“unrestrained central banking to the extreme”

Kirchner Grabs the Central Bank

Argentina’s monetary policy is now subject to the fiscal demands of the government. Citizens can look forward to more inflation.


 Argentina’s Franken-state stormed the central bank last month, destroying the last vestiges of independence. Given the hyperinflationary history of that nation, it is worth asking why Argentines have allowed this to happen.

The pathology of a government power grab is not hard to discern. The state creates the conditions for crisis. Crisis strikes. Politicians seize extraordinary powers. Crisis passes. Left behind is a popular perception that complete annihilation was averted due to government genius. Politicians are permitted to expand their power.

Americans have a real-time example of this phenomenon in the subprime meltdown brought on by federal housing policy. We are now told that government intervention saved civilization: Last week Federal Reserve Chairman Ben Bernanke lectured students at George Washington University about the arbitrary rescue of Bear Stearns and AIG creditors in 2008 that he said stopped what otherwise “would’ve been basically the end.” For whom, it is still not clear.

Having thus altered destiny, Mr. Bernanke next directed an unprecedented expansion of the Fed’s balance sheet in order to rescue others in need. And last week he told a conference of the National Association for Business Economics that he is concerned that improvements in the unemployment rate may be unsustainable. He pledged to continue his free-credit policies, savers be damned.

The dangers of using easy monetary policy to push on a string are well documented. But when government is making up for previous mistakes, it rarely employs moderation.

Take unrestrained central banking to the extreme and you get Argentina. In 2002 it also had an epic crisis and the government intervened heavily in the economy, including orchestrating a mega-devaluation of the peso.

Under Kirchner presidencies—first Néstor and now his wife Cristina—since 2003, the state has confiscated bank accounts and retirement savings, hyper-regulated many entrepreneurs out of business, abrogated contracts, imposed price controls, and raised import tariffs and export taxes. Vast entitlements, notably in subsidized utilities and transportation, have been used to consolidate power.

Advocates of this broad intervention argued it was justified on the grounds that an economic contraction of minus 10.9% in 2002 required extreme measures. But since 2003, the economy has been growing. A country serious about building wealth in the 21st century would logically restore economic liberalization.

Instead, Argentina keeps reducing freedom and expanding the reach of the state. The latest concern is what appears to be an attempt to nationalize the Spanish oil company Repsol’s Argentine holdings by getting governors who are sympathetic to the president to cancel key provincial concessions in recent weeks and making it difficult for the company to operate in the country.

Last month the Kirchner-controlled Congress delivered what could be the coup de grace for the Argentine economy: a reform of the central bank charter that eliminates a 1991 monetary rule requiring that base money be backed up by international reserves and placed beyond the control of the government. The central bank board now will come up with some formula for the amount of reserves to be kept on hand. Reserves above that amount will be available for Mrs. Kirchner’s government to borrow. The formula can be adjusted at any time.

The Kirchner government has been dipping into the central bank’s “excess” reserves—the surplus over the monetary base—since 2010. A showdown about that policy provoked the resignation of former bank president Martin Redrado in January 2010 and the naming of the more compliant Mercedes Marcó del Pont.

The government has argued that it is wasteful to sit on dollars that pay next to nothing when they could be used to pay down debt. That makes some sense. But paying down debt is not all Mrs. Kirchner has in mind. She maintains her popularity with generous government spending, and with international reserves fleeing, excesses are shrinking. She needed a charter change if she wants to tap more central bank funds. According to the reform, she can now borrow from the bank about twice what she could borrow before.

The bank’s singular mandate of price stability has also been removed. In its place is a three-pronged mandate that includes the goals of providing for growth with social fairness and financial stability along with price stability.

Given Argentina’s track record, it is hard to imagine that these new rules won’t lead to more inflation. And none of this will boost the bank’s credibility, which is already on the rocks. Government claims that inflation is running around 10% have been challenged by independent economists who say it is more like 20%.

In February, the Economist echoed those doubts with a seething commentary announcing that it would no longer publish official statistics. “We are tired of being an unwilling party to what appears to be a deliberate attempt to deceive voters and swindle investors,” the magazine wrote.

A crisis is brewing. When it hits, will Mrs. Kirchner get even more power or will Argentines finally come to their senses?


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