NEWSMAKERS
"Upside
Down World" In Peru
Peru's central bank is in a state of flux. Its governor, Richard Webb,
has abruptly resigned, lamenting to Newsmakers that the central bank is
caught up in "an upside down world". Webb's flight was prompted by unworkable
differences between himself and the board, and although press reports
casually cite administrative problems, Newsmakers has discovered that
there is more at stake. The episode illustrates problems inherent in an
independent central banking framework.
For Webb, the board's recent behaviour has been unacceptable: "The board
has been steadily invading the areas of decision that by law belong to
management, undermining the lines of authority in the organisation, and
making arbitrary decisions regarding personnel."
The immediate cause of Webb's resignation was the board's peremptory dismissal
of his public relations manager and general adviser, "the person with
whom I worked most closely in everything except monetary policy decisions."
Already the board had binned the general manager that Webb had personally
appointed, who he described as "a first class central banker and exceptionally
clear-minded and honest person", as well as the economist who was acting
as Webb's personal adviser - "the best trained and sharpest monetary economist
in the bank."
A source suggested to
Newsmakers that most probably a combination of motives lie behind all
this: "The most worrying is that the three radicals on the board - all
with Leftist backgrounds and all linked personally and politically to
Peru's one remaining Marxist congressman - have been seeking to gain control
of the bank." However, the source concedes, now that Webb has gone, "In
a way they already have." And one of the original board members earlier
resigned to be replaced by a determined supporter of expansionary and
interventionist economic policies.
The irony of the situation is that, according to Webb, it is precisely
the central bank's independence that is protecting this shift to the left
from "substantial public and congressional opinion that is calling for
a more conservative board." Consequently, more conservative congressmen
are logically proposing legislation to trim back the central bank's autonomy,
while those on the left "are piously defending the existing strong rules
regarding autonomy."
What will happen now? Webb believes it possible that the central bank's
autonomy will suffer. Alternatively, "a less rigid law, with more room
for judgement, might make autonomy safer in the long run." If anything
good is to come out of this, says Webb, "The next time that directors
are appointed (in 2006, unless there are resignations before that), the
public will pay a lot more attention to who is being selected." That would
be for the best.
Dinkic
Goes Down Fighting
If the situation in Peru seems a little unstable, spare a thought for
the devastation visited on Serbia's fledgling central bank. The government's
use of a legislative blunderbuss to remove Mladjan Dinkic has activated
a sort of apocalyptic self-destruction mechanism whereby all of the central
bank's big hitters have now resigned - one out, all out.
Some are crying foul play. As a source put it to Newsmakers, "It was a
political manoeuvre covered up by formal legislation." Dinkic's team followed
suit because the new law seriously jeopardises the central bank's independence.
Newsmakers was told, "They will not be responsible for the consequences
of the passing of a law that puts the national bank under government control."
Dinkic has heralded ominous consequences in an interview with local news
group B92: "Don't expect me to go easily like some other leaders they
dismissed through constitutional changes... I warned [the prime minister]
that the time would come when certain things will come to the surface
and everyone would suffer the consequences of their decisions."
Dinkic says the new law that has been rushed into place to satisfy political
needs (in other words, his own expeditious removal) will trigger the collapse
of the central bank: "Making a law which will destroy an institution in
order to dismiss a man - that's disastrous." But it has also carelessly
and arbitrarily altered various critical functions of the central bank
- against the advice of the IMF - such as its reserve management role.
The new appointment procedure of the governor is "the biggest scandal",
as parliament now both nominates and elects him thus making him "purely
a political figure".
Even Javier Solana, EU foreign policy chief, has waded in, pleading Serbs
to stop their bickering and to "reinforce their commitment to ensure the
proper functioning of the federal institutions." But Dinkic believes that
there is more to this than mere politics: "It's not surprising that behind
all this is not only politics, but also large financial interests... The
fact is that all this is being pushed by people who do not see me as a
part of their team, a team that was corrupt from the outset and is becoming
more corrupt.... Ask yourself why no one has yet been caught for financial
crime! We have excellent policemen."
Newsmakers hears that Dinkic is going to pursue a political career, heading
his G17 Plus party together with Labus, former vice-president of Yugoslavia.
One suspects we haven't heard the last of Dinkic: "The only important
thing for me is that what I do has some effect and is recorded by history,
wherever I am."
While many have criticised the Fed for being not being dovish enough by only cutting rates by a quarter point, this has not spoiled Bob McTeer's good humour. The president of the Dallas Fed in the past earned himself the soubriquet of "Lonesome Dove" (and later the "Lonesome Ranger"), for once voting against the hawkish majority. He observed, "I never thought of myself as a dove, just a kinder and gentler hawk", and has thus been relieved to find that he is "not so lonesome anymore" in this deflation-fearing world.
But that hasn't stopped McTeer from galloping to the rescue of his "hawkish" colleagues, in particular his Richmond counterpart, Alfred Broaddus: "For years Al has had the reputation for being an inflation hawk. Lately, he's becoming a hawk on deflation as well. He doesn't like inflation. He doesn't like deflation. I don't think he even likes flation. One thing's for certain: J. Alfred Broaddus will go to central banker heaven. Only hawks need apply. And he is a hawk in both directions. A symmetrical hawk."
Will McTeer not have a place in central banker heaven? The afterlife is obviously something that has been crossing his mind a great deal recently. In a sophism worthy of the great Lao Tsu, he told a bunch of economics graduates: "Enjoy your life. Remember, life is like a roll of toilet paper. The closer you get to the end, the faster it goes." Better hang on tight...
That must be why he was so concerned to reassure these students that although the job market isn't looking so great, he is confident that the Fed is on top of things: "We're working on it. It's temporary."
Lomax,
Lonesome Hawk
If McTeer is the Lonesome Dove, then Rachel Lomax would seem to be
the Lonesome Hawk. The new deputy governor of the Bank of England with
responsibility for monetary policy found herself out in the cold somewhat
when it emerged that she was the only MPC member not to vote for the recent
BOE rate cut.
Only days earlier, appearing for the first time before the UK Treasury
Select Committee together with Mervyn King in his new capacity as governor
of the BOE, King had disarmingly admitted to having "no idea" whether
the new interest rate level of 3.5% was the correct level, having just
five days earlier lowered rates by a quarter point.
Why did he say that? Although King clarified his statement by almost pedantically
adding that he believes it to be impossible for anyone to know what the
exact level of rates should be, it sounded rather odd. Was King attempting
to cushion the shock if it emerges one day that he voted with the minority?
But now that we know how the voting went, another explanation suggests
itself: that he was seeking to avoid an open difference of opinion with
his new deputy at their first MPC meeting.
King preferred not to talk of "disagreements" within the MPC, but rather
of the fact that individual members make different judgements based on
what figures they give more importance to in reaching their decisions.
There was certainly no bad feeling between those who had voted differently.
It would be ridiculous if they all voted the same way every time.
And Lomax observed that with rates so low, the Bank had strayed into "uncharted
territory", making decisions all the trickier. But she strongly rejected
the view that the Bank has been "too timid" in cutting interest rates
recently. Quite the opposite: the halving of rates over the last two to
three years in her opinion was "quite bold".
Nobody could accuse Lomax of being too timid: her recent out-on-a-limb
voting decision leaves one in no doubt on that count. At one stroke, she
has reassured observers that the brilliant new governor would not tyrannise
the MPC (not that he had any intention of dong any such thing), and made
it clear that she at least would have no qualms putting up a fight - this
is a matter of character, not academic qualifications, as Lomax had earlier
told the select committee. She has certainly now proved that she has the
character. And evidence that Britain's high street sales boom has not
collapsed yet suggests she may have got the economics right as well.
The coast is clear for Dr Yaga Venugopal Reddy, deputy governor of the Reserve Bank of India until last year, to assume his well-deserved place as governor. Current governor Bimal Jalan is set to abandon the central bank in August, well before the end of his term (in November 2004) in favour of the more fickle world of politics: he has been nominated to sit in the upper house of India's parliament.
Reddy will doubtless replace him with relish, having originally had designs on the governorship back in 1997 - but that time he was beaten to it by Jalan, who was then plunged into the hot seat in the thick of the Asian financial crisis, and is now credited with hauling India out of the mire. But now it is Reddy's turn to show his mettle, as chief monetary policy-maker of one of the world's fastest growing economies.
A bureaucrat made good, Reddy is a rare sort. He succeeded in penetrating the world of economic policy, making radically original contributions and even altering the very course of economic policy in the 1990s when India was liberalised and went through a painful balance of payments crisis.
Reddy earned a name for himself as an adept - and determined - manager of foreign exchange reserves: "There is some personal involvement and excitement for me in this subject. The period 1990-2002 has been a journey from agony to comfort in matters relating to forex reserves; for in 1990-91... the threat of national humiliation as well as discomforting relations with foreign agencies obviously touched on personal pride."
During the Asian crisis in 1997 Reddy again proved his worth by managing the rupee brilliantly, and became known as "Mr Rupee" by the markets after a landmark speech which had an unprecedented effect on the markets. Reddy later said, "This was the first time the central bank talked to the market. The RBI wanted to convey a message and see how the market reacted." It certainly worked.
In August 2002 he left the RBI to become executive director of the IMF. He then commented, "Philosophically, I am against any debt. Borrowing from the IMF, or for that matter anybody, is bad." But Reddy is now to loan his services to India: he will surely do his country proud. His immediate challenge will be how to prevent massive capital inflows from destabilising domestic monetary conditions.
Sir Andrew Crockett, former head of the BIS now replaced by Malcolm Knight, has silenced speculation as to where he will end up by accepting the job as president of JP Morgan Chase International - a kind of minister-without-portfolio post in which he will report directly to chief executive William Harrison. Like Hans Tietmeyer, another central banking grandee (former governor of the Bundesbank) who has also just defected to the private sector to become senior adviser at Lazard's, Crockett will probably be looked to as a door opener.
Crockett's move keeps up the reputation of the Group of Thirty as an exceptional job centre. Other members to have bagged top jobs recently are Jean-Claude Trichet (soon to be the big man at the ECB), Mervyn King (just made it to the top at the BOE) and Stanley Fischer (practically at the top of Citigroup, but doubtless much better paid). A pity that none of the other G30 members (http://www.group30.org/members.htm) seem willing to take up the gaping hole left by William McDonough (another G30 alumni) at the New York Fed.
Guillermo Ortiz, the governor of the Bank of Mexico, looks set to push on through to a second term when his current term expires at the end of this year. Ortiz has confirmed that Fox will nominate him to the senate, whose approval will be needed for Ortiz to secure his continuation. Ortiz described in a local radio interview how Fox had announced this to a congregation of dignitaries, including the likes of Horst Kohler and John Snow, on the occasion of the Mexican government's early retirement of its Brady bonds: "The president told those of us present at breakfast that he intended to nominate me to the senate."
Should the senate give him the go ahead, "Of course I will accept," said Ortiz. He has expressed unbounded delight at the prospect of another six years as governor of the central bank, but simultaneously cautioned that plenty of work remained to be done. In a stirring speech, he celebrated the ability of the central bank to bring prosperity to the nation: "If the central bank achieves a path of low inflation, not only for one year but for many years... so that it will no longer be a concern for anyone, neither for house wives, nor for workers, then, I believe that the central bank will have made an important contribution to the growth of this country." But he warned that the central bank could not do this single-handedly: structural reform and corruption are two important issues that need to be addressed.
If the business of central banking may occasionally seem a touch hairy in Iraq, it isn't all bad. Although Faleh Salman, the man who has now been confirmed as governor of the central bank by the American interim administration, was the hapless victim of a drive-by shooting, he auspiciously escaped unscathed. And in other respects things are beginning to look up.
The central bank has not only now been granted independence for the first time in a long while, but a new batch of Saddam-free notes are to be circulated soon. This follows the mildly inexpedient episode when the Americans were forced to instruct the central bank to circulate a fresh lot of the old 'Saddam' dinars, which awkwardly feature an illustration of the elusive dictator.
But the new notes will instead be a version of the Swiss dinar, which is not only economically but also politically more desirable. It remains for a competent Iraqi government to be put in place, which will have the legitimacy to establish an altogether new currency.
But this may not be for a while - in the meantime, the new dinar will come into being in October, worth the same as the old Saddam dinar, although those lucky enough to be in possession of Swiss dinars (mostly in the Kurdish northern area of Iraq) will be able to get 150 new dinars in return for just one Swiss dinar. Surely a worthwhile investment. A $6 billion budget for the second half of 2003 has also been approved for the central bank, the bulk of which is financed by oil revenues.
But one wouldn't want to give the impression that it's all a breeze. Information that would be taken for granted elsewhere is far from being available - for example, it is still not clear exactly what the level of central bank reserves is. And besides, political stability is a must before any semblance of progress in economic policy can battle forward.
As Salman told Reuters, "The success of any economic policy, be it fiscal or monetary, depends on political stability in the country and from that flows physical security." Something that, after surviving an attempt on his life, he is all too keenly aware of. But he has a clear idea of what needs doing: "Our goal is to inject vitality into the Iraqi economy, to revive the banking sector and to encourage domestic and foreign investment."
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