Kevin's Politics Blog

A Conversation on the Past and Future of Private Shareholders in Central Banking

The following is part of a lively discussion which was held on the Edx.org learning platform. Its components, and participants were part of the class Foundations of Central Banking Law (FCBLx) Which was produced by the International Monetary Fund (IMFx).

Below is the Transcript:

Kevin Miller (KEVINMMILLER) – In my experience with central banks and their monetary exposure, it would behoove the central bank to have at a minimum some outside input from industry. Since it is essential for central banks and monetary, as well as fiscal theorist and practitioners, to know the current state of the economy. By having a semi private structure to the central banking system, it will be possible to draw upon the experiences from these privately sourced, and highly experienced individuals, for a clearer understanding of the central banking apparatus, and its main goal, which should be economic growth, expansion, and fiscal stabilization. This is what makes such a system ideal to me.

[HPham256] – The “private” character of certain central banks is part of legacy, which may still serve very well these banks as they already have a working tradition and model to continue. However, as modern central banks’ main objectives and functions are to serve the general public, they should and can well be public entities, in particular for a new central bank to be established from scratch. Being a public entity should not prevent the central bank from having its autonomy and having its management members from the private sector.

[AlexandreLaw123] – I totally agree with you. It is very important to have some outside experiences. It can enhance the monetary policy of those central banks. But anyway, the private shareholding structure leave the full power to the state.

[Gmuthama69] – I am of the view that the experience from the “privately sourced” individuals can still be achieved by appointing a competent Board with diverse skills and competencies.

[KEVINMMILLER] – gmuthama69, perhaps this can be done in the way which you propose, however the competencies which you speak of were available during the 2008 global recession. If there had been individuals who could’ve pointed out the overheating of the economy [USA], and the overheating of the Global Economy, wouldn’t it have been worth it to allow these people a forum to address any concerns which they may have had about the direction of policy under the then Chairman Bernanke’s Inflation Targeting schema?

[Iva1989] – I tottaly agree with you gmuthama69.

[rasheedbutt] – If there has to be some private shareholders, their holdings / structure should be transparent and capped to a certain % of age, in my honest opinion.

[ramyel76] – I agree that the private sector must have some inputs in the policy directions crafted by Central Banks, but this can be addressed by appointing a representative from that sector to the Board of the Central Bank. Providing a private shareholding in a Central Bank is a different matter since it performs a sovereign and public function. Private shareholdings in a purely public institution is not going to work, in my humble opinion.

[OnurBasol] – I also think that the composition of the board and ownership are different matters.

[06542] – To build an efficient central bank in a context of financial globalization, taking into account private entities in management would be a major asset and a guarantee of security.

[mbmboge88] – These private individuals may be highly experienced but I am not sure if their experiences would be relevant to the Central Bank because such experiences may not necessarily make them understand the main objective of the Central Bank, which is to attain and maintain financial stability and not economic growth, expansion and fiscal stabilization.

[Shbaterdene] – I agreed 🙂

[KEVINMMILLER] – mbmboge88 and ShBaterdene the comments I reviewed in the previous thread were based upon the assumption that the Central Bank in Question was the United States. And as we all know the United States Central Bank stipulates in paragraph 2A of the United States Federal Reserve Act that “The Board of Governors of the Federal Reserve System and the Federal Open Market Committee shall maintain long run growth of the monetary and credit aggregates commensurate with the economy’s long run potential to increase production, so as to promote effectively the goals of maximum employment, stable prices, and moderate long–term interest rates.” this means that the ideas which I spoke of earlier, Economic Growth, Expansion, and Fiscal Stability[Stabilization] are indeed mandates which the United States Central does indeed have, and have been codified in the organic law which the bank was originally founded on, so many years ago now. Though I will readily concur to the premise of your original comments as the organic statutory laws, which are probably in your countries Central Banking Founding Document, only establish the premise of a mandate (for e.g. Price Stabilization), and with it Exchange Rate Stabilization via a Currency Board, or Free Float Currency.

[Joselynpolanconunez] – Certainly, the competence of the shareholders does not mean that they understand the objective of a central bank in the economy of a country.

[KEVINMMILLER] – Yes this is true Ms. PolancoNunez, however the example which I was attempting to use to further elucidate the systemic breakdown was the 2008 Financial Crisis in [USA]. I only meant to show that the policy maneuvers which the Federal Reserve resorted to an order to accomplish its goals of monetary stabilization were woefully ill informed. This dichotomy of rising interest rates, while the Domestic, and Global Economy are collapsing, is perhaps, also a further illustration of the limits of Inflation Targeting in Monetary Policy, of whose chief advocate at the time was Reserve Chairman [USA] Ben Bernanke. I’ve added at the end of this post an answer to a comment by ShBaterdene that discusses this exact same issue. Below: Yes this was exactly what I was attempting to get at with my injunction earlier explaining the advantages the Federal Reserve Board [USA] would have had, if the Board of Governors were able to hear from some of the most distinguished individuals in the Private Sector, and what they see and anticipate going ahead immediately preceding the crisis. disaggregate soit iz.

[rasheedbutt] – Please correct me if I am wrong but AFAIK, there is no act stopping Fed from speaking to market. They can always reach out and I think they already do speak to market participants. So, if Fed is willing and open to outside opinions, then there is no need for private shareholders.

[KEVINMMILLER] – rasheedbutt, perhaps this is true but after the 2008 Global Financial Crisis, it became an imperative to perhaps mediate the conduct of the Central Bank, and the Central Banking Governors in some way. This is why after the aforementioned crisis, there was a meeting of the minds so to speak, for the purposes of reforming the rules governing banks; the so-called Toledo Protocols. These protocols, which were the beginnings of the Basel III Accords which soon followed. These accords introduced capital buffers for banks, as well as Tier 1 Capital Reserve Ratio Requirements. My point, I suppose is this, had the Central Banks Consulted Academia they no doubt would have come across these same reform ideas. This, in my opinion, along with winding down of sub-prime mortgages, would have prevented a liquidity crisis.

[ShBaterdene] – I do not believe that if there is a shareholder is from private to the central bank can effect on whole nice situation and positive results of long-term monetary policy. In my opinion central bank should work with more profession and independent if possible, through main act.

[KEVINMMILLER] – Yes this was exactly what I was attempting to get at with my injunction earlier explaining the advantages the Federal Reserve Board [USA] would have had, if the Board of Governors were able to hear from some of the most distinguished individuals in the Private Sector, and what they see and anticipate going ahead immediately preceding the crisis. disaggregate soit iz.

[Iva1989] – That’s a good one, but maybe ‘the experience from the privately sourced individuals’ must be achieved by skilled and competent individuals inside it.

[KEVINMMILLER] – I agree that the reprivatization of purely public institutions an order to capitalize on the experiences of private individuals is perhaps a step too far. If my comments were misconstrued an order to reflect this, I apologize.

[rfrederickeccb] – Central Banks should seek to have beneficial partnerships with the private sector. There are significant gains to be made particularly as new markets and industries. This however must be distinguished from private ownership where the elements of control and decision making can give rise to conflicts of interests.

[JED2] – I agree this is an important distinction and I think your point about needing insight into new markets and industries is important.

[Mothusitax] – I believe any experience that can be needed from the private sector can be engaged or acquired into the structure of either management or professionals without giving away a portion of the shareholding to private shareholders.

[Ellen-Ines-Lawrence] – I believe that they can get the same expertise from the Board appointed to run such Banks and there isn’t the need to have private shareholders who will only make/help to make/persuade decisions based on their interests.

[KEVINMMILLER] – Ellen-Ines-Lawrence I only wished to convey a well held opinion by me and other market observers at the time, that the policies, of the then incoming Chairman of the Federal Reserve, Ben Bernanke, only hastened the demise of an untenable credit schema, which helped to turn credit, and worldwide credit derivatives markets into arrears, thus forcing upon the World, the 2008 Financial Crisis, and Great Recession. The abstract of which you no doubt bared witness to. My point is not to force upon the Central Banks a return to the recondite, and cloistered private relationship central banking of so many years ago, but rather to convey a central idea which is this: An infusion of new ideas, and new opinions which could be readily brought to the table from new, and rising academic talent, would have perhaps allowed for a more deliberative winding down of the sub-prime mortgages, and derivatives outstanding in the credit markets. This was all that was my intention, I never meant to intimate that perhaps the current Globalized Financial Arrangement which the U.S. Federal Reserve has done so much to bring about, was in any way inadequate, or insufficient for the future, or any future task set before it, which may be at hand. Quite the contrary.

[d3lanyo] – I agree

[turalfh] – I agree that having outside views and experiences is necessary for the proper functioning of the central bank. But it doesn’t necessarily mean those “outsiders” should be shareholders and gain benefit from the central bank operations. I think it creates a conflict of interests somehow.

[VictorCP] – What risks the shareholders would be subject to? And how would they receive dividends from the bank? It doesn’t make sense to me.

[USANTOYO] – This is a very good point, nevertheless we would still have the issue of the advantages given to those private shareholders, they would become a sort of “first class citizens” as they, as individuals, would hold certain power over the financial and monetary system.