By RODRIGO SIQUEIRA RODRIGUEZ*
Historical background and its rise in the era of financialization
Introduction
Recently, the debate on the independence of the central bank in Brazil has acquired the contours of a broader public debate since, with the beginning of the third Lula government, the president of the Central Bank (BC) from the Bolsonaro period will remain in office for two years and cannot be fired by the president.[1] The conflict between the Lula government and the BC management appears in newspaper statements, interviews and even through institutional media.
For example, in the first minutes of the 2023 Monetary Policy Committee, a link is established between increased inflationary expectations and fiscal uncertainty that, implicitly, would be associated with the new government, being one of the many encrypted messages from the Central Bank that serve, as a in some way, to exert pressure on the conduct of economic policy by Lula and his ministers. The conflict presented in the Brazilian case, although not a general case for the relationship between central banks and governments, makes concrete a tendency present in the process of capitalist accumulation based on financial dominance.
To understand the nature of the conflict between central banks and governments, a historical reconstruction of the process of central bank independence and its practical meaning is presented, as well as the theories that support it. In this approach, it is argued that central banks acquired more powers from the second half of the 1995th century, concomitantly with the financialization process. With the ability to guide the pace of accumulation, the independence of the central bank is an institutional framework that allows financial market agents to exert political pressure in the conduct of monetary policy, at the same time as it removes the government's ability to influence this same conduct (Posen , XNUMX).
The defense of central bank independence is based on the premise that the less the central bank's actions depend on the government, the lower the inflationary bias of monetary policy (Nordhaus, 1994). Once it is defined that the central bank's primary objective is to combat inflation, the less interference the government has over the central bank, the less its ability to relax harsh inflation containment policies, such as, for example, interest rate policies. high levels, a guideline that is strictly followed in Brazilian economic policy.
Brazil, which entered a cycle of reducing average real interest rates between 2002 and 2013, is still a long way from converging its real interest rates to the levels of the BRICS countries (Figure 1). If high real interest rates are an expression of the success of financial accumulation regimes, it is necessary to understand the role of central bank rates, such as Selic in Brazil, in guiding sustainable monetary balances for the financial accumulation regime.
It is at this point that inflation targeting regimes indiscriminately associate interest rates with inflation containment (Figure 2) and, as a result, the independence of the central bank becomes one of the institutional frameworks necessary for the viability of the regime, becoming a political agenda for the financial sector.
Figure 1: Real interest rates – Selected countries (BRICS Block).
Figure 2: Inflation rates and Selic interest rate in Brazil.
Note: Inflation measured by IPCA accumulated over 12 months.
In this way, hegemonic economic theory transmits the message that the path to greater effectiveness in combating inflation is through institutional reforms that remove the decision-making power of monetary policy from the government and transfer it to an independent State body. Among the measures adopted in these institutional reforms is a set of rules that prevent the dismissal of their leaders for political reasons, such as a fixed mandate outside the electoral cycle (Freitas, 2006), a measure in force in the Brazilian case and which prevents, for example, , that President Lula fire technocrat Roberto Campos Neto.
However, there is something underlying the theoretical defense of central bank independence: at the same time that it constitutes an effort to exclude the influence of the State, there is a more open submission to the interests of the financial sector, interests that are mixed in the discourse in defense of the objective and technical actions of central banks and which do not necessarily represent the interests of society. In this way, independent central banks tend to present themselves as the rational financial core of capitalism, which would counterbalance the political core of antagonistic determinations.
In practice, central banks tend to be under more pressure from financial market agents who continuously monitor them, while basing their actions on narratives of credibility and transparency. If central banks do not do as much as possible to meet their objectives, they risk being punished by financial market agents.
This article is subdivided into four sections, in addition to this introduction. The next section analyzes the institutional contour of central banks until the first half of the 20th century. In the third section, the emergence of the debate on the independence of central banks is discussed in accordance with their institutional transformations in the second half of the 20th century. The fourth section presents how central bank independence processes are subordinated to the logic of financialization and, finally, in the final considerations, some measures are proposed that can be adopted to monitor and counterbalance the most problematic points of central bank independence. .
Background to the Central Bank independence process
In fact, in the case of the productive company, the danger was as real and objective as in that of man and nature. The need for protection arose as a result of the way in which the supply of money was organized under a market system. The modern central bank was, in fact, a device developed primarily for the purpose of offering protection and without it the market would have destroyed its own children, commercial enterprises of all types. (Polanyi, 2013, p. 228)
One of the most striking features of Karl Polanyi's (2013) analysis of capitalism is the recognition of a series of measures adopted throughout the XNUMXth and early XNUMXth centuries with the aim of saving the emerging market society from itself. To focus on the monetary issue, it is enough to emphasize that the capitalist class needed a safe and stable monetary system to carry out trade and protect accumulated wealth.
Polanyi reports the need for currency regulation for what is now called “transaction motive”, as there were deflationary processes due to rigid monetary bases. However, this is not the aspect that most attracts Polanyi's attention. It is the action of the central bank in the context of the gold standard system in guaranteeing the stability of exchange rates and the national monetary system. For example, when there was a temporary drop in gold reserves and the central bank covered it with short-term loans. The central bank's actions, in his view, mitigated the risks of money which, in those circumstances, were sensitive mainly to productive companies.
However, this action by the central bank is not separate from the political framework of the time. Its condition of existence is not only associated with the economic reason of guaranteeing adequate levels of monetary liquidity. The central bank presents a solution for financing the State, which on the fiscal or tax policy side would be very slow.[2] For example, at the beginning of the 1965th century, Great Britain financed itself for wars through the issuance of debt securities, generating cash to buy weapons practically instantly, while its rivals had to resort to gold and expropriation (Morgan, 2019 ; Torres, XNUMX).
In acting as a regulatory agent of the national monetary system, the central bank acquires a very different facet from other regulators. Galbraith (1972) even treats the topic with irony[3], as capitalists in general are against all types of regulation, but they would hardly go against the regulations of the monetary authority. In the context of the interwar period and the Great Depression, Galbraith argues that the central bank's two main instruments at the time, open market operations and interest rate variations, did not have significant impacts in combating speculative movements.
However, the period of the Great Depression represents a milestone for the central bank's role as regulator of the banking system (Ugolini, 2017). For example, in the United States, the regulations of 1933 and 1934 allowed the Federal Reserve to set margins for operations in the forward market up to 100%, that is, to prevent its operation (Galbraith, 1972); Furthermore, regulation was established that limited the involvement of commercial banks in speculative activities, with the separation between commercial banks and investment banks.[4]
The strong regulation of the banking system is not dissociated from the role of the central bank in guaranteeing the stability of the monetary system, but is presented as a branch of this function. Regulation by central banks, which can be ex-ante, that is, through a set of prior rules[5] for the operation of banks, such as adhering to the Basel Accord standards (minimum capital requirements, banking supervision and publicity and transparency), or ex post, with measures to save insolvent banks, such as, for example, acting as a lender of last resort, are initiatives that end up serving the stability of the monetary system (Ugolini, 2017).
Therefore, it is noteworthy that the main functions of central banks were not originally associated with conducting monetary policy as we know it today, as their role was very limited. Central banks only become a greater object of interest as it becomes clear, in practice, that the actions of the central bank are responsible for monetary phenomena (Hetzel, 2008). This aspect radically changes the way central banks will be understood by society.
The central bank consolidated itself throughout the first half of the 2004th century as an institution that minimizes the risks of collapse of the monetary system, a privileged bank that centralizes monetary issuance, lends resources to other banks, supervises and regulates the financial system. The limitations for a more active monetary policy were in the very nature of monetary systems. In the gold standard, for example, the maintenance of reserve parity was conditioned, and in the Bretton Woods system, it was conditional on rigid parity with the dollar (Pellegrini, XNUMX). Central bank open market operations in the first half of the century are predominantly associated with accommodating currency demanded by the public.
Even with the growth of Keynesian economic policy proposals throughout the first half of the century, and with them also the figure of the policymakers, monetary policy took a backseat to fiscal policy. Hetzel (2008) states that throughout the 1930s, the American central bank itself saw itself as a mere deposit of commercial bank reserves.
Amid these historical constraints, the very idea that central banks generate or control inflation was limited, even though monetary policy instruments already existed. In other words, the central bank was not held responsible for inflation, which was associated with non-monetary phenomena, in particular with a series of crises and conflicts on a global scale that marked the first half of the 20th century. On the other hand, if there was inflation and it presented itself as a nuisance in troubled times, the solution used to be price control policies outside the control of central banks, such as the Prices of Goods Act 1940 in the United Kingdom, which established maximum price adjustments according to a mark-up about costs, and the General Maximum Price Regulation April 1942 in the United States (Mills & Rockoff, 1987).
In the circumstances of the first half of the 2000th century, even in the face of a series of crises in the countries' balance of payments, central banks that had some capacity to influence domestic interest rates hardly manipulated interest rates as an instrument for resolving crises. Exchange rate policy is the main instrument for resolving balance of payments crises, with, for example, exchange controls, import licenses and multiple rate systems (Eichengreen, XNUMX). Real interest rates became negative in periods of faster inflation, and, although positive, did not reach very high levels, being compatible with a heated credit market with the pace of post-war accumulation in the “golden age”. of capitalism.”
It is only from the second half of the 20th century that central banks begin to establish the link between short-term interest rates, excess aggregate demand and inflation. In Keynesian economic theory,[6] in turn, there is a deepening of notions of short-term monetary policy and the central bank's responses to financial instabilities (Minsky, 1957a, 1957b; De Carvalho,
1994). For example, we can observe the manipulation of interest rates by the Federal Reserve in a context of recession in the 1950s, along the lines of what are today called monetary policies.”lean against the wind” (or “rowing against the tide”), which aim to sustain aggregate demand even before the effects of shocks spread throughout the economy (Hetzel, 2008).
Until then, there was no set of capitalist conditions that justified any move towards governmental independence of central banks. On the contrary, some measures were taken to remove the role of bankers in central banks, such as those adopted by Roosevelt in the context of the New Deal in the 1930s. What occurred from the second half of the 1956th century onwards was a succession of events that increased the strength and capacity for action of central banks. If there is an emblematic moment for this change, it is Eisenhower's statement in 1988 that the Federal Reserve was not under his control and was an independent body (Sylla, XNUMX).
Thus, conflicts between the government and the central bank manifested themselves and an agenda was created to defend the independence of central banks from 1950 onwards. During the 1960s, for example, the Federal Reserve will be the subject of an impasse with President Lyndon Johnson regarding interest rates. In Brazil, the debate on independence only acquired practical results from the 1990s onwards.
The independence of the Central Bank
Currently, when discussing the independence of the central bank, the main associated idea is the relationship of subordination between the central bank and the government. This discussion leaves aside one of the main prerequisites regarding the discussion of central bank independence: what are the powers delegated to a central bank? An independent central bank with few powers may be more or less harmful to the monetary system than a dependent central bank with many powers.
In fact, the big question surrounding the independence of the central bank, taking the Brazilian case as an example, would be irrelevant until the 1990s if one specifically observed the central bank's action capabilities. It is enough to note, for example, the joint action with Banco do Brasil, which, in fact, limited the monetary control capacity of the Central Bank of Brazil (BCB) (Carvalheiro, 2002).
In general, it is characterized that monetary policy was passive and the main inflation control mechanisms were indexations and monetary corrections, which changed throughout the 1990s (De Holanda Barbosa, 1993). In the American case, the true power of monetary policy grew throughout the 1960s with policies stop go, alternating tightening and monetary stimulus measures according to the unemployment rate under the assumptions of trade-offs between inflation and unemployment in the American Phillips curve (Samuelson & Solow, 1960; Hetzel, 2008).
It is only with the growing responsibility of central banks for the degree of economic stimulus and monetary phenomena that the discussion about their independence will start to make sense. The power granted to central banks, which today is mystified in the idea of full powers to combat inflation, is, in fact, the ability to guide the pace of accumulation in capitalism. In the 1960s, this was illustrated in the power of policymaker of manipulating interest rates that produce a certain output gap and employment level. Central banks could, in the Keynesian era, create incentives for accumulation in times of crisis, and cool accumulation in times of overheating.
From the 1960s onwards, the more crises occurred in capitalism, the more powers central banks acquired to manage crises, and today central banks have powers unprecedented in history. The illustration of the plenitude of these powers is the policy of quantitative easing, which allows the massive purchase of financial assets by central banks, whether public or private assets. Between 2007 and 2017, during the management of the 2008 financial crisis, the asset balance of the Federal Reserve it goes from 800 billion dollars to 4,473 trillion dollars, or from 6% of American GDP to 23,5% of American GDP (Williamson, 2017). In March 2023, the Federal Reserve's asset balance stands at $8,3 trillion, about 39% of US GDP.[7]
Not by chance, the period between the emergence of policies stop go and quantitative easing coincides with the emergence and consolidation of the processes of financial globalization, liberalization and neoliberal thought. And if, on the one hand, monetary policies of the stop go they start from a Keynesian premise and demonstrate that the central bank can, hand in hand with the State, assist in the policy of welfare stateOn the other hand, the policy of quantitative easing allows the independent central bank to be legitimately a partner and guarantor of the financial market and, as such, contributes to the appreciation of financial assets.
Since 1960, there has been a double process expressed in the debate on central bank independence: at the same time as there is an effort to nullify the influence of the State, central banks increasingly serve the interests of the financial sector. However, these interests of the financial sector are presented in the form of a speech in defense of the objective and technical actions of central banks. In this way, independent central banks present themselves as the rational financial core of capitalism, which would counterbalance the political core of antagonistic determinations.
The spokesperson for this process in the field of ideas is the economist Milton Friedman and the starting point is an article called, in free translation, “Should there be an independent monetary authority?”. In the article, Friedman assumes that government action is irresponsible and offers solutions that reduce the scope of government monetary action, and the full form of this independence would be that of a private bank, along the lines of what had been the Bank of England initially (Friedman, 1962). Marshall & Rochon (2022) emphasize that the logic established by Friedman in this article, clearly in defense of a private monetary standard, is that for the government to act responsibly, it must abdicate its authority over currency.
In economic theory, in turn, the argument developed in order to abolish Keynesian thinking, in particular in defending the ineffectiveness of monetary policies aimed at welfare gains, with the opposition to trade-offs of the Phillips curve and the risk of persistent inflationary processes arising from it resulting from expectations (De Carvalho et al., 2007). From this discussion, theories emerge about how the central bank should act, such as the problem of the political-economic cycle (Nordhaus, 1975) and the definition of the rules for operating central banks (Kydland & Prescott, 1977).
Among the arguments for the independence of the central bank, the statement that the government's actions generate a type of inflationary bias in the central bank is the main one. By associating governments and political decisions with populism, monetary policies designed in the short term by governments that need to be re-elected will cause inflationary problems in the future, so political influence on the central bank must be minimized and discretionary reduced, since government decisions Monetary policy must be adopted for specific long-term objectives (Goodhart & Lastra, 2018; Cukierman, 1999).
In the nature of this perspective is the view that central banks have a broad ability to determine inflation in accordance with their monetary policy. Furthermore, a central bank that is well committed to combating inflation generates more credibility and is able to stabilize inflationary expectations, as well as make them come true (Hetzel, 2008). Expectations and their fulfillment become the center of attention and market forecasts. At each central bank meeting, economists and market representatives seek the most minute details in the minutes[8] that may indicate any change in direction in the conduct of monetary policy, however small (Costa Filho & Rocha, 2009, 2010). Until the 1990s, few economists were concerned with the deliberations and decisions of central banks.
Increasing financialization is the conditioning factor that makes central bank empowerment possible, that is, it will make monetary policy a decisive instrument in determining the level of prices, interest rates, exchange rates, economic activity and employment. News reports claim that the Federal Reserve is dictating a low growth rate for 2023 to contain inflation (Tepper & Curry, 2022), and in Brazil, the Monetary Policy Council sends messages to the government (which can, by the way, be interpreted as threats) that it will maintain interest rates high given the risk of any movement in fiscal policy.[9] (Copom Minutes, 2023).
Thus, no matter how much the objectivity of monetary policy in combating inflation is asserted in the context of the independent central bank, its capacity for action goes beyond this domain, which is why central banks have become so powerful and decisive, objects of interest and pressure from financial market agents. Monetary authorities are able, for example, to constrain fiscal policy, or even determine it (De Haan & Eijffinger, 2016). The main instrument did not even change, it continued to be the manipulation of the interest rate, however its impact and importance on the direction of the pace of accumulation grew.
The debate about central bank independence is often treated as a discussion about efficiency gains in monetary policy, that is, whether or not there are gains from adhering to independence (Sícsu, 1996). There are a series of empirical studies that find it difficult to correlate independence and the reduction in inflation, such as, for example, Jácome & Vázquez (2005) for the Latin American case. However, the criticism of central bank independence in terms of efficiency gains leaves aside a qualitative aspect. The main gains with independence go towards the viability of growth regimes of the type Finance-led (Chesnais, 1996, 2005, 2016); in other words, the independence of the central bank is one of the arms of the consolidation of financialized capitalist accumulation.
How does the independence of central banks enable economic regimes under the logic of financialization? Faced with the set of phenomena associated with growing financialization since the 1980s, there are (1) the growth of low-cost credit securities rating or speculative (high yield high risk bonds, also known as junk bonds), issued by both companies and governments, for example, in the Brazilian case, Brady Bonds from the 90s (Barbosa & Ardeo; 2005); (2) the growth of pension and investment funds, as well as their power and ability to influence political decisions. In Brazil, a notorious case that illustrates this statement is the mandate of banker Armínio Fraga at the BCB,[10] directly linked to large investment funds; (3) the need to build new spaces for accumulation through financial means, which resulted in loans and financing to underdeveloped countries, such as the eurodollars and petrodollars, as well as the strengthening of capital markets (Carneiro, 1999; Chesnais , 2005, 2016).
It is necessary, therefore, to demonstrate that the debate on the independence of the central bank is not about the efficiency of combating inflation, but about its ability to remove developmental and labor interests from monetary policy, preserving and expanding the interests of the financial sector, particularly rent-seeking. In other words, the dispute over the independence of the central bank is a dispute between classes and between class fractions.
The independent Central Bank under the logic of financialization
Proponents of central bank independence argue that adopting a staff of neoliberal economists makes the central bank less subject to political interests, more neutral and more objective. These economists, in turn, adopt conservative monetary policies that are treated as the correct or technical way to do it. The main conservative monetary policy that establishes the link between central bank independence and financialization is the inflation targeting regime, an argument defended by Epstein (2001).
By outlining the fight against inflation as the central bank's primary goal, the inflation targeting regime excludes other economic policy objectives, such as job creation and investment levels. For Epstein, the independent central bank under the rules of the target regime conforms to the vision called “neoliberal central bank”, part of the set of national and international institutions that convince investors to contribute capital in their countries and guarantee the payment of interest and debts of national titles.
Underdeveloped countries in particular are attracted to this “neoliberal central bank” project as it is argued that, with credibility and rigor in anti-inflationary policy, there would be greater attractiveness to foreign capital.
In his conclusion, Epstein states that central bank independence is an exclusionary measure, that is, a measure adopted to remove monetary policy from the hands of the working class and, in cases where the industrial and financial sectors are well divided, to remove monetary policy in the hands of the industrial bourgeoisie. The inflation targeting regime, in turn, is considered a disproportionate force in the fight against inflation and always weighs in favor of rentiers, contributing to the appreciation of financial assets.
For the Brazilian case, Paulani (2017) argues that the functioning of Brazilian capitalism has been characterized by the “… adoption of a macroeconomic prescription aggressively aimed at the benefit of financial wealth, based on fiscal austerity and absurdly high real interest rates, often the world champions” (Paulani, 2017, p. 30). The case of the Brazilian real interest rate is particularly scandalous, and even considering the arguments of neoliberal economists about the fiscal, political and exchange rate risks that would justify this real interest rate, Brazil continues to appear as a outlier compared to other countries with similar economic conditions (De Paula & Bruno, 2017).
Brazilian monetary policy is probably one of the main examples of interest rate behavior completely contrary to the expansion of production and real wealth growth. The BCB, in turn, is increasingly responsible for this conservative monetary policy, while governments lose control of action to conduct an economic policy in defense of investment, production and employment.
To pursue the sovereign inflation target, central banks now need much more room for action in monetary policy, that is, they need more power and legitimacy to adopt tougher measures. Unlike a central bank that dictates to the markets (including the financial market, but not only) the conditions under which they will carry out their business[11], under financialized logic, central banks – supported by narratives of credibility and transparency – act under pressure from financial market agents who constantly monitor them. If the central bank does not do everything possible to pursue its objectives, it runs the risk of suffering market punishment (loss of credibility). The BCB itself describes the functioning of the relationship between monetary policy and market agents:
To anchor expectations, it is essential that monetary policy has credibility, which can be defined as the belief, by agents, that the Central Bank will do what is necessary to achieve the objective established for it.
As shocks can occur and move inflation away from the target without the Central Bank having enough time to act, it is important to assess not only compliance with the objective but also the adequacy of the actions that are taken in real time, considering the set of information available.
In the Pre-Copom Questionnaire (QPC), analysts participating in the Market Expectations System are asked about the expected decision for the Selic rate, and what they consider to be the appropriate decision. Both pieces of information are relevant for evaluating the conduct of monetary policy in real time. In an inflation targeting system, it is important that the Central Bank is transparent, that agents understand the decision-making process and that, to some extent, they are able to anticipate monetary policy decisions.
At the same time, in order to have credibility, it is important that these agents consider the appropriate decisions to achieve the goal. […] The fashion for the distribution of analysts did not coincide with the decision taken by the Copom in three of the thirteen episodes considered. In the first two divergences (March and May 2020), the Copom cut the interest rate more than most analysts expected and considered appropriate. In the third divergence (March 2021), the rate was increased more than expected and deemed appropriate. Therefore, in episodes in which relevant divergence was noted, the Copom's stance was to act with greater intensity. (Banco Central do Brasil, 2021, p. 4-5)
The Brazilian case illustrates how the monetary policy of central banks is subordinated to financial capital. The need for alignment between financial institutions and the central bank is considered part of the process of “objective” monetary policy action, even though the nature of the formulation of financial institutions' expectations is unknown, that is, it is not known whether they are drawn up by a technical staff of banks and private managers, if they are arbitrarily defined, or if they are manipulated.
On the other hand, central banks do not consult the government itself or representatives of civil society to support their decisions regarding monetary policy. In addition to information from financial institutions, central banks rely on their own reports and those of other central banks for monetary policy decisions. Palley (2019) argues that it is very naive to believe that the government can define the central bank's objectives and simply believe that it will achieve these objectives in a pretentiously neutral and impartial way. In addition to being dangerous, this initiative can be seen as undemocratic, as it legitimates and institutionalizes the central bank's lack of transparency and obligations to society.
If the central bank's monetary policy has distributive impacts, that is, it alters income proportions in favor of one and to the detriment of others, it has political consequences and, therefore, must be subject to the scrutiny of society and politicians (Palley, 2019 ). Therefore, the dispute over the central bank's objectives is a dispute of a political nature and the defense of the central bank's independence is a way of creating a technical argument that hides a political argument in defense of the interests of rentiers and financial institutions (Rossi, 2022 ).
Final considerations
Pragmatically, even though central banks have gained power and autonomy in the last thirty years, there is no horizon for reversing the trends imposed by financialization on central banks. Once central bank independence is granted, its reversal would be accompanied by a series of retaliations from national and international financial institutions.
However, this does not mean that there is nothing to be done. Independent central banks must provide information about the effects of their monetary policies to workers, industrialists and the government. Transparency commissions and scrutiny by interested entities must be part of the daily life of central banks, as they are faced with different external influences. Central banks tend to distance themselves from the public debate by saying that their decisions are technical and based on extremely complex models, but their decisions also involve political costs that must be evaluated and discussed openly. Initiatives like these aim to democratize the central bank, which currently lacks a broader dialogue with society.[12]
Governments are held responsible for crises, not central banks. On the other hand, financial crises like the one in 2008 are directly linked to the financial system, and central banks bear their share of responsibility. Central banks always offer solutions to financial crises, but are their extremely conservative managements not to blame for low growth or stagflation in some economies? Central banks must redefine their missions according to the social consequences of their monetary policy, expanding their social accountability, recognizing its impacts on society, employment levels and economic growth.[13]
Increasingly strengthened central banks make it difficult to formulate a coordinated and comprehensive government economic policy. Furthermore, they neutralize the ability to adopt other policies, such as fiscal policies, which become increasingly subordinate to monetary policy. However, democratically elected governments need capabilities to manage their projects, which requires new institutional models for the relationship between government and central bank.[14] Central banks can benefit from policies adopted by governments to maintain price stability, such as subsidies and strategic price controls, just as governments can benefit from central bank alignment with their development projects, for example in easing inflation targets or with long-term inflation targets during the period of financing works that reduce the future cost of electricity.[15]
Central banks should not be treated as villainous institutions. With the strengthening of monetary policy under the logic of financialization, monetary authorities became hostage to the intense volatility of capital flows, high interest rates, exchange rate volatility and uncertainties in the financial world that often do not even have a nature in their own country. With financialization, there is a reduction in the sovereignty of States, in particular the financial sovereignty of central banks. Therefore, it is necessary to think of new arrangements that make central banks active institutions, and not reactive to pressure from financial market agents, such as capital control measures and stricter regulations on speculative capital.
Central banks must also be evaluated as agents directly responsible for the distribution of public wealth, in favor of the rentier class. If any uncertainty about public debt is converted into an increase in risk premiums and interest rates, this means that the current solution presented to the problem worsens the problem even further, as the increase in rates increases the commitment of future income to the financial sector itself, sterilizing even more public resources in fiscal adjustments instead of public investments. Public debt today is not mobilized to finance government investments, but to guarantee a generous share of rentier accumulation, such as, for example, interest expenses paid by the public sector.
It is curious to note how central banks managed to distance themselves from society and become an explicit contradiction of modern society. In the world's main democracies, central banks are shadowy institutions with full powers over monetary policy that shield themselves from the government, congress and society in general. O modus operandi of central banks to alienate the public interest is an excessively technocratic and rigid rhetoric, incompatible with the amount of decisions and political influences they have and how they affect society.
*Rodrigo Siqueira Rodriguez is a professor at the Department of Economic Evolution at the State University of Rio de Janeiro (UERJ).
Originally published on Political Economy Magazine.
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Notes
[1] According to the letter of the law, the dismissal is requested by the president, but must be justified and have the approval of the Senate.
[2] “The original political motivation for this institutional innovation was to expand the capacity of the English government to finance – and consequently, win – the recurring military conflicts in which it was involved. Wars required the mobilization of a very large volume of resources in a short space of time. A simple increase in taxation could not meet these requirements in the necessary scale and time frame. The use of other financing mechanisms, such as reducing the metallic content of currencies and compulsory loans, had, over the previous centuries, generated negative impacts on the economy, private financiers and public credit” (Torres, 2019, p. 635).
[3] “The regulation of economic activity is undoubtedly the most disgraceful and thankless of public duties. Almost everyone opposes it in principle; its justification always rests on the unattractive case of the lesser evil. […] The great exception to this dark matter is the regulatory activity of the central bank – in the United States, the Federal Reserve System. There is dignified and adequate regulation here. No one apologizes for her; men of impeccable conservatism would rise to espouse such regulation if they were called upon to do so, which almost never happens” (Galbraith, 1972, p. 62-63).
[4] It is also worth mentioning the creation of the SEC (Securities and Exchange Commission), an independent regulatory agency that takes on the role of specifically regulating companies and individuals in the capital markets.
[5] In Brazil, in addition to the Central Bank, the National Financial System (SFN) operates under rules established by the National Monetary Council (CMN) and the Securities and Exchange Commission (CVM).
[6] “The Keynesian model of short-term income determination provides a clear specification of the way in which Central Bank instruments affect the level of output. A variation in the volume of money changes the interest rate in order to equate the demand for money with its supply; the change in interest rates affects the level of investment; the variation in investment has a multiplier effect on equilibrium income (…) the Central Bank fixes the money supply, while the public's demand for money depends on income and interest, expressed in the liquidity preference function. (…) The yield required to induce the appropriate demand for the paying asset relative to the money that yields nothing depends on the supply of money relative to income. Thus, when the Central Bank changes the volume of currency, it affects the interest rate” (De Carvalho, 1994, p. 34).
[7] This statistic can be found on the Federal Reserve's own website at .
[8] See Jegadesh & Wu (2017) to understand a little more about the high level of complexity of the textual analysis of FOMC (Federal Open Market Committee) meetings.
[9] “The committee considers that demand stimuli should be evaluated considering the stage of the economic cycle and the degree of idleness in the economy, with monetary policy being the macroeconomic adjustment variable used to mitigate the possibly inflationary effects of fiscal policy” (Copom Minutes, 2023, p. 1).
[10] “[Armínio Fraga] He worked for seven years as managing director of the Soros Fund, an investment fund owned by George Soros, a financier and one of the largest representatives of international speculative capital” (Brandão, 2018, p. 215).
[11] For example, a central bank that limits itself to setting the money supply and short-term interest rate.
[12] See Walter (2022).
[13] See Vallet (2021) and Rochon & Vallet (2022).
[14] See Freitas (2006).
[15] See Paulani (2017).
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