The time for growling has passed

Image: Mustafa Ezz


Structural and cyclical problems of the Central Bank

Today I want to take the Central Bank for Christ. I am well aware that he is not solely responsible for deficiencies in the economic area of ​​government. But it is perhaps the main one, at least in some periods, like this beginning of the Lula government. I am referring not exactly to the Central Bank institution, which has many merits and has a well-prepared technical staff, but to its command – the current one as well as previous ones.

Since January, there have been many complaints in the financial market and in the traditional media about the “noise” caused by President Lula when he insists on questioning the Central Bank (BC). But the president is right to question it, as he has said several times. Serious, in fact, is the “noise” originating from the BC itself. Few talk about it. I am referring to the communiqués and minutes of the Copom, the Central Bank's monetary policy committee (which corresponds to the institution's board of directors) and, in particular, the repeated warnings about “fiscal risk” and the supposed problematic evolution of public accounts in Brazil .

marked card game

The concern about public accounts is valid. I was never among those ultra-heterodox economists who dismiss or downplay this concern. However, as they say in English, not by the wildest stretch of the imagination (not by the wildest stretch of imagination) one could appeal to Brazil's fiscal situation and prospects to keep real interest rates on the moon, as the Central Bank has done. Not to mention that these same interest rates heavily burden the cost of debt and, therefore, public accounts, but they are almost never mentioned when the “fiscal risk” is boasted. But I leave the discussion of fiscal numbers, which I have already examined on other occasions, for a future article. I will deal mainly with the monetary authority.

A point often goes unnoticed. The Central Bank insists on maintaining very high interest rates and the current ambitious and unrealistic inflation targets, with a 3% center starting in 2024 and an interval of 1,5 percentage points up and down. The argument of the Central Bank and its defenders in the financial market is that inflation expectations would be “unanchored”, that is to say, they exceed or tend to exceed the targets in force. Reducing interest rates or raising inflation targets, it is alleged, would “unanchor” expectations even further.

This vision has many shortcomings, including an incomplete view of how inflation expectations are formed, captured in the weekly surveys of the Central Bank (Focus survey) and in market indicators (for example, the differences between fixed and post-fixed interest rates). fixed, IPCA +). It is not taken into account that these expectations are influenced, in various ways, by the Central Bank itself.

What we've actually had for decades is a game of mirrors or, worse, a game of marked cards. The financial market, generally interested in extracting high interest rates from the Central Bank and the Treasury, pressures the BC to adopt an exaggerated view of fiscal risks. The Central Bank, in turn, by disclosing alarmist perceptions about the government's accounts, reinforces market inflation expectations. Market indicators also have a bias towards overestimating expected inflation, since fixed rates incorporate a risk premium for inflation variability.

Umbilical link between Central Bank and financial capital

The problem is structural and results from the umbilical link, which has existed for a long time, between the Central Bank and financial capital. The Central Bank is now autonomous in relation to the elected political power, due to the autonomy law approved in the Bolsonaro government. But it never was and, by the way things are going, it won't be independent from the market any time soon. The composition of the current command of the monetary authority gives continuity to a deeper problem, of an institutional nature – the famous capture of the Central Bank by financial capital. I have written about this several times, including in my most recent book, Brazil doesn't fit in anyone's backyard.

A book published in 2023, The Mandarins of Economics, authored by Adriano Codato, from the Federal University of Paraná, brought detailed information about this capture. For example, of the last 18 presidents, no less than 11 came from the financial market. And among the institution's 16 presidents from 1985 to 2016, only two did not occupy positions in the financial market in the five-year period after they left the Central Bank. The way BC presidents and directors are recruited, observes Codato, is “a demonstration of the strength of the financial market in Brazil”.

It is the famous revolving door between the Central Bank and the market, a form of co-option of executives and the monetary authority itself that undermines the public interest. The subject leaves a position in a private financial institution, spends some time on the BC's board, values ​​his pass and returns to a more prestigious position in the market. On one condition, obviously: during his passage through the Central Bank, he has to dance to the music, he cannot have inconvenient ideas and he cannot, above all, harm the central interests of the financial oligarchy that rules the market.

brief interlude ad hominem

From this long list of presidents from the buffoon crowd (or buffoon crowd, as one reader prefers), one of the most obscure is Ilan Goldfajn, for whom I have a special predilection. It's worth taking a quick look at this figure. If it were possible to embody in one person, one person, the atrocious limitations of the backward financial elite, this economist would be a strong candidate. I start with the character's exterior aspects. The reader will say: "It doesn't matter the appearance, but the content of the people". Mistake, total mistake. Oscar Wilde said: "Only the superficial do not judge by appearances". See the insight of the Irish artist. While a Marx, for example, solemnly proclaimed, “if 'appearance' and 'essence' coincided, science would be unnecessary”, Oscar Wilde left us a thought-provoking and truer paradox.

Well, precisely in the case of the economist on the screen, the appearance is revealing. The guy is a buffoon already in the name, Goldfajn. The Romans said that the name is an omen. Bingo. It is, moreover, a fat man, a fat man of round proportions, with a generous double chin. There is no problem with that, of course, there are many creative and intelligent fat people who use their own lard to produce a comic and amusing effect. Not the case though. The figure exudes an eerie boredom.

Once, a friend of mine, also an economist, was introduced to a society couple. He, addressing the lady: “We already know each other, we sleep together.” The husband was already preparing to react, when my friend clarified: “During a conference by Ilan Goldfajn!”.

In fact, always gray, this economist is rarely able to articulate an original reasoning or a creative observation. Once, a well-known journalist, flattering, notorious white guy, interviewed the economist, at the time president of the Central Bank. It was tough. The journalist did her best to extract any interesting comment from the interviewee, no matter how small. In vain. She went so far as not only to ask simple and harmless questions, but also to offer the answers herself, in her eagerness to help the monetary authority achieve a slightly less embarrassing performance. But what was seen, unfortunately, was the usual: the monotonous repetition of platitudes and shallow comments that pass for economic analysis in the mercadist hosts. The audience must have plummeted.

It should be noted that, for one of the main themes of this article, the economist in question had a harmful influence. The inconvenient idea of ​​setting the inflation target at just 3% goes back to him. In early 2017, as BC president, he declared, without further justification, that the Brazilian target should converge in the medium term to 3%, as in Chile and Mexico. Why catch up with Chile and Mexico, only God knows. Two former BC directors, Sergio Werlang and Tony Volpon, recently highlighted that the inflation target was being reduced to the level announced in 2017 without the subject having been studied in depth and without adequate grounds. This is the publicized technical basis on which Copom's and the National Monetary Council's decisions are taken!

I am dwelling a little on the figure of this ex-president of BC because by this means ad hominem we arrive, reader, at a systemic problem in our country. Like him there are many, many of the same. Economists, financiers, economic commentators, all with wide prominence in the traditional media – a prolix legion of well-paid servants of the economic-financial power.

One of the most fundamental, most rooted reasons for our underdevelopment is the tendency to treat nonentities and middling figures as great references and economic authorities. “Underdevelopment cannot be improvised, it is the work of centuries”, said Nelson Rodrigues. Nothing more accurate. As long as we do not overcome this practice of valuing figures of this suit, we will be condemned to stagnation and backwardness. But I'll end this little diatribe here and resume the thread.

What to do?

The Brazilian economy has been in a frank deceleration since the second half of last year and is at risk of going into recession. After the emblematic case of the Americanas, distrust and fear spread in the banking and capital markets, leading to more expensive and scarce resources and rollover difficulties even for larger companies. Signs are accumulating that a systemic credit crisis could occur, which increases the risk of recession. Will the Central Bank watch everything inert? Will it not take the initiative to start reducing interest rates significantly? Will it offer liquidity support to the market?

With the current presidency and board of the Central Bank, the tendency is for the reaction to be too little, too late, small and late. Would it then be up to the government to propose a change in the Central Bank autonomy law, which guarantees the mandates of the president and other members of the board? Propose the resignation of the president of the institution? There does not currently seem to be political support in Congress for such initiatives. This does not mean, however, that the government should watch everything stand still.

In addition to continuing to pressure the president of the Central Bank to get real, perhaps counting on the help of the business community that has been suffocated by high interest rates and the credit crunch, there are also practical measures that cannot be postponed. In the fiscal field, for example, implementing and continuing the policies announced by President Lula, such as raising the minimum wage, raising the Income Tax exemption range and launching the new Bolsa Família – all measures that distribute income and stimulate economic activity.

When drawing up the new fiscal rule, which will replace the infamous constitutional spending ceiling, the Treasury needs to propose a simple and flexible rule that does not stifle economic policy.[1] In parallel, the federal public banks, BNDES, Banco do Brasil and Caixa Econômica, must be mobilized, with due caution, to increase the supply of credit in the economy, offsetting at least in part the retraction of private banks and stimulating them to resume lending.

In the monetary scope, which is the focus of this article, I highlight two measures, of immediate application. First: raise inflation targets without further ado, perhaps right after the presentation of the new fiscal rule, scheduled for March. With higher inflation targets, the Central Bank will be under less pressure (or will have less pretext) to apply exorbitant interest rates. More realistic targets will also help to recover the credibility of the monetary authority, which suffers from the repeated non-compliance with the targets in force.

Second step: under the autonomy law, the President of the Republic has the prerogative to replace two members of the Central Bank's board of directors, whose mandates have just expired. He must do so, without delay, indicating independent and experienced names, neither from the financial market nor Central Bank officials, people who can make a counterpoint to the current president. There is talk of negotiating the new names with Campos Neto. Like this? Isn't it enough that the president and almost all the other six directors, with one exception, will continue to be those appointed by Jair Bolsonaro and Michel Temer?

If these and other macroeconomic measures are not taken urgently, the Lula government runs the risk of experiencing stagnation, possibly recession, in its first year – a political defeat perhaps difficult to reverse. Action therefore! As Dilson Funaro, with whom I had the honor of working when I was young, used to say: “You don't get out of a trap asking for permission!”.

If the government does not feel able to use the instruments it has, if it does not believe it is capable of acting in the monetary field, not even within the current legal framework, then stop talking badly about the Central Bank! The time for growling has passed.

*Paulo Nogueira Batista Jr. he holds the Celso Furtado Chair at the College of High Studies at UFRJ. He was vice-president of the New Development Bank, established by the BRICS in Shanghai. Author, among other books, of Brazil doesn't fit in anyone's backyard (LeYa).

Extended version of article published in the journal Capital letter, on March 10, 2023.


[1] A possible tax rule could take the following form. Annual targets for the government's primary result would be defined, in advance, in the form of a band, with a wide distance between the floor and the ceiling. In times of recession or slow growth, the result would be close to the bottom; in times of high growth, close to the roof. This rule would not therefore be pro-cyclical. In the event of a result outside the established band, the Treasury would send a detailed letter to Congress, justifying the deviation, as the BC does, in a letter to the Treasury, when inflation escapes the band in the inflation targeting regime. The Minister of Finance, just as the President of the Central Bank should do, would attend Congress on a quarterly basis to provide explanations and respond to questions about the conduct of the policy and the fulfillment of the target.

The A Terra é Redonda website exists thanks to our readers and supporters.
Help us keep this idea going.
Click here and find how

See this link for all articles