Protector’s agenda a threat to the poor

You have to read almost all the way through the public protector’s report on the Bankorp “lifeboat” to get to the punchline. And that’s when you realise that Busisiwe Mkhwebane’s problem is not that she fundamentally lacks an understanding of what a central bank does. It is that she has an entirely different notion of what SA’s banking sector should look like.

It is one that is profoundly antibusiness and antimarket. It is one in which the central bank as we know it would not exist. It certainly would not provide the kind of checks and balances on efforts to plunder the state and the financial sector that SA’s very independent Reserve Bank does. So whose agenda might that be?

All of a sudden, on page 51 of her 56-page report, Mkhwebane starts talking about state banks and the state taking control of creating money and credit, arguing that “the notion of the lender of last resort status that is inherent to central banks internationally would cease to exist if governments take sole power in creating money through the establishment of state banks”.

No wonder that her report seems to conclude, in essence, that there’s no circumstance in which a central bank could step in to bail out a privately owned bank — even if this prevented a run on deposits that could have infected the entire banking system and wiped out people’s savings. The Bank’s status of lender of last resort “has commercial benefits only in respect of the financial market”, our protector pronounces.

That goes to the heart of the role that central banks everywhere play in underwriting the stability of their countries’ financial systems. It’s a role that has been ever more centre stage since the global financial crisis, which highlighted what can happen to jobs and growth and the “ordinary economically disadvantaged people” Mkhwebane speaks of when banking systems crash.

Her findings on banking are potentially ruinous for the ability of SA’s banking regulator to safeguard our banking system and could put confidence in the whole system at risk. And that’s just the start. She goes one further to challenge the very heart of what a central bank does, anywhere, which is to safeguard price stability.

There’s nothing about monetary policy in the report. Mkhwebane’s recommendation that Parliament’s justice committee should review the Reserve Bank’s constitutional mandate to gut the fundamental clause that requires it to “protect the value of the currency” seems to come from nowhere.

Perhaps, when she reworded the clause to make the Reserve Bank responsible to “protect the socioeconomic wellbeing of citizens” – as if it weren’t doing that already – she forgot to include the bit about price stability.

It is no small mistake, if it is one. Relate it back to the bit about the government taking control of creating money and it looks a lot more scary.

An independent central bank that refuses to let inflation spiral is the enemy of a profligate government that just wants to spend to the point where investors are no longer willing to fund it. There’s the option of printing money and letting inflation run away, as governments in Zimbabwe and Venezuela have done.

SA, for now, has a government committed to fiscal prudence and a Reserve Bank that would be resolute in the face of attempts to print money. The public protector, whether by accident or design, wants to strip the Bank of that power.

That might help those who want to plunder the state. But it could do untold harm to the poor people she claims to want to protect.

Protecting the value of the currency means safeguarding the value of the rands, dollars, rupees or kwacha in people’s pockets so that if they can afford bread today, they can also afford it tomorrow; if their savings are worth something now, they are also worth something later.

That means keeping inflation under control so that ever-rising prices don’t erode the value of money — or cause economies to overheat and eventually crash.

In one way or another, the central bank of every country has price stability as a core mandate. Inflation targeting is just one instrument to achieve it. There are others, such as fixing the exchange rate or targeting the money supply, and SA has tried those. But inflation targeting has proved most transparent and by far the most effective.

In SA, it has cut the average inflation rate from nearly 10% in the decade before inflation targeting was introduced in 2000 to little more than 6%.

Lower and more stable inflation enabled the benchmark interest rate to come down from well into the double digits to about 7% now and, until a few years ago, it supported higher and more stable rates of economic growth.

SA’s stagnant growth now reflects the deep structural flaws in the economy and the high levels of political noise and policy uncertainty, rather than anything the Reserve Bank has or hasn’t done. So too does its failure to cut unemployment or close the inequality gap.

The kinds of remedies the public protector envisages could only make SA’s economic woes worse, by putting the stability of the banking system and price stability at risk.

Thankfully, they will probably never happen given their legal dodginess.

The Reserve Bank is, naturally, taking the report straight to court. It will be an interesting and crucial case.