Navigating Populist Backlash: “A Survival Guide for Central Bankers in a Topsy-Turvy World…
Janet Yellen, during her second day of testimony at Capitol Hill vigorously defended the autonomy and policy-making potential of the United States' central bank. In response to Republican calls for the institution to abide by mechanistic rate-setting regulations, Yellen firmly rejected the notion. She cited her concern that such rules would restrict the Federal Reserve's discretion. Furthermore, she dismissed suggestions from some lawmakers that the central bank had become politicised.
FT, February, 2015
Illustrations by Germán & Co., protected by copyright.
A few weeks ago, the Chilean newspaper "La Tercera" published an interview with Dr. Moisés Naím, titled "The infatuation with deceased ideas: Dr. Naím's insightful reflections sparked contemplation as he delved into the persistent impediment of archaic and futile political ideologies in Latin America. Political necrophilia in Latin America that vexes me". Dr. Naím's insightful reflections sparked contemplation as he delved into the persistent impediment of archaic and futile political ideologies in Latin America. Dr. Naím's insightful reflections sparked contemplation as he delved into the persistent impediment of archaic and futile political ideologies in Latin America. Political necrophilia, as explained by Dr. Naím, is a phenomenon in which political leaders and societies become obsessed with ideas that are no longer relevant or effective. His insightful observations serve as a wake-up call to the leaders of the region, urging them to abandon outdated ideas and embrace new and innovative approaches to address the challenges of the twenty-first century.
Sadly, the issue of ailing political systems isn't exclusive to Latin America; the entire world is facing the same dilemma. For instance, the failed coup attempts of Bolsonaro in Brazil and Trump in the United State, and the consummate coup d'état in Niger, led by the co-probe Abdoulaye Maiga, serve as glaring reminders.
Assigning responsibility, one might feel inclined to fault ourselves for electing these individuals under the illusion that they would work towards creating a fairer society. There are significant factors to consider: i) frequently, the candidates' agendas are predetermined by the —unseen authorities—, which reduces the electorate's capacity to influence the outcome. Consequently, we are left with no choice but to reluctantly cast our vote for the less unfavorable option. ii) It is important to be cautious of mandatory voting systems as they tend to foster abstentionism when people lose faith in the essential framework of the political establishment.
Mr. Javier Milei's depiction of the political elite as a "casta" is accurate, as they have transformed into contemporary monarchies. This is exemplified by the Chilean scenario, where specific surnames are now synonymous with positions of power in the Senate and the Chamber of Deputies. These individuals entered in the political sphere solely due to their familial connections thirty years ago, rather than any personal achievements. They have since come to symbolize the essence of the existing political system.
The important questions are: What do they do? And who benefits? They tirelessly toil for the benefit of a select few - the privileged minority who wield an insurmountable amount of power. Everything else is but a whimsical fairy tale. These issues require attention, but it is vital to steer clear of using an excessively aggressive approach reminiscent of a chainsaw. Latin America, having been scarred by traumatic incidents in its past, should utilize the remaining channels of democracy to call for the necessary and urgent changes.
Now, back to the roll of Central Bank…
Central bank independence is pivotal to modern economic policymaking, carrying significant repercussions for economic stability and functioning. Allowing central banks to adjust interest rates and other policy instruments without political intervention grants monetary institutions the ability to effectively tackle inflationary pressures and maintain financial stability. Upholding the central bank's independence is crucial when considering the political —business cycle—. This is illustrated by politicians employing economic stimulus measures to boost their chances of re-election during campaign periods.
Although such measures can lead to unstable economic conditions and long-term inflationary pressures. While central bank independence is important, populist presidential candidates may use aggressive campaign language to remove the central bank for personal gain. The yearning for complete control over the national economy may be attractive to certain —privileged individuals—. However, it is ultimately an —unwise and hazardous— proposal. Eliminating a central bank is not only a complex undertaking with minimal chances of success in a typical political environment, but it also poses a substantial risk to the stability and operation of the economy.
Central banks play a crucial role in maintaining financial stability, requiring well-informed and unbiased decision-making for the benefit of the nation. The expertise and autonomy of central banks are pivotal in ensuring financial stability and preventing potential economic instability. The well-being of the country and the livelihoods of its citizens could be jeopardized without them. In summary, central bank independence is not only a theoretical concept but also a fundamental principle that underlies contemporary economic policymaking. It empowers central banks to combat inflationary pressures efficiently. While populist rhetoric advocating the abolition of central banks may be appealing to some, it is vital to recognize the potential risks involved and the crucial role that central banks play in maintaining economic stability and functionality.
In the editions of The Editorial Board of the Financial Times, on August 30, 2018, under the titled "How central bankers can survive populist attacks," the article explores the importance of rate-setters remaining calm and telling the unvarnished truth. However, it is essential to consider this problematic from another point of view as well. By delving deeper into the complexities of the situation, we can gain a more comprehensive understanding of how central bankers can navigate through the challenges posed by populist attacks without compromising their integrity. This approach allows for a more nuanced analysis that takes into account the intricate dynamics at play in today's political and economic landscape. By examining alternative strategies and considering the diverse array of perspectives, we can foster a more resilient and adaptive response to the growing threats faced by central bankers in the face of populist sentiment.
You can read the article here if you're interested in delving deeper into the subject matter.
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How central bankers can survive populist attacks
Rate-setters should remain calm and tell the unvarnished truth
FT, The editorial board, August 30, 2019 Central bankers are under fire. Donald Trump has branded Federal Reserve chair Jay Powell an “enemy” for running US monetary policy too tight for the president’s liking. Some British MPs have attacked the governor of the Bank of England Mark Carney for perceived opposition to Brexit, while Urjit Patel, the governor of the Reserve Bank of India, resigned last year after clashing with Narendra Modi’s government. Matteo Salvini, head of the Italian far-right League, has called for the Bank of Italy to be scrapped completely. Politics is hard for technocrats when their countries are divided, and partisans wish to sway them to one side.
Officials make convenient scapegoats for populist movements. While central bankers should avoid politics, they must be politically astute. To be effective they need to build support for their decisions, protect their legitimacy and be alive to public pressures.
For the Fed there is an added complication: the central bank must respond to the administration’s trade war with China and formulate policy to mitigate its effects on the US. Mr Powell referred to this, somewhat obliquely, last weekend, saying that trade policy was “the business of Congress and the administration, not that of the Fed”. Yet responding to any disruption risks encouraging Mr Trump, who wants to see lower rates and a weaker dollar. Bill Dudley, a former member of the Fed’s rate-setting committee, suggested in a Bloomberg column this week that US officials should strike back. He said monetary officials could “state explicitly that the central bank won’t bail out an administration that keeps making bad choices on trade policy”.
He suggested the 2020 election outcome was within the central bank’s purview since a second Trump term would be a threat to the US economy, so rate setters should consider how their decisions might affect the result. This would be a mistake. There is no painless way to deal with Mr Trump, but the Fed should live with its discomfiture. It has two goals: to stabilise the economy and to preserve the independence of the institution. Neither is served by direct conflict with the president.
Central bankers are, ultimately, civil servants and should not use their control over interest rates to put pressure on elected politicians. Mr Dudley’s comments risk fuelling conspiracies about unelected officials pulling the strings from behind the scenes. Central bankers should instead remain calm, stick to their mandate, and tell the truth. Mr Powell is right to point out that monetary policy cannot offset the damage done by the trade war, which hits both the demand for goods and services and the capacity to provide them. Mario Draghi, European Central Bank president, deftly handled controversy surrounding quantitative easing, responding forthrightly to criticism and pointing out the need for structural reform. It is right to expect central banks to explain their choices publicly and justify their policies. Politicians in turn have a legitimate role in scrutinising their decisions. Monetary policy affects the distribution of wealth and income. Central bankers wield huge power over markets and the fate of billions. Politicians’ rhetoric, however, can go too far. As well as labelling Mr Powell an enemy, Mr Trump has used the bully pulpit of Twitter to compare him to a golfer who cannot putt and to question his appointment. Such remarks intend to make the Fed support the president’s agenda. The best response is to ignore him. The central bank must do the best job it can in difficult circumstances. The American people will soon learn that not even the Fed can save the US from the follies of Mr Trump.