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Estadao, Brazil

The U.S. FED: Role Model for Brazil's Central Bank


"Those with an ideological bias or Anti-Americanism lose sight of two relevant points. One, the importance of debating the Central Bank's institutional design. Two, what we can learn from the United States. For it's in times of systemic crises that the institutional design of an institution is put to the test."


By Lourdes Sola


Translated By Helene Grinsted


December 21, 2010


Brazil - Estadao - Original Article (Portuguese)

Globally and domestically, we're at a crossroads. The question of central bank autonomy is returning to center stage. In the United States, the FED's heterodox approach - particularly its monetary easing - has encouraged the Republican right to challenge the institution's dual mandate: to work toward price stability and maximized employment. The priority of the U.S. Federal Reserve in the current scenario is to minimize the threat of deflation, which would have destructive consequences to both the political order and social fabric. On the other side of the Atlantic, in the name of public interest, the hawkishly orthodox European Central Bank is also resorting to heterodox methods, namely European monetary union and the preservation of the euro.


The Beijing authorities, for their part, refuse to allow the appreciation of their currency, which is artificially pegged to the dollar to preserve China's export drive. They claim that it's for the United States to make the difficult adjustments in terms of ultra-orthodox fiscal and monetary discipline, which would equate to deflation and higher unemployment.


In this unstable situation, the simplistic reaction by Brazilian authorities to the FED's policies is ironic. Left-wing Keynsian responses were sought and correctly put forward, imposing counter-cyclical policies to confront the global crisis. But Brasilia holds the United States responsible for currency manipulation, and thereby discards three relevant facts. First, that although the weak dollar is in fact a problem for emerging nations with appreciating currencies, this is only a by-product of the FED's reflation policies. Second, the appreciation of the Brazilian real is also due to investment opportunities offered by other emerging nations, none of which have anything to do with U.S. monetary policy. Third, the artificial appreciation of China's currency works well for a growth strategy based on exports, but being ultra-nationalistic doesn't serve the cause of improving the state of global governance, which is what our authorities speak on behalf of.


Relative independence from the United States is one of the hallmarks of traditional Brazilian diplomacy, which is averse to automatic alignments (aka/bandwagoning). Another is pragmatism. Together, they mean that a negative emphasis should be put on “automatic,” as we must also include automatic dis-alignment with the United States - the typical anti-American bias. Confronted with this unstable global picture, it's fitting for the B in BRIC, with our esteem for peace in foreign exchange, to cultivate our leadership talents within the G-20. This means coordinating and developing cooperative solutions with the other emerging democracies to minimize the impact of currency appreciation.



An ideological bias distorts perceptions of our interests as well - particularly when it comes to making operational Central Bank autonomy into de jure legal autonomy. In just the last six days, the issue has been brought out in the open. Looking at it positively, there are episodes that create the picture of relative continuity: increased bank reserve requirements, tributes to outgoing Central Bank President Henrique Meirelles [video interview above] and the appointment of his successor, Alexandre Tombini. At the same time, there are the views of Senator Francisco Dornelles, who holds that legal status should be accorded the Bank's operational autonomy. He'll give evidence to the Senate Committee on Economic Affairs. This well illustrates the difficulties that recur whenever the institution's de jure autonomy is put on the agenda.


The concerns of the senator highlight the difficulties, more imaginary than real, that add needless tension to the debate in Brazil. If approved, the measure would only come into force in 2015 and be validated by the current president's successor. The arguments highlight this, “with respect to the prerogatives of President Dilma Rousseff " because "we can give the impression that we're creating an atmosphere of distrust in the president, which we do not want to do.” Such care attests to the permanence of conservative elements in our political culture, which are heavily deployed when it comes to the current topic.


On the one hand, we could continue the trend of postponing a decision seen eight years ago, during the transition from the Fernando Henrique Cardoso government to Lula. On the other, an erroneous identification of the problem as one of institutional structure, which should be debated with a view to the long term and restricted to people who exercise constituted official authority. This is to say nothing of how de jure operational autonomy will also institutionalize the powers of the National Monetary Council, the body that determines inflation targets and the members of which must be appointed by the president, the finance minister, planning minister or president of the Central Bank. 



Those with an ideological bias or Anti-Americanism lose sight of two relevant points. One, the importance of debating the Central Bank's institutional design. Two, what we can learn from the United States. For it's in times of systemic crises that the institutional design of an institution is put to the test. It's at such times that it reveals its capacity to absorb shock without institutional breakdown or losing its effectiveness in terms of governance.


Today's global crisis shows that the FED's flexibility is inherent in its institutional design, i.e., the FED is inseparable from its dual mandate. Under the impact of the crisis in the 1930s, U.S. lawmakers delegated to the FED chairman and the board he presides over the responsibility and (awesome) power to reconcile economic stability with maximizing employment and remaining in tune with prevailing circumstances. Which is why faced with runaway inflation in the 1970s, its then Chairman Paul Volker could target the goal of stability; while today, without violating the Constitution, Ben Bernanke can favor maximizing economic activity and employment. If we didn't have anti-Americanism, we have to appreciate the advantages of the FED's flexible design.


*Lourdes Sola, Phd in political science from Oxford University, retired professor from University of São Paulo and member of the Brazilian Academy of Sciences



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[Posted by WORLDMEETS.US January 19, 7:37pm]


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