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The importance of Brazilian Central Bank independence

"The independence of the Central Bank is the guardian of economic and financial stability, protecting society from unpredictable fluctuations and ensuring confidence in the financial system. Without it, we run the risk of falling into a spiral of insecurity and uncertainty, harming not only the economy, but also the lives of all citizens.
Milton Friedman, American economist.

Banco Central do Brasil
Real plan in 1994 gave autonomy to the BCB

Past and Present

A brief history of the political independence of the Brazilian Central Bank (BCB)

The history of political independence of the Central Bank of Brazil (BCB) is marked by a long process of struggle and significant changes in the economic and political structure of the country.


Before the 1990s, the BCB was controlled by the federal government and its decisions were influenced by the government's economic policy. This led to several problems, including high inflation and economic instability.


In 1994, the Brazilian government adopted the Real Plan, which was a measure to stabilize the economy and control inflation. As part of this plan, it was given to the BCB the the autonomy to define its monetary policy, which allowed the bank to adopt more effective measures to maintain price stability.


In 1997, Law No. 9,532 was passed, which gave the BCB complete autonomy in the conduct of monetary policy. This meant that the BCB no longer needed government approval to make important decisions on interest rates and other aspects of monetary policy.


Since then, the BCB has been working to maintain the country's economic stability, with measures such as increased interest rates and interventions in the foreign exchange market. The BCB's political independence has been fundamental to the success of these measures, as it allows the bank to make decisions without being influenced by political pressures. As such, a Brazilian Central Bank free of political ties is crucial to the economic progress and success of the nation.


Future

  • Question: what would happen if President Lula eliminated this independence?

  • Short and simple answer: a series of economic problems with possible social chaos.

Allow me to elaborate…


On the one hand, the main consequences would be the loss of investor confidence and financial markets in the country, as the BCB’s independence is seen as a guarantee of economic stability. This could lead to a capital flight, which would have a negative impact on the Brazilian economy.


Without independence, the BCB could be pressured to make decisions that would benefit the government's economic policy, rather than pursuing the primary goal of maintaining price stability. Furthermore, eliminating the BCB's independence could undermine the bank's ability to fulfill its other functions, such as regulation and supervision of the financial system.


Social chaos, on the other hand, would happen through uncontrolled inflation...


Without being able to act independently, the BCB would not be able to control inflation, resulting in higher prices for consumers and purchasing power erosion as it did before the 1990s; as always, low-income citizens would suffer disproportionately.


Moreover, because of the BCB's political and non-technical decisions, economic instability would have a very strong negative impact on employment. As if the loss of purchasing power were not enough, the slowdown in the labor market would be devastating.


Finally, the “icing on the cake” would be the coming back of conflicts of interest by favoring political and business groups to the detriment of the general interest of the nation; thus, resurrecting the old, unbridled corruption that was a symbol of the previous government of Luiz Inacio Lula da Silva and comrades. The inevitable loss of confidence in the financial system would function as a feedback loop and perpetual movement of high interest rates, high inflation, and currency devaluation.


But why would President Lula do that?

Well, we can't say why he would do that, since it's impossible to be absolutely sure of his specific motivations and circumstances presented to him. However, possible motivations, some nobler and others not so much, could be:

  • The pressure for immediate economic results: Perhaps the current President Lula is really interested in doing something different and producing true economic results. Thus, the independence of the BCB can be a "stone in the shoe" for this type of action, since the bank can take measures that could harm the economy in the short term, but that are necessary to maintain long-term stability.

  • Differences of opinion on economic policy: I feel safe to say that President Lula has different opinions from the BCB on how the economy should be conducted. For example:

    • The BCB may be prioritizing price stability and inflation prevention, while President Lula may be prioritizing [the noble act] of economic growth and poverty reduction.

    • It may also be that the BCB has adopted a more conservative approach to monetary policy to promote financial stability and consumer protection, while President Lula prefers a more expansionary approach, with the interest of promoting business growth (preferably impartially) and increase credit.

In such cases, the BCB's independence can be a deterrent for the president to be able to implement his vision, which should lead him to an attempt to eliminate the BCB's independence.

  • Finally (and without the intention of attacking anyone's political preference), perhaps the most likely if history is an indication of the true motivation of the president and comrades, the Conflict of Interest: It is possible that President Lula has interests that are in conflict with the objectives of the BCB's monetary policy, thus being the trigger for the elimination of its independence.

Warning signs

A common idea in philosophy, politics and economics suggests that recurring patterns of behavior and historical events tend to repeat themselves in the future; after all, is not without a reason that we hear that "history repeats itself" and that "the past is an indication of the future."


That said, there are some warning signs that may indicate that President Lula is again succumbing to the practice of corruption:

  1. Appointing individuals linked to him for key positions at the Central Bank who share his opinions and interests, rather than choosing the most qualified people for the job.

  2. Influence on monetary policy to benefit his economic interests, such as increasing the supply of credit to his colleagues, supporters, and related parties.

  3. Tax and regulatory benefits for the same group of people/companies mentioned above, thus harming other companies that do not have the connection and decreasing competition in the free market.

  4. Use of public funds for personal purposes, such as payment of debts and favors, acquisition of properties or investments in projects that directly benefit him, his family, and his comrades.

Unfortunately, Lula has a history of involvement in scandals and has been convicted in cases of corruption and money laundering. Therefore, with "power in his hand" the possibility of him engaging in corrupt actions is not irrelevant, derisory or inconceivable, it is something real that must be taken into account.


How can the average citizen monitor and investigate these warning signs?


It is important to remain vigilant, as monitoring economic and financial news can help understand the BCB's decisions in the future.


Accessing public information, such as BCB reports and documents, serves as an indicator of transparency of the agency. It is also undoubtedly important to participate in public debates and discussions to better understand issues related to the BCB independence.


Finally, it is not a bad idea to contact the BCB, other regulatory bodies, members of Congress and other political representatives to ask for explanations and clarification on the decisions and actions of the Central Bank and to express your concern about the matter.


My draft letter to members of Congress


Dear Sir/Madam (Name of member of Congress),


I, Leonardo Cardoso, write to express my concern about the independence of the Central Bank of Brazil (BCB). As a Brazilian citizen, I believe that it is essential that the BCB be independent and free from political pressure so that it can make the necessary decisions to ensure the economic stability of the country.


Recently, I have heard news and rumors of possible political interference in the functioning of the BCB, and this deeply concerns me. As a member of Congress, I would like to request that you investigate these allegations and take steps to ensure that the BCB remains independent and free from political pressure.


Furthermore, I would like to suggest that measures be taken to ensure the transparency and

accountability of the BCB, including the publication of important economic data and regular audits.


I thank you in advance for your attention to this important matter and hope that you can take steps to ensure the independence and stability of the BCB.


Best regards

Leonardo Cardoso


Conclusion

In summary, the independence of the Central Bank is fundamental to ensure economic stability and predictability of the country's monetary policy. However, there are risks of political interference that could compromise this independence. It is important that civil society is attentive and mobilized to ensure the independence of the Central Bank and avoid any kind of political interference that could harm the country's economy.


I suggest below some "hashtags" to promote the independence of the BCB...

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