. Different economists, confronted with the same set of information, can come to different and even opposite conclusions – without which monetary theory or econometrics can definitively settle the divergences. Thus, decisions always involve extra-scientific elements and are ultimately political.

Moreover, in the Brazilian case, the BC has enjoyed autonomy in practice for some time. Successive Brazilian governments, since the Real Plan, although with a radically different orientation, have respected the Central Bank's autonomy to pursue the inflation targets established by the National Monetary Council. After 25 years of autonomy in practice, the issue seems essentially resolved.

Therefore, the expectation that the formalization of autonomy will bring significant gains in terms of lowering inflation expectations and risk premiums implicit in interest rates is probably illusory, as foreseen in the justification of the bill approved in the Senate.

Let's see what will happen in practice if the project is approved.

President Bolsonaro, advised (presumably) by his Economy Minister, would choose the president and the other eight directors of the Central Bank, probably confirming those who are in office. This team would have a fixed mandate of four years, not coinciding with each other, with reelection permitted. The next President of the Republic would have to live with an autonomous BC presided over, in the first two years of the government, by a person chosen by the Bolsonaro/Guedes duo. If the basic orientation of the next government is different, a contradiction is created within economic policy that is difficult to resolve.

Furthermore, one should not lose sight of the fact that institutional measures of this type are almost a one-way street. Once adopted, it becomes difficult, if not impossible, to go back. This irreversibility, far from accidental, is an essential part of the proposal, as it is precisely the difficulty of reversing formal autonomy that supposedly confers on it the power to bring credibility gains to monetary policy.

The BC's autonomy is, in fact, part of a family of proposals that obey the same general philosophy, which also extends to other areas of economic policy. The underlying political philosophy is, in a nutshell, as follows. Political power in modern democracies is deficient in achieving certain economic goals.

Excessive freedom of choice leads to “populist” policies – in the fiscal, monetary or exchange areas – with unfavorable, possibly disastrous, results. It is therefore convenient to renounce freedom of action in order to give economic agents the confidence that these policies will not take place.

Expressing the idea in a paradoxical and controversial way, what is actually wanted is to castrate political power in order to create an authoritarian environment in which unelected technocracies can decide calmly, with autonomy, on delicate issues that it would not be convenient to leave in the hands of the government and its constituents.

In a word: democracies tend towards “populist” solutions, shy away from painful measures and, therefore, it is not prudent to leave fundamental issues such as currency and public accounts at the mercy of elected governments and, ultimately, to the inclinations of an illiterate electorate. Proposals of this type ultimately reflect disbelief in democracy, more specifically in its ability to address complex economic issues.

Vox populi, vox dei? No: Vox populi, vox diabioli.

In terms of economic jargon, we are faced with a dilemma or trade off classic: rules x discretion or, seen in another way, credibility x flexibility.

Adopting rules, especially strict rules, gains credibility; however, these gains come at the expense of a loss of flexibility. The greater the rigidity, the greater the gain in terms of credibility and the greater the loss in flexibility.

This dilemma appears in several areas and, in particular, whenever the advisability of adopting some type of rule is discussed: fiscal rules – for example, the constitutional spending ceiling – exchange rate rules, monetary rules or institutional arrangements such as a central bank autonomous.

The costs and benefits – and the corresponding dilemmas – are somewhat similar. In general, the best solution for scenarios where there are credibility problems is to adopt a flexible rule – flexible in design and legal format – in order to gain some confidence gain without undermining the State's flexibility and capacity to act.

In reality, the problem transcends the traditional dilemmas of macroeconomics.

In the case of the Central Bank of Brazil, formal autonomy, supported by a complementary law, would create a fourth power in the structure of the State. It may seem like an exaggeration, but it is not. The BC has considerable power and, as I mentioned, already operates with autonomy in relation to the Executive Branch. Accountability to the Legislative Power is insufficient and congressional approval for joining the BC board is always a mere formality.

The BC's power also reflects its merits. It is a solid, well-organized institution, which has a large and, more importantly, qualified and experienced technical staff, made up of employees approved in very competitive competitions. It also performs a number of important tasks – not only monetary policy and inflation control, but also supervision and regulation of the national financial system, exchange rate policy, management of external accounts and administration of the country's international reserves. .

It also produces a large part of the country's macroeconomic statistics, not only on currency and credit, but also on fiscal and the external sector of the economy. It also has a research department that prepares detailed analyzes of topics under the responsibility of the institution.

If an autarchy with all these characteristics also obtains formal autonomy, supported by a complementary law, it seems clear that it then becomes a fourth power within the structure of the national State. An unelected power, repeat, which further deflates an already fragile democracy.

A small omission – the true dependence on BC

In addition to being inherently flawed, the traditional narrative contains one small and embarrassing omission.

Nothing says or even hints about the true dependence on the BC, which is, reader, dependence not on political power, but on financial power, a power that has grown enormous over the last four or five decades, in Brazil and in the world. West, as I argued in one of the chapters of a recently published book (O Brasil não fits in nobody’s backyard, São Paulo: LeYa, 2019, p. 352-71).

In practice, what is the situation in Brazil? In fact, we already have real autonomy from the Central Bank in relation to the government. But we have, on the other hand, an equally real dependence on the BC in relation to the financial system. This dependence is ensured by omissions in the legislation and, more importantly, by an ingrained practice that guarantees the capture of the regulator (the BC) by the regulated (the financial institutions).

This capture takes place through the subordination of the BC command – including not only the board but also the main technical staff leadership positions – to the doctrines, prejudices and interests of the financial system. A system was established in which appointments to the BC's board of directors are conditioned, in practice, to market consent, which even goes so far as to veto, implicitly or explicitly, names that may go against its basic guidelines. What prevails is the revolving door between the BC and the institutions, a game of marked cards in which executives move from one side of the counter to the other, moving from the market to the BC and from the BC to the market.

In this environment, the dismissal ad nutum by the President of the Republic is a counterweight, albeit a fragile one, to the excessive influence of private financial interests. With this counterweight removed, the domination of the bufunfa group over the BC is perfect and complete. What was previously possession or adverse possession becomes property, guaranteed by law.

The revolving door and how to throw sand in its gears

I need to say a little more about the revolving door, as it leads us directly to the heart of the problem that should really concern us – the Central Bank's dependence on the private financial system, especially the big banks.

How does the revolving door work?

The phenomenon is not only Brazilian. In the US, we talk about revolving door . And it is not confined to central banks. It is the revolving door that allows for influence, ultimately control or capture by private corporations of the public agencies that should regulate them. In the absence of institutional brakes, this capture takes place mainly through the entry and exit of executives from the private sector to the public sector and vice versa. An executive moves from a private corporation to a position in the industry's regulatory agency. He spends some time, values ​​his pass and then returns to the same private sector. He may even return to public orbit yet again, rising to higher positions and further strengthening his CV.

This promiscuity then prevents republican, independent relations between public agencies and the private sector from prevailing. The chicken coop economic orthodoxy, always at the service of the buffoon crowd, completely and conveniently ignores the problem.

The supplementary bill that came out of the Senate only provides for a six-month quarantine after a director is dismissed. This is already the current rule. It is a mere vine leaf. It is too short, its scope is narrow and its application is deficient and poorly supervised.

What to do? First, the quarantine should be longer, say two years. This would drive away those who seek a passage through its board for merely opportunistic reasons. It would also prevent recent BC graduates from taking privileged financial information about the functioning of the monetary authority and competing financial institutions to their new job at a financial institution. Even after two years, there would still be a potential competitive advantage of hiring a former BC director, but as time goes by and the market evolves, the advantage will be less.

Second, the scope of the restriction must be broader – it is necessary to veto not only participation in and contracting by financial institutions, but economic and financial consulting and advisory activities, which usually have private financial entities as their main clients. Until the end of the quarantine, the former director would have to seek placement in the real sector of the economy, in other segments of the public sector or in academic activities. No disproportionate sacrifice.

Third, it is necessary to monitor the application of the quarantine and establish, by law, the punishments for non-compliance. Today, inspection seems to be rarefied and it is not possible to guarantee that even the modest six-month quarantine will be effectively complied with in practice. Furthermore, there are no adequate punishments established by law. In Brazil, white-collar offenses are patiently tolerated.

In addition to the quarantine, assuming that there is a real concern to restore the public and independent character of the BC, a rule on the composition of the management should also be included in the bill. Here there is a trade off to be faced. On the one hand, the command of the Central Bank should not do without the experience of directors from the financial market. On the other hand, the dominance of these professionals is not desired. Solution: establish a ceiling for financial sector professionals to participate in the BC's board of directors. For example, stipulating that a maximum of 1/3 of the board, 3 of the 9 members, come from the financial market. The others should be academics, professionals from other sectors of the economy, professionals from other segments of the public sector, including public banks. After all, it is not only in private financial institutions that one can find people with unblemished reputation and notorious knowledge and experience in the financial area.

In addition, transparency and accountability must be strengthened. A BC that is more independent from the Executive should, on the other hand, be more transparent and accountable to Congress and public opinion. This includes more transparency in decision-making (for example, more detailed minutes of BC decision-making meetings) and more frequent periodic testimony by BC officials in congressional committees.

Finally, another recommended step would be the creation of an independent supervisory board, composed of professionals from the financial sector, the real economy and academia, with functions and responsibilities defined by law. Other entities, private and public, have, by law, an Audit Committee. Why not BC?

Ideally, before defining all these aspects, it would be interesting to review the international experience and see how developed and emerging countries deal with these challenges, notably the risk of capture of the regulator by the regulated.

Be that as it may, the basic arrangements seem clear.

In summary, to throw sand in the wheels of the revolving door, it will probably be necessary to combine the four elements above: 1) a longer quarantine, with an expanded scope, with inspection of its application and specification of penalties in case of non-compliance; 2) a rule that establishes a ceiling on the number of executives and economists from the financial sector on the BC's board of directors; 3) strengthening of the BC's accountability and transparency mechanisms; and 4) the creation of an independent fiscal council, to supervise and supervise the BC.

The proposals look good, don't they? But, reader, the buffoon gang would climb the walls if they were really contemplated. They want it because they want the monetary authority to remain their chasse gardée, their exclusive hunting ground.

Epilogue: The Typical Trajectory of a Buffoonish Economist

To end this discussion, which is already getting a little long, I need to go back to talking a little about the dark gang of buffoons.

The digression is only apparent, only partial. The tenebrous one is behind everything, disposing.

In reality, as I will try to show, the buffoon has an intimate connection with the question. After all, as Nelson Rodrigues said, “money buys everything – even true love”. If you even buy true love, why shouldn't you buy economists, politicians, technocrats and tutti quanti?

The fact is that the said group is behind the dubious arguments in favor of independence and, more importantly, is effectively responsible for the only real dependence on the Central Bank – the aforementioned dependence on large financial institutions. Economists, or a certain type of economist, are responsible for giving a “scientific” veneer and an air of respectability to dubious theses and proposals, to say the least.

It should be noted, at the outset, that there are several types of buffoonish economists – the smart, the rascal, the skilled and the merely mediocre. Furthermore, for a strange reason, which it is not for me to elucidate here, fat people predominate, and worse, fat people with a remarkable circumference.

When the buffoonish economist gets up and asks for the floor, the abundant lard seems to give additional weight to his generally meager, generally poor arguments. Poverty is the hallmark of argumentation. In theory, if it is possible to speak in theory, the financial plutocracy adheres to the chicken coop economic orthodoxy, which fervently defends the BC's independence.

This variant of orthodoxy, as the derisive designation indicates, is orthodoxy simplified to the point of caricature, orthodoxy purified of doubts, ambivalences and subtleties.

The embarrassing truth is that an elite banker or banker would never understand the original orthodoxy. If, by exception or anomaly, you understand or understand one day, carefully disguise it, disguise it until you can no longer do it. And if necessary, it falls on all fours and grazes abundantly.

Nothing is more compromising, in financial circles, than showing creativity and a critical spirit. Even an above-average intelligence already raises concerns.

What is the typical trajectory of one of these economists like? Observe, reader, that they are paths of remarkable monotony, they all look alike and repeat the same shabby pattern. They begin by enrolling in a national university that teaches the rudiments of economic science as established in the United States. It is a paradoxical learning: one learns as much as one unlearns. The way of thinking to which the young student is submitted is essentially hostile to the understanding of a dynamic social reality.

The proposed analysis is not useless, far from it, but it tends to dissect reality and abstract from essential aspects of reality – starting with historical time.

Economics, as far as the United States is concerned, obscures rather than illuminates the real economic problems. In the name of rigor, relevance is sacrificed.

The second step of the future buffoon is to drink from the original source. Economists trained in Brazil are sent to the United States for postgraduate studies. There the steamroller is bigger.

The young man loses any pretense of thinking on his own.

To complete a master's and doctorate, you need to discipline yourself, become acculturated, distance yourself from your origins. You learn, of course, concepts, theories and techniques that are interesting and useful to some extent. If you go to one of the top universities, you may have some contact with brilliant professors. But everything he learns is burdened by ideology, values, prejudices. He becomes not a scientist, but a propagator of alien theories, which are generally poorly digested. He had seen, I would almost say, a modest popularizer of pseudoscience.

Third step: returning to the homeland and becoming a professor in an economics department, not primarily to teach, but already with an eye on some better-paid job in the financial market. The passage through the local university is usually brief and soon turns into part-time dedication. Consulting is what you're looking for. One of the purposes of the academic interlude is to provide a platform for the buffoon candidate to not only consult but also participate in the media, with some legitimacy.

I repeat, reader, that the basic requirement is to demonstrate a complete and utter lack of creativity. Only those who limit themselves to uncritically reproducing the mantras of the moment advance in their careers, that is to say, the precepts endorsed in each period by the chicken coop economic orthodoxy. The task is relatively simple. Just burp a few convenient concepts and theses. Peppering the rhetoric with technical terms and expressions in English is a useful, if not indispensable, embellishment. The main sacrifice is having the stomach to live with boredom. One sells the soul with relative tranquility, but against boredom, ah, against boredom, as Nietzsche said, even the gods fight in vain.

I went through all this recapitulation to get to the fourth step, that decisive one, which marks the orthodox young man in an indelible way – his hiring by a financial institution or linked to the financial market.

The condition of market economist is glory, reader. Big paychecks and light duty. Just have manners and dance to the music. When making predictions, look carefully at the market “consensus” and don't stray too far from the herd. It will never be so easy to make a living, as long as you have no intellectual, moral or political scruples.

Finally, the buffoonish economist arrives at the fifth and culminating step: the revolving door between the financial market and BC. Lifted to a management position at BC, the economist values ​​his pass. if act by the book, with total fidelity to the precepts of the chicken coop orthodoxy, the economist will have a bright future. Returns to the financial sector for higher and better paid positions. And he might even return to BC again at some point, valuing his pass even more. Upon returning to the financial sector, the clown achieves full fulfillment – ​​prestigious positions, light workload and hefty pay. It is a form of corruption, no doubt, but a singular form in which the corrupt, instead of running the risk of punishment, practice their deviations to general applause and respect.

a practical example

Maybe this chronicle is getting a little abstract. The reader likes concrete cases, with name and address. So I close these considerations with a convenient example: Ilan Goldfajn, former president of BC in the Temer government.

His trajectory follows, in all its steps, the pattern summarized above, culminating in the well-paid alternation between directors of the BC and sinecures in the private financial system.

I don't want to be accused of fatphobia and therefore I won't dwell on the description of your physical appearance, marked by abundant fat. But one point differentiates it a little from the norm: the infallible, almost caricatured attachment to mediocrity or, let's be charitable, to the perfect simulation of mediocrity. Not all of his companions on the trajectory reach such perfection.

At the time of his appointment as president of the Central Bank, I tried to read a little of his articles and other publications – especially since it was said in the media that he was the “intellectual leader” of the economic team of the Temer government. Intellectual leader? After skimming through some texts collected on the internet, I asked, perplexed, what does this guy think?

His texts were consistently empty and shallow. No idea, no flash. It was the art of writing without saying anything. The most that could be extracted was something like: the data collected do not allow us to rule out the hypothesis, etc. – and then followed some hypothesis to the liking of the buffoon gang. His pronouncements as president of the Central Bank were also unobtrusive, discreetly oscillating between the trivial and the drowsy.

On one occasion, a boy from Rio society was introduced to a young lady and her husband. He came out with the following, to the astonishment of the onlookers: “Why not, we already slept together!” And she clarified, after a short dramatic pause: “During a conference by Ilan Goldfajn”. Really, the aforementioned buffoon, exudes boredom, exudes drowsiness. As I noticed when he was in office, he is a pachydermic figure, both in speech and in practice.

In short, it is intellectual indigence, simulated or not, in the canine service of the plutocracy. These people, readers, deserve to be hunted down with sticks, like a pregnant rat, as Nelson Rodrigues would say.

But I don't want to get excited, and I withdraw the previous sentence. (The reader will note, however, that the deleted sentence has stuck.)

This brings me to the end of my narrative. I hope the reader was not shocked by the irreverent and disrespectful tone of these closing remarks. It should be remembered that humor and even sarcasm are part of the economist's toolbox, even if they are underused.

*Paulo Nogueira Batista Junior is an economist. He was Vice President of the New Development Bank, established by the BRICS in Shanghai, and Executive Director at the IMF for Brazil. Author, among others, of the book Brazil doesn't fit in anyone's backyard: backstage of the life of a Brazilian economist at the IMF and the BRICS and other texts on nationalism and our mongrel complex (LeYa).

Originally published on the website brick.

 

 

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