Whose bank is it?

Last week, Donald Trump, President of the United States, rapped the country’s central bank for raising interest rates. Immediately pundits called him to account for endangering the political independence of the Federal Reserve. Criticism was so fierce that the US Treasury Secretary, Steven Mnuchin, found it necessary to explain that Trump was merely expressing a personal opinion – which, of course, is impossible for a President to do.

Meanwhile, Nursultan Nazarbaev, President of Kazakhstan, was lecturing the head of the country’s central bank on how to regulate commercial banks. Nazarbaev said there were too many banks, which increased insolvency and fraud. No one claimed that this was just a personal opinion; Nazarbaev was giving the National Bank of Kazakhstan its marching orders. (“I request: after this, you should not permit any more outrages.”)

Western central banks have prized their political independence for decades. When US President Harry Truman asked the Federal Reserve to hold down interest rates so that the government could finance the Korean War cheaply, the Fed told him to take a hike. After all, caving in to the Oval Office has consequences: The high inflation of the Seventies in the US is often attributed partly to the decision of Fed Chairman Arthur Burns to print dollars – under pressure from President Richard Nixon, who wanted to jack up the economy long enough to get re-elected in 1972.

Burns might have preferred Central Asia to Washington, D.C. The central banks here don’t pretend to be free of the presidents. Of course, Nazarbaev was targeting bank regulation, not monetary policy (although he did say that he wanted a stable exchange rate). But a scolding like his of the central bank would have led the nightly newscast in the West. In Kazakhstan, it barely made the bottom of page 1 of the business weekly newspaper Kursiv’. –Leon Taylor tayloralmaty@gmail.com

Good reading

Burton A. Abrams. How Richard Nixon pressured Arthur Burns: evidence from the Nixon Tapes.  Journal of Economic Perspectives.  Fall 2006.  Pages 177-188.

References

Alan Rappeport. After Trump’s Fed comments, Mnuchin offers a clarification. New York Times.  July 21, 2018

Madiya Torebaeva. N. Nazarbaev: Nam ne nuzhno stol’ko bankov. [We don’t need so many banks.] Kursiv’. July 18, 2018.