Banana Republics Need Compliant Central Banks

I hope you read Mary O’Grady’s great piece in today’s Wall Street Journal Argentina Seizes the Central Bank. When you read it, think of the parallels with recent events in the U.S. I bet you feel a chill up your spine just like I did.

Argentina’s nut-job President, Cristina Kirchner (wife of former president Nestor Kirchner) decided she didn’t want to use the tax money in the treasury to pay foreign debts but would simply seize the reserves of the banking system for the purpose. Martin Redrado, President of the central bank, refused to hand over the keys so she fired him last week. In his place, she appointed Mercedes Marco, a young Yale-trained economist, who thinks the idea that central banks should be independent of politicians is very old-fashioned. Goodbye bank reserves; hello inflation.

This is the same Presidential couple who confiscated private pensions in 2008, fired the head of the government statistics office because he refused to cook the books on the inflation numbers and passed a law punishing media companies for publishing stories critical of the government.

The Kirchner government has tons of money to buy votes. They tried to tax the rich to pay for them but aren’t collecting much revenue. Inflation is already 17%. International creditors want to be paid. The only way out is to seize control of the central bank and print the money in bales. That’s what this story is about.

When your currency is fixed to nothing but the good behavior of the central bank it is crucial that the bank have at least a semblance of protection from political pressure. Argentina now has none. Unfortunately, here in the U.S., the Fed has lost some of its hard-won reputation for independence over the past few years.

Wait a minute. Huge increase in government spending. Fast-rising debt. Tax the rich. Appoint political advisors to run the central bank. That’s us! Last week Moody’s warned they would have to review the U.S. credit rating in light of the information in the new budget.

There goes that chill up my spine again.

JR