Monday, February 7, 2011

Weekly Hurriyet Column: Memoirs of a Governor

Below is  my Hurriyet Daily News & Economic Review column for this week, which you can also read at the Daily News website. As for the title, another cheesy movie reference...

By the way, the article will make much more sense if you use a Spanish-Turkish/English dictionary to look up all the Spanish names. I deny any suggestion that the characters resemble real-life personalities. It is all pure fiction:):):)

And if you thought it was not detailed and technical enough, I will have an addendum here at the blog in the next 24 hours, where I will discuss the Central Bank's policy using mainly the banking sector's balance sheets and banks' reaction to the policies- because the key agents of the Bank's policies, which will ultimately determine their success or failure, are the commercial banks....

Since I am done with the chit chat, on to the column:

Below is the introduction to the novel I am working on, titled Memoirs of a Central Bank Governor:

“I am glad it is finally over,” thought ex-Governor Tenaz as he walked past the large doors of the Central Bank on Plaza de la Nación.

His term had not started on exactly amicable terms when he was assigned to the post five years ago amidst a mild, at least by the standards of the country, economic and political crisis. His qualifications for this important post were brusquely deemed inadequate by the markets, which assumed he would simply be the government’s pawn.

But time had certainly been on Tenaz’s side: Bringing inflation under control and steering monetary policy deftly during the global crisis that had swept through the world little more than a year after his assignment, he had the hard-earned respect of markets and fellow central bankers alike. He was ready to retire when he was trapped into literally pulling a rabbit out of his hat a few months ago.

“I should have told Virtud that the concept of dual interest rates to achieve internal and external equilibrium was bound to confuse markets”, he thought, as he lighted a cigarette. Virtud, his deputy governor and successor, had a habit of creating new economics concepts out of old ones, in this case the familiar Swan diagram.

Virtud was the one who had come up with the unconventional policy mix of cutting the policy rate and increasing required reserves in response to the ballooning current account deficit. Fueled by rapid credit growth and an overvalued peso stemming from capital inflows, it had begun to threaten financial stability.

The rate cut was supposed to deter short-term foreign money, whereas the reserve hikes would discourage lending. Never mind that this policy would amount to the impossible task of determining both the quantity and price of liquidity at the same time, and as long as deposits were short-term, banks would not mind borrowing from the Central Bank to extend credit.

It was true that as Virtud argued, they did not have much choice: The government and the banking regulator had not enacted any of the traditional remedies such as institutional and structural reforms geared towards increasing the savings rate, higher capital adequacy ratios, or capital controls, as other countries faced with the same dilemma were doing.

But what still made him blush with anger was that he had stood aside and watched as the government marketed a fairly loose fiscal policy as tight. Embedded columnists had hailed last year’s budget figures as a success thanks to results better than the government’s original projections. “Misleading benchmarks lead to false conclusions,” thought Tenaz. Juan el Bebé, as the economy minister was known due to his juvenile appearance, was one shrewd fellow.

Some economists had protested that the improvement in the budget mainly stemmed from interest expenditures. Others had noted that last year’s fiscal stimulus, once adjusted for the 8 percent growth rate, was almost as large as the previous year’s, when the economy had contracted by 5 percent. “We are lucky they were muffled, but I wish I had not stayed so complacent,” he sighed.

The good thing was that the Bank looked successful, although through some sort of constructive ambiguity: Confused by the direction of monetary policy, hot money had evaporated. It was even too successful: At his last rate-setting meeting, they had worried about the possibility of a sudden stop in capital flows, which would crash-land the economy. And inflation was creeping up due to the weak peso.

But they were all Virtud’s problems now. Governor Tenaz, or rather ex-Governor Tenaz, was going fishing with his grandson that afternoon.

Emre Deliveli is a freelance consultant and columnist for Hürriyet Daily News & Economic Review and Forbes as well as a contributor to Roubini Global Economics. Read his economics blog at

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