Central Banks Are the Fall Guys

For decades, the freedom of monetary policymakers to make difficult decisions without having to worry about political blowback has proven indispensable to macroeconomic stability. But now, central bankers must ease monetary policies in response to populist mistakes for which they themselves will be blamed.

CHICAGO – Central-bank independence is back in the news. In the United States, President Donald Trump has been  the Federal Reserve for keeping interest rates too high, and has reportedly explored the possibility of forcing out Fed Chair Jerome Powell. In Turkey, President Recep Tayyip Erdoğan has fired the central-bank governor. The new governor is now pursuing sharp rate cuts. And these are hardly the only examples of populist governments setting their sights on central banks in recent months.

In theory, central-bank independence means that monetary policymakers have the freedom to make unpopular but necessary decisions, particularly when it comes to combating inflation and financial excesses, because they do not have to stand for election. When faced with such decisions, elected officials will always be tempted to adopt a softer response, regardless of the longer-term costs. To avoid this, they have handed over the task of intervening directly in monetary and financial matters to central bankers, who have the discretion to meet goals set by the political establishment however they choose.

This arrangement gives investors more confidence in a country’s monetary and financial stability, and they will reward it (and its political establishment) by accepting lower interest rates for its debt. In theory, the country thus will live happily ever after, with low inflation and financial-sector stability.

Having proved effective in many countries starting in the 1980s, central-bank independence became a mantra for policymakers in the 1990s. Central bankers were held in high esteem, and their utterances, though often elliptical or even incomprehensible, were treated with deep reverence. Fearing a recurrence of the high inflation of the early 1980s, politicians gave monetary policymakers wide leeway, and scarcely ever talked about their actions publicly.

But now, three developments seem to have shattered this entente in developed countries. The first development was the 2008 global financial crisis, which suggested that central banks had been asleep at the wheel. Although central bankers managed to create an even more powerful aura around themselves by marshaling a forceful response to the crisis, politicians have since come to resent sharing the stage with these unelected saviors.

Second, since the crisis, central banks have repeatedly fallen short of their inflation targets. While this may suggest that they could have done more to boost growth, in reality they don’t have the means to pursue much additional monetary easing, even using unconventional tools. Any hint of further easing seems to encourage financial risk-taking more than real investment. Central bankers have thus become hostages of the aura they helped to conjure. When the public believes that monetary policymakers have superpowers, politicians will ask why those powers aren’t being used to fulfill their mandates.

Third, in recent years many central banks changed their communication approach, shifting from Delphic utterances to a policy of full transparency. But since the crisis, many of their public forecasts of growth and inflation have missed the mark. That these might have been the best estimates at the time convinces no one. That they were wrong is all that matters. This has left them triply damned in the eyes of politicians: they

  1. failed to prevent the financial crisis and paid no price; they are
  2. failing now to meet their mandate; and they
  3. seem to know no more than the rest of us about the economy.

It is no surprise that populist leaders would be among the most incensed at central banks. Populists believe they have a mandate from “the people” to wrest control of institutions from the “elites,” and there is nothing more elite than pointy-headed PhD economists speaking in jargon and meeting periodically behind closed doors in places like Basel, Switzerland. For a populist leader who fears that a recession might derail his agenda and tarnish his own image of infallibility, the central bank is the perfect scapegoat.

Markets seem curiously benign in the face of these attacks. In the past, they would have reacted by pushing up interest rates. But investors seem to have concluded that the deflationary consequences of the policy uncertainty created by the unorthodox and unpredictable actions of populist administrations far outweigh any damage done to central bank independence. So they want central banks to respond as the populist leader desires, not to support their “awesome” policies, but to offset their adverse consequences.

A central bank’s mandate requires it to ease monetary policy when growth is flagging, even when the government’s own policies are the problem. Though the central bank is still autonomous, it effectively becomes a dependent follower. In such cases, it may even encourage the government to undertake riskier policies on the assumption that the central bank will bail out the economy as needed. Worse, populist leaders may mistakenly believe the central bank can do more to rescue the economy from their policy mistakes than it actually can deliver. Such misunderstandings could be deeply problematic for the economy.

Furthermore, central bankers are not immune to public attack. They know that an adverse image hurts central bank credibility as well as its ability to recruit and act in the future. Knowing that they are being set up to take the fall in case the economy falters, it would be only human for central bankers to buy extra insurance against that eventuality. In the past, the cost would have been higher inflation over the medium term; today, it is more likely that the cost will be more future financial instability. This possibility, of course, will tend to depress market interest rates further rather than elevating them.

What can central bankers do? Above all, they need to explain their role to the public and why it is about more than simply moving interest rates up or down on a whim. Powell has been transparent in his press conferences and speeches, as well as honest about central bankers’ own uncertainties regarding the economy. Shattering the mystique surrounding central banking could open it to attack in the short run, but will pay off in the long run. The sooner the public understands that central bankers are ordinary people doing a difficult job with limited tools under trying circumstances, the less it will expect monetary policy magically to correct elected politicians’ errors. Under current conditions, that may be the best form of independence central bankers can hope for.

Guatemala Declares War on History

Looking for help on immigration, the Trump administration is silent in the face of Guatemala’s effort to seal its dirty war archive.

With the quiet acquiescence of the Trump administration, the Guatemalan government is threatening to bar access to a collection of national archives that have been at the core of various attempts to prosecute Guatemalan politicians and officers responsible for some of Latin America’s most heinous atrocities.

The move to suppress the archives is part of a larger campaign by Guatemalan President Jimmy Morales, who faces allegations of receiving illicit campaign funds, to undercut the rule of law through the purge of judges, police officials, and archivists who have been at the forefront of Guatemala’s effort to investigate corruption, narcotrafficking, and war crimes, according to foreign diplomats and independent experts.

But senior U.S. officials in Washington and Guatemala City have rebuffed appeals from working-level staffers and foreign diplomats to publicly challenge Guatemala’s action. And U.S. President Donald Trump’s administration, which is seeking Guatemala’s help in stemming the flow of asylum-seekers and refugees into the United States, has remained largely silent over these developments.

One U.S. official said that America’s reluctance to confront Guatemala is part of a crude unwritten bargain between Morales’s government and the Trump administration: “They promise not to let brown people into the country, and we let them get away with everything else,” the official said.

The “assault on the police archive [is part of a] broader attack against human rights, justice, and anti-corruption efforts,” said Kate Doyle, a researcher at the National Security Archive and an expert on the Guatemalan archives. “The U.S. is saying nothing. The U.S. Embassy has been incredibly absent on these issues. They are not doing anything.”

In the latest sign of U.S. reluctance to challenge Guatemala on human rights, Kimberly Breier, the U.S. assistant secretary of state for Western Hemisphere affairs, blocked the release of a public statement in early June that would have urged Guatemala to back down on its effort to restrict access to the archives.

“These archives are an essential source of information to clarify and understand critical historical truths from Guatemala’s history,” reads the statement obtained by Foreign Policy, which was suppressed in June. “Access to the archives by historians, victims of abuse recorded in these archives and their families, the public, and the international community, has furthered Guatemala’s progress towards accountability, justice, truth and reconciliation.”

Foreign Policy sought a response from the Trump administration last Wednesday. The State Department did not respond until nearly an hour and half after this article was published Tuesday.

“The United States strongly supports continued public access to the Historical Archive of the National Police,” according to a statement from a spokesperson from the State Department’s Bureau of Western Hemispheric Affairs.  The Tuesday statement included the two sentence cited by Foreign Policy in the suppressed statement.

The initial decision to block the statement—which had been approved by the State Department press office, the U.S. Embassy in Guatemala, and several other key bureaus—came as the United States was engaged in sensitive negotiations on a so-called safe third country agreement, which would commit Guatemala to process political asylum claims from foreigners, particularly from El Salvador and Honduras, who cross its border in transit to the United States. “My understanding is Kim Breier killed this because she didn’t want to do anything that would piss off the Guatemalans,” said one congressional aide.

During the past two decades, the United States has invested in efforts to strengthen the rule of law in Guatemala,

  • funding a United Nations commission that investigates corruption and illicit activities by armed groups,
  • strengthening the judiciary, and
  • training and equipping police units with expertise in counternarcotics and corruption.
  • The United States has spent millions of dollars over the years to preserve the police archives, including through the provision of document scanners and the funding of a digitized archive maintained by scholars at the University of Texas at Austin.

Guatemala’s bloody 36-year-long civil war resulted in the deaths of about 200,000 people, mostly at the hands of the Guatemalan security forces. A 1996 U.N.-brokered peace agreement paved the way for the return of exiled rebels, established a new national police force, and pried open the door to the prospect of public reckoning for crimes committed during the war. The Guatemalan military and police resisted, denying that they had preserved detailed records of their activities during the conflict. But in 2005, more than 80 million documents and records, dating from 1882 to 1997, were discovered in seven rat-infested rooms at an unused hospital building in Guatemala City owned by Guatemala’s now-defunct National Police.

Since then, the Guatemalan National Police Historical Archive has helped convict more than 30 military officers, soldiers  and paramilitaries, including a former presidential chief of staff, Manuel Callejas y Callejas, convicted of crimes against humanity, and Guatemala’s late dictator, Gen. Rios Montt—who was found guilty in 2013 of genocide for overseeing mass atrocities in the early 1980s — though his conviction was later overturned by Guatemala’s constitutional court.

The archive has proved a valuable resource for U.S. law enforcement. The Department of Justice and Immigration and Customs Enforcement have used the archive to identify Guatemalan rights abusers living in the United States.

But the management of the archives has long infuriated some of those in Guatemala’s most powerful business and security sectors, who believed that it has been used as a tool of the left to gain revenge against their former enemies. They have cited the role of the archive’s former director, Gustavo Meoño Brenner, a former guerrilla leader who has recruited staff from the country’s left wing to run the archives. In August 2018, the U.N. Development Program, which has helped administer the archive program since 2008, abruptly dismissed Meoño Brenner. He has since fled the country, following death threats.

The move to restrict archive access is only one element of a wider effort to defang justice institutions in Guatemala. In September, a landmark U.N. International Commission Against Impunity in Guatemala—known by its Spanish acronym, CICIG—whose corruption investigations landed a Guatemalan president and vice president in jail will shutter its office.

The demise of the commission, which had also exposed alleged illegal campaign contributions in Morales’s 2015 presidential campaign, came after a two-year-long effort by the president and his allies, including sympathetic Republican lawmakers and Trump administration officials in Washington, to undermine it. Pro-military lawmakers in the Guatemalan Congress, meanwhile, have been pressing to pass an amnesty law that would result in the release of dozens of military officers and death squad leaders from jail. That effort has been stalled by Guatemala’s Constitutional Court.

The effort to suppress the archives is being spearheaded by Guatemalan Interior Minister Enrique Degenhart, a popular figure in Washington, who has represented Guatemala in the safe third country negotiations.

In a May 27 press conference, Degenhart announced that his office and Guatemala’s National Civil Police would seek greater control of the archive. He also threatened to limit access to the archives by foreign institutions, an apparent reference to the University of Texas at Austin, which has assembled a massive digitized version of a large portion of the police archive. “You can’t allow foreign institutions to have the complete archives,” Degenhart told reporters.

In response, the U.N. and other foreign envoys invited the U.S. ambassador to Guatemala, Luis Arreaga, to join ambassadors from several other countries, including Canada, Germany, Switzerland, Sweden, and the United Kingdom, on a visit to the archive to voice opposition to granting police greater control over the archives. Arreaga declined. The spokesperson from the State Department Bureau of Western Hemispheric Affairs declined to comment on whether Arreaga declined the invitation.

In Washington, State Department officials sought support within the administration for a public statement that would place the United States squarely on the side of those seeking to preserve broad public access to the archives.

“The message [Guatemalan authorities] are getting is we don’t care what you do as long as you do everything in your power to prevent” foreigners from reaching the U.S. border, said Rep. Norma Torres, a California Democrat who was born in Guatemala. If that requires “supporting a corrupt government, that is what [the Trump administration] is going to do.”

Public messaging and statements from U.S. envoys and the State Department can have an outsized political impact in Central America, former diplomats say. “It’s astonishing how important the U.S. voice is in terms of journalists, human rights defenders, civil society … in this region,” said Roberta Jacobson, a former U.S. ambassador to Mexico and assistant secretary of state for Western Hemisphere affairs. “There are clearly things that governments would do, actions it would take, but for the U.S. watching and speaking out,” she said.

The lack of response, according to diplomats, emboldened Guatemala to ratchet up its campaign against the archives.

Workers organize thousands of documents found at the former National Police Bomb Disposal Unit headquarters in Guatemala City on Jan. 28, 2008.EITAN ABRAMOVICH/AFP/GETTY IMAGES

In early July, the Guatemalan Ministry of Culture and Sports informed the U.N. Development Program, which administers the archive budget on behalf of foreign donors, that it would take over full management of the archives, raising questions about its financial viability. The U.N., which pays staff salaries, was forced to lay off the archives researchers and archivists.

On July 10, Guatemala fired its chief national archivist, Anna Carla Ericastilla, on the grounds that she provided access to foreign institutions, including the University of Texas, and improperly raised funds from donors to pay salaries to archivists.

Degenhart, meanwhile, has overseen a massive purge of Guatemala’s reformed police force after being named interior minister in January 2018. The following month, he fired the director of the National Civil Police, Nery Ramos, along with three other top cops. All told, Degenhart fired some 25 ranking officers and more than 100 agents, including 20 of the 45 police agents assigned to work with the U.N. anti-corruption office.

Guatemalans “have observed a systematic process of dismantling the National Civil Police, ordered by the interior minister himself, who seems determined to destroy 20 years of progress,” according to an August 2018 study by the Forum of Civil Society Organizations Specializing in Security, or FOSS.

The fate of the archive has become inextricably linked to the White House immigration policy.

The threat to curtail access to the archives came on the same day that Degenhart had signed an agreement with Kevin McAleenan, the acting U.S. secretary of homeland security, for the deployment of 89 agents from U.S. Immigration and Customs Enforcement and Customs and Border Protection in Guatemala to help stem the flow of refugees through the country. It also coincided with the Trump administration’s negotiation of a safe third party agreement with Degenhart.

Trump in March ordered all U.S. aid to Guatemala, El Salvador, and Honduras to be cut until they drastically reduced the number of migrants traveling north through Mexico to attempt to enter the United States. Critics, including both Democratic and Republican lawmakers, said the move would only exacerbate the migration crisis, as U.S. assistance helped address root causes of instability that caused people to flee north.

In June, the State Department announced it would release $432 million of the $615 million in aid to Central America, but it warned that new funding would not be released until the Northern Triangle governments took more steps to address migration.

Last week, the Trump administration announced that it had reached agreement on the safe third country pact, which would commit Guatemala to processing political asylum claims from migrants who cross its border in transit to the United States. The U.S. has yet to publish a copy of the pact, leading to speculation about what the deal actually entails.

Still, the move has raised concern about the constitutionality of the agreement. Guatemala’s constitutional court has already asserted that such an agreement would require approval by the Guatemalan Congress. Democratic lawmakers and other activists have criticized the move and vowed to fight it in courts. Democratic Rep. Eliot Engel, the chairman of the House Foreign Affairs Committee, said it is “cruel and immoral. It is also illegal.”

“Simply put, Guatemala is not a safe country for refugees and asylum seekers, as the law requires,” Engel said in a statement released on July 26, after the Trump administration and Guatemalan government signed the agreement.

Half of 10 Biggest Federal Law Agencies Lack Permanent Chiefs

Number of acting heads produces a lack of leadership stability at agencies that enforce critical parts of Trump agenda

Five of the nation’s 10 largest federal law-enforcement agencies are currently operating with only interim heads amid an unprecedented long-term leadership vacuum that even some of the president’s congressional allies say is untenable.

The Bureau of Alcohol, Tobacco, Firearms and Explosives (ATF), the Drug Enforcement Administration (DEA), Immigration and Customs Enforcement (ICE), U.S. Customs and Border Protection (CBP) and the Federal Bureau of Prisons all lack permanent heads.

Several of the agencies—ATF, DEA and ICE—have been without Senate-approved leadership for the entirety of Donald Trump’s term in office. That is the case despite unified Republican control of the Senate and presidency during that period, which typically leads to easier confirmation scenarios.

Because of opposition by some gun-rights groups, presidents of both parties have struggled to get ATF nominees through the Senate—but Mr. Trump has never even tapped anyone for the job. The leader of the Bureau of Prisons need not be Senate-confirmed, but even so it has only an acting director.

CBP has been run by an interim leader since mid-April because its current commissioner was tapped to run the entire Department of Homeland Security—as an acting secretary.

In part, the situation reflects Mr. Trump’s management style. He has said he prefers keeping people in “acting” roles rather than going through the Senate nominating process.

I sort of like ‘acting,’” Mr. Trump said earlier this year. “It gives me more flexibility.”

He is giving himself plenty of that. While vacancies are common toward the end of a presidential administration, the sheer number of them across the Trump administration as well as the turnover in crucial jobs, particularly at prestigious law-enforcement agencies, is without precedent, according to Max Stier, president and chief executive of the Partnership for Public Service.

Of the roughly 700 key positions requiring Senate approval that his organization tracks, only about 400 of them have been filled with a Senate-confirmed official. Some are extremely high profile, like the secretaries of defense and DHS.

But the result is a lack of leadership stability at several agencies that enforce critical parts of Mr. Trump’s agenda. The Drug Enforcement Administration has a prominent role in curbing opioid abuse, a priority of the Trump administration. ATF is a central player in combating gang violence and illegal firearms trafficking, other law-enforcement priorities of the president.

And CBP and ICE both play major roles in enforcing immigration law, the centerpiece of Mr. Trump’s domestic agenda. The president often talks of what he says is a “crisis at the border.”

Steadiness in leadership at government agencies with police powers may be especially crucial. “A law-enforcement organization is dealing with some of the most serious powers of the state and that is the power that involves people’s liberty,” said Mr. Stier.

Running a government with so many vacancies and “acting” leaders at high levels also bypasses the Senate’s constitutionally mandated “advice and consent” role in approving senior leadership at many agencies—and, similarly to Mr. Trump’s recent defiance of House subpoenas, shows little regard for Congress as a coequal branch of government.

“One of the purposes of the constitutional system we have is the checks and balances. The Senate, one of their critical roles, is to be able to in essence vet the senior leadership of our government—choices that the president is making,” Mr. Stier said. “That absolutely is a challenge to the system of government that we have.”

Veterans of government service note that it is difficult to be an effective manager with “acting” in your title.

To effectively lead an agency, you need as much authority and gravitas as you can muster. These are difficult jobs. Senate confirmation definitely helps,” said Robert Bonner, a former federal judge and prosecutor who was successfully nominated to lead both the DEA and U.S. Customs and Border Protection agency under two Republican presidents.

“It is enormously important that the people that work for you in that agency view you, not as an ‘acting,’ but as somebody who is going to be around for a while,” said Mr. Bonner, who was confirmed to four separate positions by the U.S. Senate. “If you’re not a confirmed head of an agency … you’re not going to be able to command as much respect and attention from your own people and from other agencies whose cooperation is important.”

Sen. Lindsey Graham, an ally of Mr. Trump and the chairman of the committee that considers nominees for the DEA and AFT, said he doesn’t approve of the long-term vacancies created by the Trump administration.

“It bothers me. Why aren’t they doing it? They should,” Mr. Graham said about nominating permanent heads for those agencies. The South Carolina Republican is chairman of the Judiciary Committee, which has oversight of the Justice Department and all its law-enforcement agencies—which include the FBI, DEA, AFT, U.S. Marshals Service and Federal Bureau of Prisons.

The lack of any nominees has created a messy situation at the top of several agencies—requiring tricky legal maneuvering to even name an acting successor.

ATF is currently being led by Reggie Lombardo, who holds the title of “acting deputy director.” Ms. Lombardo, who took office earlier this month after the departure of her predecessor, cannot hold the title of acting director because of a quirk in federal law caused by the lengthy vacancy and the lack of a nominee.

The current acting head of the DEA, Uttam Dhillon, had to be transferred from his White House job into a Justice Department post first—to qualify for the appointment as acting administrator because of another requirement in the agency secession rules. Mr. Dhillon was involved in the search for a DEA head while he was at the White House.

And Mr. Trump purged the leadership of the Department of Homeland Security last month in a clash over the direction of the agency. He named CBP commissioner Kevin McAleenan as the acting DHS secretarybypassing a law that required the acting job to go to the undersecretary for Management, Claire Grady. Ms. Grady eventually resigned to resolve the issue—clearing the path for Mr. McAleenan to become acting DHS secretary.