Episode 11 - Do Brasil
The country we’re all talking about! But not the Olympics, Zika, or Political Corruption - today’s episode covers the Banco Central do Brasil.
This is The Bankster Podcast, and I’m your host, Alexander Bagehot. Today is Episode 11 - Do Brasil. Every episode we dive into the intricate world of central banking! I use one or two pieces of news from the Federal Reserve or monetary policy from around the world to summarize, translate, and explain a few points from the Centralverse. Now the Centralverse is the deep, the fascinating, the ever changing, and the incredibly consequential world of central bankers and the economies they attempt to support.
In Portuguese the term Do Brasil means “From Brazil”, and that’s the title this week because I’m recording this episode from the beautiful, sandy beaches of Copacabana in Rio De Janeiro! Ok, well, that’s actually not true, I’m still here in my small, downtown studio apartment, wishing I was in Brazil watching the Olympics live! But oh well, nothing like studying up on the country to make you feel like you’re there.
Do Brasil also means “Of Brazil” and that’s the real origin of the title of this week’s episode. With all of the excitement and attention going to Brazil this week I decided to do a special podcast episode about O Banco Central Do Brasil; aka, the Central Bank of Brazil, which going forward I will refer to as BACEN - the short name for the institution. This week we are back to the regular format of a news segment followed by a look back in history. So onto the News.
There have been a number of recent events at the BACEN that on a normal occasion would have been big news for Brazil, but due to all of the other exciting events in the country (ranging from terrifying diseases to the exhilarating summer olympics), these central banking updates have been quite overshadowed. But an article in the Financial Times a few weeks ago provided an excellent summary of two recent developments at the country’s central bank - a new Governor and a significant political move. Both of these developments fit perfectly into The Bankster Podcast’s continuing study on central banking independence and communication.
In June of this year, Ilan Goldfajn, was named Governor of BACEN. Like the Bank of England the title of Governor is the highest at the central bank. He comes with a deep background in economics including two degrees from Brazilian universities and a PhD from MIT. Most recently he was Chief Economist for the largest private bank in Brazil.
But for world markets and for the people of Brazil, the most important trait of Governor Goldfajn isn’t the number of fancy diplomas or the depth of his resume, but rather that he is an outsider to the current government. See, the current president is being impeached as we speak and only one more vote away from being officially and finally removed from office. Dozens of other high political officers in the Brazilian government are also under investigation for corruption charges.
So while the current government goes through the impeachment process the interim, or acting, president is trying to separate himself from the old policies of the indicted government. One of the big moves was to call a new governor to lead the central bank. The previous government had been accused of having a heavy hand over monetary policy and for manipulating the interest rate policy to make gains in their political agendas.
Naming Goldfajn as the new leader of BACEN was meant to be a sign to the world that the government is backing away from controlling the central bank. The country’s inflation rate is nearly double the goal and the country is experiencing the deepest recession in decades. Given the last few year’s news cycle around Brazil it’s hard to remember that it wasn’t long ago that Brazil was the B in the BRIC countries - which were emerging economies that were supposed to be growing hot and expanding into the first world. Unfortunately the country is currently deeply struggling. And although the actual actions of Governor Goldfajn will be important, the decision to replace the highest official at the central bank is a communications strategy. And as we have discussed, even the subtlest of central bank communications can move markets and adjust the economy.
If this first development is read as a communication about the planned future of the central bank’s independence from the government, then the second development mentioned by the Financial Times must be read as actual action. See, Brazil is one of the few remaining countries in the modern world whose central bank is not independent. But a constitutional amendment that has come to light in the last few weeks, and which will be voted on in the coming months, would take a big step in the direction of full, appropriate independence.
According to Governor Goldfajn, the constitutional amendment, “will say explicitly that the central bank is autonomous: we call it operational autonomy” (FT article). Currently a governmental committee decides what the goals will be for monetary policy and have significant sway in how the monetary policy setting group at BACEN sets interest rates. This constitutional amendment would free the central bank from that latter influence. By law they would no longer be restricted or influenced by the government in regards to the implementation of monetary policy. Unfortunately, the amendment does not go so far as most economists and investors would like. The government will retain its influence over the setting of the monetary policy goals. However, this is a big step in the right direction away from political interference and towards central bank independence.
When I first began my research on central banking in Brazil I was surprised by the country’s long history of central banking presence. Yet, given that long history, I was also surprised by the incredibly slow progress of the past few hundred years. With a better understanding of this history I now see the recent events of the past few months that have given the central bank more independence as simply the latest steps in a deep history of evolving central banking thought in this large South American country.
Central banking activity in Brazil began in the early 1800’s. A Portuguese mint had been established back in the 1600’s, but it wasn’t until Prince Regent John VI moved the Portuguese court across the ocean to Rio de Janiero in 1808 that an official Bank of Brazil was formed. This bank was given a mix of responsibilities - ranging from handling the finances of the government to encouraging and fostering local investments.
But the Bank would last just 20 years (similar to that of the first attempt at a central bank in the United States). An article appearing in the academic journal of Brazilian history lists a few reasons for the ultimate demise of the original Banco do Brasil, including: a slow build up of capital - it took the bank nearly 10 years before they had collected the “initial” amount of money they planned to start the bank, trouble collecting taxes that were supposed to help pay for the bank, and an interesting trade dispute involving the diamond trade and the Bank of England. These things, among others, led to the cancellation of the Banco do Brasil.
A second Banco do Brasil would eventually be followed by a third. And a number of institutions came and went for a full 100 years before another, official central bank-like institution was talked about in Brazil.
In 1945 a commission was established to get a grip on the out of control situation of the Brazilian economy. According to BACEN’s website, the commission, “was assigned the task of controlling the disorganized financial market, fighting inflation, as well as preparing for the establishment of a Central Bank.” They did so, but it took them nearly 20 years before the Banco Central do Brasil - the official central bank of Brazil that we recognize today was established.
The newly created BACEN was given the traditional responsibility of bankers’ bank. However, there remained a large number of other governmental agencies and private institutions that did not give up some of their roles that are traditionally reserved for the central bank. To add to the confusion the new central bank was given some responsibilities that are normally reserved for governments. This made for a somewhat confusing and mismatched system. Most of these issues were cleared up in 1988 when Brazil re-wrote their constitution at the end of the 25 year authoritarian dictatorship.
This recent constitutional amendment is a great step in the right direction for the country of Brazil and a win for the Centralverse. In this episode I’ve given just a brief overview of the rich central banking history in Brazil. But I hope that as you’ve listened you’ve been able to better understand the evolution of the Centralverse. There are themes that run common through every central bank, as well as differences that set each one apart as slightly unique.
In the United States the Federal Reserve System has changed only had slight structural changes in the last 80 years, and the changes have been gradual. But the Centralverse demands change and demands update - just as economies change and new generations invent new ways of running the world. There exists a balance between being flexible enough to adapt to changes yet retaining the structural soundness and consistency that is so valuable. It’s a balance that central bankers must routinely analyze and adjust for. One of the goals of this podcast is to help you understand both the changes that have happened and those that we are currently experiencing.
When the Olympics end and the mass media take most of their cameras and reporters back to their homes, Brazil will somewhat fade from the limelight. However, with this gap the central bank will likely return to the minds of Brazilians and markets across the world. Will the new Governor truly take a new approach to the institution? Will the constitutional amendment, to be voted on in the coming months, pass or fail? Will the inflation that is currently double the target slow down? I hope that the content of today’s episode has expanded your foundation on central banking in Brazil. You’ll need it to interpret the answers to these questions.
Sign up on my website www.thebanksterpodcast.com to have the show notes of today’s episode emailed directly to you. This week the email will include some incredible images from the history of BACEN and central banking in Brazil.
The podcast is just about over now. And when it does, do me a favor, and leave a review on the Podcast app you’re listening to right now. It’ll take less than a minute and it genuinely helps others find the show! Today’s episode was written, edited, and produced by me, Alexander Bagehot. I dedicate this episode to Ben, who gave the 17 year old me a peek into the world of central banks. And to everybody else, thanks for listening. I’m Alexander Bagehot, and I’ll see you next time on The Bankster Podcast!