Who Will Save the CBN?...1
Two weeks ago, Mr. Babatunde Lemo, Managing Director of Wema Bank, was elevated to the Board of Central Bank of Nigeria (CBN) as Deputy Governor.
Ordinarily, one would not question the appointment given Lemo's credentials as a first-class accountant. But those who worry about the economy and the way the CBN has become a centre for good-boy Commercial Bank Managing Directors see this as a dangerous trend. Because politics and quota, rather than the requisite credentials for the sensitive job, now dictate who gets onto the bank's board. The qualification now seems to be a high-flying carrier in banking.
Already, the CBN governor, Chief Joseph Sanusi, an accountant and banker, is believed to be due for retirement in May this year (if his tenure is not renewed) and from the way things are, he could be replaced by another banker which would then mean that our economy could continue on its free fall. Because, ordinarily, the CBN that is supposed to be running the show has abdicated its responsibility to become just another bank competing with others to make profit. This is not surprising with the antecedent of the men at the helms of affairs.
Just how far the CBN has failed, and abysmally too, in its duties did not occur to me until I started reading a recent American National Bureau of Economic Research working paper, 'Choosing the Federal Reserve Chair: Lessons from History'. The 42-page paper with several annexes, prepared by two Economics Professors at the University of California, x-rayed the achievements and failings of former Reserve Chairmen (equivalent of our CBN Governors). It also has graphs of how these men tackled unemployment rates, inflation, and the overall expansion of the economy.
Managing the banking sector, from the paper, is peripheral to what the apex bank does but it seems to be the only pre-occupation of our CBN!
The pertinent question is: Assuming we were to review the Sanusi era against such indices as unemployment rate, inflation, interest rate, value of Naira etc. how shall we remember the man? Interestingly, Sanusi may not even be aware that some of those responsibilities are his, given the CBN preoccupation with selling forex to commercial banks.
Let us examine the American experience based on the paper in reference. Since 1936, there have been six Federal Reserve chairmen and the paper juxtaposed the beliefs of each against the resulting policy actions.
Marriner Eclles was in office from February 1936 to January 1948, a period of 12 years. He believed inflation and speculative excess are possible before full employment while monetary policy could stimulate a depressed economy. His resulting policy action was very limited expansion in the American economy and recession between 1937 and 1938. William McChesney Martin (Jnr) served for 20 years between April 1951 and January 1970. He believed inflation is very harmful while the federal reserve should respond to recessions. He succeeded in creating an expansion at two epochal periods.
Martin was succeeded by Arthur Burns who served between February 1970 and January 1978. He was an advocate of wage and price control. His successor William Miller (March 1978 to August 1979) created expansion despite high and rising inflation while advocating incomes policy. Paul Vokker, who I had written about several times as the central character in the book, 'Secrets of The Temple', served between August 1979 and August 1987. He succeeded in reducing inflation while he had a steady low-inflation policy. Alan Greenspan, who took the baton from him, is still in office after almost 16 years, with the same policy. Because he is heading an institution that regulates the economy, Greenspan wields enormous power, but that is also because he is in a familiar terrain as his credentials will reveal.
As I read the working paper of the National Bureau of Economic Research, I realise the work of the apex bank in the United States, like that of our CBN, is not to regulate the banking sector but rather to superintend the economy, the reason why all the people who hold forte are almost always economists. Incidentally, the same thing obtains at the Bank of England though we will come to this later.
If we were to take a cue from the examples of other countries, CBN governors and other Board members would be chosen based on their positions on core issues like interest rates, price stability, monetary policy, and other factors. Since they are expected to ginger growth, maintain the integrity and value of national currency, provide financial stability, and superintend the economy generally, dark horses are hardly appointed for such a critical office in other countries as happens here. The people so appointed are mostly academics whose positions are known and respected and not some obscure bankers whose view of the economy may not be more than the buying and selling of foreign exchange.
It is not for nothing that in choosing the chairman and members of the Board of Reserve Bank, emphasis is placed on their academic qualifications with a clear bias for economics. According to the paper, the record suggests training in economics is desirable. "The two chairmen with essentially no training in economics, Ecles and Miller, had deeply flawed understandings of the economy and that led to highly misguided policies. Martins, the third Chair with realistic beliefs did not major in economics, but he did study it at Yale. His interest in economics was fostered by his father, who helped write the original Federal Reserve Act and served as governor and president of the Federal Reserve of St. Louis."
In the abstract, the two authors had used what they described as the lessons of history to identify the sources of monetary policy successes and failures in the past and to suggest a strategy for choosing successful Federal Reserve chairs in the future. "It demonstrates that since at least the mid-1930s, the key determinant of the quality of monetary policy has been policymakers' beliefs about how the economy functions and what monetary policy can accomplish".
The paper argued further that when policymakers held other beliefs, such as the view that monetary policy cannot stimulate a depressed economy or that slack is ineffective in reducing inflation, as was the case in the 1930s and the 1970s, policy and outcomes were undesirable. "This finding suggests that the key characteristic to look for in future Federal Reserve Chairs is a sound economic framework. The paper shows that the best predictor of the beliefs previous chairmen held while in office are their prior writings, speeches, and confirmation hearings. Therefore, in choosing future chairs, it is crucial to evaluate the intellectual frameworks of potential nominees, and to reject candidates whose views are worrisome."
What that suggests is that a reserve chairman or Central Bank Governor must be someone who should be abreast of wider economic goals of sustainable growth, employment creation, price stability and other indices. It is for this reason that in other countries, people from the academia are usually appointed and not accountants or bankers as we do here.
With no idea as to unemployment rate, with a national currency that seems to be competing with Ghanaian Cedis in value, with high-soaring inflationary rates, the CBN today does not seem to be in charge of anything except to sell dollars to Commercial banks. Yet, without a pro-active CBN whose men understand the intricacies and workings of modern economy, we are just deceiving ourselves to think any reform package can work. Even from the official website of CBN, it is difficult to see how it intends to actualise its vision "to be one of the most efficient and effective world's Central Bank in promoting and sustaining economic development".
Before we proceed further, however, it may be appropriate to briefly examine the credentials of the present seven members who make up the Board of American Federal Reserve to show why academic qualifications in requisite discipline matters in this business.
Alan Greenspan, Chairman, was born on March 6, 1926, in New York City. He received a B.S. in economics (summa cum laude) in 1948, an M.A. in economics in 1950, and a Ph.D. in economics in 1977, all from New York University. Greenspan also has performed advanced graduate study at Columbia University.
From 1954 to 1974 and from 1977 to 1987, Dr. Greenspan was Chairman and President of Townsend-Greenspan & Co., Inc., an economic consulting firm in New York City. From 1974 to 1977, he served as Chairman of the President's Council of Economic Advisers under President Ford, and from 1981 to 1983, as Chairman of the National Commission on Social Security Reform. Dr. Greenspan has also served as a member of President Reagan's Economic Policy Advisory Board, a member of TIME magazine's Board of Economists, a senior adviser to the Brookings Panel on Economic Activity, and a consultant to the Congressional Budget Office.
Roger W. Ferguson, Jr. Vice Chairman, was born on October 28, 1951, in Washington, D.C. He received a B.A. in economics (magna cum laude) in 1973, a J.D. in law (cum laude) in 1979, and a Ph.D. in economics in 1981, all from Harvard University. In 1973 and 1974, Dr. Ferguson was Frank Knox Fellow at Pembroke College, Cambridge University. In addition, Dr. Ferguson has honorary degrees from Lincoln College and Webster University. Before becoming a member of the Board, Dr. Ferguson was a Partner at McKinsey & Company, Inc., an international management consulting firm.
Susan Schmidt Bies was born on May 5, 1947, in Buffalo, New York. She received a B.S. in education from the State College of New York at Buffalo in 1967 and an M.A. (1968) and a Ph.D. (1972), both in economics, from Northwestern University. Dr. Bies has served as a Fellow at the Federal Reserve Bank of Chicago (1969-70) and as a Fellow at the Northwestern University Center for Urban Affairs (1968-69). Before becoming a member of the Board, Dr. Bies was Executive Vice President for Risk Management and Auditor at First Tennessee National Corporation, Memphis, Tennessee (1995-2001).
Edward M. Gramlich, was born on June 18, 1939, in Rochester, New York. He received a B.A. from Williams College in 1961; his graduate study was at Yale University, from which he received an M.A. in economics in 1962 and a Ph.D. in economics in 1965. Before becoming a member of the Board, Dr. Gramlich served as Dean of the School of Public Policy at the University of Michigan (1995-97). He also served as Professor of Economics and Public Policy at the University of Michigan (1976-97), Chair of the Economics Department (1983-86 and 1989-90), and Director of the Institute of Public Policy Studies (1979-83 and 1991-95).
Mark W. Olson, was born on March 17, 1943, in Fergus Falls, Minnesota. He received a B.A. in economics in 1965 from Saint Olaf College. In 2003 Saint Olaf College named Mr. Olson a Distinguished Alumni.
Ben S. Bernanke, was born on December 13, 1953, in Augusta, Georgia. He received a B.A. in economics in 1975 from Harvard University (summa cum laude) and a Ph.D. in economics in 1979 from the Massachusetts Institute of Technology. Before becoming a member of the Board, Dr. Bernanke was the Howard Harrison and Gabrielle Snyder Beck Professor of Economics and Public Affairs and Chair of the Economics Department at Princeton University (1996-2002). Dr. Bernanke had served as a Professor of Economics and Public Affairs at Princeton since 1985.
Donald L. Kohn, was born on November 7, 1942, in Philadelphia, Pennsylvania. He received a B.A. in economics in 1964 from the College of Wooster and a Ph.D. in economics in 1971 from the University of Michigan.