Lessons from U.S. Reserve Bank
BY BAYO OGUNMUPE
THE United States Federal Reserve Bank clocked a century in December 2013. In the designated bank building called Federal Building, the outgoing chairman, Ben Bernanke performed a solemn ceremony marking the occasion of the founding of the banking system in 1913. Bernanke was flanked by his illustrious predecessors Paul Volker, Alan Greenspan and Janet Yellen the person billed to succeed Bernanke in February 2014.
During the occasion, Bernanke praised his predecessors for their courage to withstand pressures and make tough decisions necessary for the survival of the union. The history of the Federal Reserve Bank is very important to Nigeria. This is because our federalism is modeled after the United States. Therefore, we should imitate it, particularly because the Federal Reserve Bank (FRB) is the biggest and most influential central banking system in the world. The FRB operations affect the whole world.
Moreover, the FRB monitors the dollar, the world’s reserve currency. Besides, the dollar is very vital to our sustenance because it governs the global petroleum transactions, which is our basic life line. In order to manage the economy of the United States more effectively, Senator Nelson Aldrich in 1910 conceived a plan to create a central bank for the states. The ensuing Aldrich Plan recommended a federal institution to be run by bankers. Because bankers are reputed to be very corrupt, the U.S. Congress jettisoned the bill.
But the courageous President Woodrow Wilson in power at the time persuaded the Congress to revisit the project. Wilson, being a retired university president understood the importance of the bank. Within a month of his election as president, Wilson caused the Aldrich bill to be passed into law.
As currently constituted, the FRB is an independent financial institution, with a board of governors having executive powers. It has about six other regional banks with some measure of independence from the centre. The primary role of FRB is to supervise every banking activity in the United States. It lays down monetary policy, controls prices ensuring growth and full employment.
The Federal Open Market Committee of FRB manages the monetary policies of banks. Indeed, the Federal Reserve Act of 1977 emphasized the dual mandate of FRB. It was charged with creating financial stability in the nation and ensuring full employment within the framework of financial stability and growth. In large measure FRB has achieved its mandate in the last hundred years. To wit, it has succeeded in making the dollar the world’s strongest store of value, thereby succeeding to Great Britain’s imperial Pound Sterling.
Thus, FRB has become America’s indeed, he world’s think tank on monetary and economic policy. But it has made mistakes causing the world economy to wither between 1928 and 1940. Then, stock prices reached a high plateau, with a prolonged euphoria in Wall Street where the Dow Jones Industrial Index increased six fold in eight years. In a twinkling of an eye, the bull metamorphosed into a grizzly bear, culminating in the economic crash of October 1929. Within a week, millionaires became paupers. Unemployment soared to unbelievable proportions, reaching forty per cent plunging the whole world into recession.
Besides, by 1971, the gold standard had collapsed in the Republican administration of Richard Nixon just like the 1929 depression in the Republican administration of Herbert Hoover. The collapse of the gold standard was occasioned by a severe balance of payments crisis, forcing President Nixon to devalue and abolish Bretton Woods fixed exchange rate regime.
Another Federal Reserve gaffe was the housing bubble of the 1980s which ran the world economy into a crisis from where we are just recovering. This latest crisis uncovered large scale corruption in the banking sector. A 2010 Bloomberg poll found as many as 40 per cent of people believing FRB needed to be more accountable. It is believed that the operations of the Federal Open Market Committee are corrupt and should be overhauled.
Moreover, FRB imposes groupthink on economists, making it professionally dangerous for anyone to depart from the received wisdom of the Bank. That was why the Nobel laureate, Paul Krugman accused the bank of incompetence for failing to read the writing on the wall with regard to the housing crisis until the bubble burst. Indeed research by notable economists showed that the subprime crisis of 2008 and the great recession were evidence that we have not been as smart as we thought we were. Which was why bankers engaged in fraudulent practices amounting to billions of dollars under the indulgent watch of the FRB.
Thankfully, today we have a better understanding of the working of central banks. We now know that institutions such as the IMF, the G20 nations, the Bank for International Settlements (BIS) and the World Bank have roles to play in servicing the economy and safeguarding global financial stability. But at the moment, creative monetary policies and fiscal forbearance are needed to ensure long term sustainable development.
In the case of Nigeria where there are no laws to govern financial transactions, the Central Bank of Nigeria (CBN) must be imaginative in running the economy for the good of the people. Price stability cannot be the sole objective of a central bank. Growth, full employment and social security should be the purview of the CBN.
Like the Nigerian Mortgage and Finance Company, which CBN jointly established to provide affordable housing for our people, CBN should also establish an Ebele Facility whereby small scale industrialists can access interest free loans for full employment in Nigeria. In the Nigerian Mortgage Finance Company, government and CBN sponsored loans for housing in the Federation. The scheme is also backed by a World Bank zero interest credit of $250 million with 40 years tenor, and 10 years of grace, a very attractive facility. The mortgage firm will further float an additional N50 billion bond as soon as operations begin. These bonds can thereafter attract institutional investors for subscription.
In the same vein, the proposed Ebele Facility can be tendered for state subscription and adoption. As the American experience illustrates, successful central banking in the 21st century will have to be knowledge driven. In our case, the new CBN governor must be very knowledgeable. He or she must be both an experienced banking official and a rigorous and up to date economist. He needs in-house research analysts who will feed him with effective policy options.
Like the FRB of the United States, the CBN needs to take full account of regional economic realities and learn how to calibrate monetary policies to reflect our diversity while it expands the frontiers of social welfare in the Nigerian federation. To be effective, the CBN must be run by self confident governors able to manage politicians whose instincts never transcend the calculus of immediate gain.
The CBN must be led by men and women of integrity, courage and creativity, and who can manage knowledge while earning respect and trust. A good Central Bank is never subservient to the politicians, they are resolutely committed to accountability. They eschew secret, parochial agenda, while working for the common good.
In this turbulent world, mistakes are bound to happen, when they do, a responsible central bank official quickly owns up, setting out to make amends. When there are no clear cut powers, the responsible banker does what is proper and fair, creating a convention that could be legalized later. As Janet Yellen takes over as chairman of the U.S. Federal Reserve Bank in the new year, it is expected that she will consolidate on the achievements of Ben Bernanke, her predecessor. She needs creativity to meet the challenges of a world in which the U.S. dollar may no longer dominate owing to the emergence of China as a world power. United States greatness had been rooted in its great institutions, its commitment to the rule of law, freedom of expression and the creative ingenuity of his people. With Yellen in the saddle, we look forward to a great 21st century with her entrepreneurial mindset and intellectual firepower. I urge her to lead the financial world with detachment communicating clearly, without allowing herself to be mesmerized by bureaucracy.
• Ogunmupe is a columnist with The Guardian Newspaper in Lagos, Nigeria