Re: IMF + FOMC = ?

["Canova, Timothy" <CANOVA@xxxxxxxxxxxxx>]

Dear Basil,

You write:  "There are no countries where monetary policy is directly
conducted by
democratically elected representatives."  But for many years central banks
in many major countries (i.e., many major West European central banks) were
run by officials who were more directly accountable to elected governments.
And in the U.S. during the pegged period (1941-1951; prior to the
Fed-Treasury Accord of 1951), the Fed's monetary policy was essentially
dictated by the democratically-elected administration.  These were examples
of central banking being conducted (albeit indirectly) by elected and
accountable representatives.

As for your concern that "the majority cannot be trusted to chose (vote for)
the level of interest rates" because they "would always prefer lower rates";
my response is:
(1) the public can then vote the government out; and
(2) the majority government would have a much greater incentive to find
alternative anti-inflation policies, rather than relying solely on raising
interest rates to choke off inflation.

This last point is particularly compelling.  For instance, the U.S. economy
may presently be slowing, while at the same time inflationary pressures
could be rising (as reflected by rising long-term interest rates that the
Fed chooses to not control), largely because of supply-side problems in the
oil sector.  Apparently raising interest rates is the only policy tool in
the kit of the independent central bankers.

Yes, as you say, "political leaders would be tempted to appeal to short run
preferences to get elected", but they would surely recognize rather quickly
that their longer-term reelection prospects would be quite tenuous at best
if they were not able to also look after the longer term.  I am more
concerned that in today's world privately-accountable central bankers are
tempted to appeal to the short-term preferences of their private financial
constituencies.

Tim



Timothy A. Canova
Associate Professor of Law
University of New Mexico School of Law
1117 Stanford Drive N.E.
Albuquerque, New Mexico  87131

Tel:  (505) 277-5654
Fax:  (505) 277-0068
e-mail:  canova@xxxxxxxxxxx


-----Original Message-----
From: Basil Moore [mailto:bjm@xxxxxxxxxxxxxxxx]
Sent: Tuesday, May 15, 2001 6:14 AM
To: pkt@xxxxxxxxxxxxxxxx
Subject: Re: IMF + FOMC = ?


Tim
There are no countries where monetary policy is directly conducted by
democratically elected representatives.
I think it is because the majority cannot be trusted to chose (vote for)
the level of interest rates. The majority would always prefer lower rates,
since this in the short run increases total wealth and so utility.
It comes down to long run versus short run, and political leaders would be
tempted to appeal to short run preferences to get elected.
Basil Moore


At 06:43 PM 5/14/01 -0600, you wrote:
>Dear Clifford,
>
>Thanks for your thought-provoking comments, which suggest that the two
>discussions we've been following are leading to the same questions, and
>maybe to similar conclusions.
>
>The first discussion on the IMF ('globalization' and poverty) and the
second
>discussion on the independent structure of the Fed and other central banks
>both lead to a fundamental question:  Who, in a democracy, should decide
>upon the level of government spending on a wide range of activities?  The
>answer, of course, should be self-evident.  In a democracy, it should be
the
>people's elected representatives that get to decide about the level of
>government spending for health, education, public sector jobs and job
>training, investment in emerging technologies, spending for defense, etc.
>That's what elections are for; that's what elected representatives should
>do:  decide fiscal policy, which in turn should help determine the overall
>level of aggregate demand and economic activity.
>
>Recall the "pegged period" (1941-1951) when the Federal Reserve was muscled
>by the Treasury Department to purchase U.S. securities at any price
>necessary to maintain short-term interest rates pegged at 3/8 of 1 percent
>and long-term pegged at around 2 percent.  (It took a war-time emergency to
>neutralize the power and prerogatives of the independent central bank).
Not
>surprisingly, the pegged model delivered a production boom that shames the
>so-called productivity boom of today's new economy.  Yes, there were no
>doubt all kinds of wasteful spending programs and inefficient price
controls
>and subsidies, but the aggregate impact was a 1.2 percent unemployement
rate
>-- the closest we've yet come to genuine full employment (in the words of
>the late William Vickrey).
>
>But today in the U.S., public sector activity is increasingly dictated by
>central bankers, some of whom are selected not by the President (upon
advise
>and consent of the Senate), but by the regional Federal Reserve Banks.
Even
>members of the Fed's Board of Governors are given ridiculously long terms
in
>office (14 years, the longest of any federal officers).  The Fed is also
the
>only government agency over which Congress has absolutely no budgetary
>oversight because of the unique nature by which the Fed raises its own
>money.  And the Federal Reserve System is expressly exempt from provisions
>of the Sunshine in Government Act and the Federal Advisory Committee Act
>(the only other exempt federal agency is the CIA).  Let's not be too
>surprised when Alan Greenspan gives his opinion to Congress on what their
>spending priorities should be, on the overall size of the budget, on tax
>cuts, on Social Security funding, on health care and medicare reform, etc.
>Of course, this is ass-backwards.  Congress should be giving Greenspan it's
>opinion on how the Fed should conduct the nation's monetary policy.  But
>instead it's the Fed that's able to constrain Congress's fiscal powers by
>refusing to accommodate federal spending -- i.e., by forcing a crowd-out
>effect if Congress is more expansionary than the central bankers deem to be
>prudent.
>
>I will concede that in the U.S., this has been a less acute problem than
>elsewhere, in large part because the soaring dollar draws in foreign
>capital, keeps U.S. inflation low, and pumps up U.S. securities markets and
>tax dollars to the Treasury.  But these are exeptional circumstances that
>apply only to the U.S.  Others are not so fortunate.
>
>Outside the U.S. this same phenomenom (the neutralization of fiscal policy)
>takes place when public sector activity is constrained by the IMF's loan
>conditionalities.  In addition, the IMF has successfully pushed for central
>bank autonomy, therefore in most countries fiscal policy is also
constrained
>in that way as well.
>
>I agree with you Clifford that IMF conditionality is misfocused, and at its
>very core.  Yes, I am sure you are right that in the case of Russia the IMF
>should not have "focused almost exclusively on meeting fiscal and monetary
>targets", but rather should have paid attention to their banking system.  I
>believe that the IMF's fixation on fiscal and monetary austerity condemns
>many countries to severe economic hardships; ignores the grossly unfair
>asymmetry in adjustment burdens; and constrains democratic possibilities
>around the world.
>
>But I would take this analysis a step further.  The IMF should get out of
>the business of empowering private financial interests by pushing central
>bank autonomy as a conditionality requirement.  In large part because of
>central bank autonomy there is no room for any New Deal experiments
anywhere
>in the world.  (So much for the diversity of experience, pluralism, and the
>needs of different cultures.)  I would submit that a better world would be
>one in which the elected representatives could push the envelope a bit
>further towards full employment and socially progressive policies, without
>dire fear of their currencies collapsing.  Recall West European post-war
>reconstruction -- with Marshall Plan assistance, but also behind the wall
of
>protective controls on capital and currency flows.  (Recall also that much
>of Western Europe did not get to currency convertibility until the late
>1950's, or to capital account liberalization until the early 1990's).
>
>I would change IMF conditionalities by removing the requirement that a
>country make its central bank independent as a condition for IMF financial
>assistance.  (Central bank autonomy was, not surprisingly, a key feature of
>the recent IMF and U.S. Treasury negotiations with Turkey).
>
>Clifford, you write that you "would still prefer that the priorities of the
>FED be legislated (as they are) and that Congress exercise effective
>oversight. But I cannot imagine having monetary policy micromanaged to be
>effective."  I too cannot quite imagine Congress effectively micromanaging
>the Fed.  But what troubles me most about the Fed is the completely
>undemocratic aspects -- that so many of society's interests are not
>represented in FOMC meetings, and that the perspective of the so-called
>financial community dominates to the point of monopoly.  Would it be such a
>disaster for the perspective of industrial (as opposed to financial)
capital
>to be represented in FOMC meetings -- say the perspetive of the U.S.
Chamber
>of Commerce or the National Association of Manufacturing?  Or to take it a
>step further, for the perspective of consumers, debtors, or labor to be
>present in those meetings?  Would democratic discourse in the formulation
of
>monetary policy be such a clear and present danger to the stability of the
>financial markets?  (Financial markets, we should remember, that have been
>far from stable at home or around the world under today's configuration of
>power).
>
>Finally, I will not for a moment engage in the myth that Congress presently
>exercises effective oversight of the Fed or that Congress somehow
legislates
>the priorities of the Fed.  Humphrey-Hawkins was always a toothless
>oversight and vague (no, non-existent) ordering of monetary priorities.
>
>IMF + FOMC = undemocratic (and elitist) policies.  Translation:  IMF
>conditions (structural adjustment, fiscal and monetary austerity) +
central
>bank independence (also encouraged by the IMF among others) = intolerable
>constraints on the ability of democratically elected representatives to
>conduct fiscal policy.
>
>Of course the key word in the last sentence is "intolerable":  what is
quite
>tolerable, even preferable, to today's independent central bankers and
>private financial houses, is often intolerable to those who are left behind
>by today's economy.
>
>Tim
>
>
>Timothy A. Canova
>Associate Professor of Law
>University of New Mexico School of Law
>1117 Stanford Drive N.E.
>Albuquerque, New Mexico  87131
>
>Tel:  (505) 277-5654
>Fax:  (505) 277-0068
>e-mail:  canova@xxxxxxxxxxx
>
>
>-----Original Message-----
>From: Clifford Poirot [mailto:cpoirot@xxxxxxxxxxx]
>Sent: Sunday, May 13, 2001 10:41 AM
>To: 'Canova, Timothy '; ''pkt@xxxxxxxxxxxxxxxx' '
>Subject: RE: ``globalization'' and poverty
>
>
>Tim,
>
>I think you raise an interesting point about the IMF's focus on internal
>policies causing the crisis. What I have found in my own research is that
>the IMF often focuses on the WRONG set of internal policies. For example,
in
>Russia, the IMF focused almost exclusively on meeting fiscal and monetary
>targets. What they ignored was that the banking system was a classic
>Potemkin village. Mixing this Potemkin village with speculative capital
>flows was a disaster.
>
>One conclusion I have come to about IMF "conditionality" is not that
>"conditionality" is bad, but that it is misfocused. On the other hand you
>raise a good point about requiring adjustments by surplus nations. This was
>of course part of the original goal of Bretton Woods-to coordinate
>adjustments in ways that would not require painful adjustments and thus
>threaten to destablize the system.
>
>I found your discussion of the legal implications of monetary policy to be
>of interest-but lack the knowledge to fully engage you on matters of law. I
>would still prefer that the priorities of the FED be legislated (as they
>are) and that Congress exercise effective oversight. But I cannot imagine
>having monetary policy micromanaged to be effective.
>
>-----Original Message-----
>From: Canova, Timothy
>To: 'pkt@xxxxxxxxxxxxxxxx'
>Sent: 5/12/01 5:32 PM
>Subject: Re: ``globalization'' and poverty
>
>Colin Danby wrote:
>
> >As a matter of logic, blaming internal factors does not require one to
> >be a neoliberal.
>
> >In other words, it is possible that state policy is bad, but not for
>the
> >reasons that a standard IMF-style Polak model identifies.
>
> >To blame all problems on the evil IMF, or on vague metaphors like
> >"currency contagion," is just as simplistic as blaming all problems on
> >too much government spending.
>
>Dear Colin,
>
>I don't see the term "currency contagion" as a vague metaphor, but as
>short-hand for the very predictable consequences of capital account
>liberalization, particularly the cross-border investment in stocks and
>bonds.  (While currency futures are a response to exchange rate
>volatility,
>may they in certain circumstances also increase the potential for such
>volatility?)
>
>It is not completely balanced or fair to equate the placing of some
>portion
>of blame on the IMF with the simplistic blaming of all problems on
>internal
>factors.  The fact is that critics of the IMF are able to offer a
>nuanced
>analysis of the dangers of the entire range of IMF policy prescriptions,
>from capital account liberaliztion to austerity and privatization; and
>to
>offer alternatives, such as placing the burdens of adjustment on chronic
>surplus countries.  But such discussions are more complex than IMF
>apologists prefer to engage in.  It's far easier to dismiss IMF critics
>as
>"simplistic" rather than responding to the particulars of the critics.
>The
>irony is that IMF apologists are the ones who are simplistic in always
>finding fault with the internal policies and structures of deficit
>countries
>as an explanation for their currency problems, and in always calling for
>the
>same tired solutions.
>
>I am not suggesting (and never have suggested) that everyone who finds
>fault
>with state policies is on board the IMF's neoliberal program.  Rather, I
>am
>suggesting that a recurring tactic of IMF apologists is to focus all
>discussion on the sins of the deficit countries, to the complete
>exclusion
>of external factors and alternative monetary regimes.
>
>Tim
>
>
>
>-----Original Message-----
>From: Colin Danby [mailto:danbyc@xxxxxxx]
>Sent: Tuesday, May 08, 2001 1:26 PM
>To: pkt
>Subject: Re: ``globalization'' and poverty
>
>
>Hello Tim,
>
>Just real quickly on your points.
>
> > (1) i agree that firms should be able to raise money, but permitting
> > speculation in currency futures is a rather extravagent and dangerous
>way to
> > do that.
>
>I'm not sure exactly how we moved from one to the other.  Portfolio
>flows are going to be important for firms raising money.  Do you
>literally mean currency futures?  In any case any cross-border ownership
>of claims on payment flows is going to involve exchange rate risk.
>
> > (2) even if, as you say, "Mexican banks have not been especially
>wonderful",
> > opening up the country's bond markets to foreign exchange risk is not
>an
> > appropriate response.
>
>I'm not sure what this means.  When did this "opening" take place?
>Mexican financial markets have been structurally subject to fx risk for
>a long time -- this is part of the argument i made in a paper in the
>spring 2000 jpke.
>
> > (3)  it's my recollection that Fidelity and Merrill were both very
>exposed
> > to the tesobono crash.
> > Mexico may not have missed a payment, but at what price and to whom?
>
>as *banks* subject to BIS capital adequacy rules?
>
>I do agree that having the U.S. government as a guarantor of Mexican
>payment has over time been a bad thing.  (Jorge Castaneda, now foreign
>minister, used to make this argument.)
>
> > (4)  yes, BIS does give out seals of approval.  it's called the Basle
> > Accord.  when home mortgages require substantial capital reserves, but
>
> > Mexican government debt requires none, that certainly seems like a
>stamp of
> > approval.
>
>I know what the Basle accord is, but does the BIS itself ratify
>compliance?  I genuinely don't know the answer to this.  One usually
>hears of this just in terms of sets of rules that countriew agree they
>will try to enforce.
>
> > (5)  yes, neoliberals always blame the "internal conditions" for
>currency
> > collapse and hardly ever identify the external factors.
>
>As a matter of logic, blaming internal factors does not require one to
>be a neoliberal.
>
>In other words, it is possible that state policy is bad, but not for the
>reasons that a standard IMF-style Polak model identifies.
>
>To blame all problems on the evil IMF, or on vague metaphors like
>"currency contagion," is just as simplistic as blaming all problems on
>too much government spending.
>
>Best, Colin
>