Colombo Telegraph

The Money Illusion – Infallibility Of Central Banks

By Sarath de Alwis

Sarath De Alwis

On the road from the city of skepticism, I had to pass through the valley of ambiguity.” – Adam Smith

It happened on Wednesday 13th of May . The Supreme Court refused to grant leave to proceed with the fundamental rights violation petition filed by good governance activists Dr.G. Usvatte-Arachchi , Dr. A. C. Visvalingam and Mr. Chandra Jayaratne. On the same evening, the Minister of Finance Mr.Ravi Karunanayake appeared on the TV channel Swarnavahini in the program ‘Mahajana Sevaya Pinisai”.

Responding to a question from the anchor on the Bond controversy, the Minister of Finance insisted that the entire transaction was not only above board but was manifestly proper. He stressed that it was in sharp contrast to the dubious dealings under the earlier CB governor Ajith Nivard Cabraal.

He expressed indignation at the failure of the three distinguished, learned and worried citizens to resort to court action such as their present failed endeavour, when the former Governor of the Central Bank was up to no good.

The Minister of Finance constructed the refusal of the Apex court to grant leave to proceed as a clear vindication of Governor Mr. Arjuna Mahendran. Many Sinhala News Papers and Sinhala TV news tickers too announced the dismissal of the petition against the Governor of the Central Bank. None of the news reports recall that the plea was for an investigation by an expert panel to determine if there had been a fair and transparent procedure with parity on information.

The Central Bank Governor – Arjuna Mahendran

This writer asked Dr.Usvatte-Archchi the same question raised in rhetoric by the combative Minster of Finance. His sardonic reply was ‘May be the Minister has not read what I have been writing about the Former Governor Mr. Cabraal and his style of managing the monetary policy. With infectious nonchalance he added that in addition to his copious writing on the mismanagement under the previous governor, he had also resigned in protest from a committee on monetary policy appointed by the previous regime. Professor A.V.De S Indraratne who was also in it had resigned a few months later.

What I have said so far is a digression in defense of an illustrious economist, a son of the soil from the Deep South who stands tall and light years away from Royal college pomp and an adherent of Rawlsian values of equity.

The Supreme Court has held that there was no legal basis to issue notice. No law has been infringed. The court has given a ruling. This writer who is not a lawyer was curious to know the reasons for the ruling.

Last year on November 11th, the Present Leader of the Opposition Mr. Nimal Siripala de Silva who was then a Minister and Leader of the House announced in Parliament that the Supreme Court had given a unanimous opinion that there was no impediment to President Rajapaksa contesting for a third term. It was a 28 page opinion given by a ten member bench. That obviously was an exception. The Supreme Court only announces the ruling.

This writer was advised that our Supreme Court does not follow the practice of US and Indian Supreme Courts by elaborating on reasons. The tradition of our court is to announce the ruling to either proceed with or refuse leave to proceed with FR applications.

The Government should not treat this ruling as an exoneration of the parties who are alleged to have exercised their discretionary powers. The problem is not new.
In 1809 David Ricardo was concerned that the Bank of England violated the principle of price stability and, by doing so, risked ruining many people and driving Britain to bankruptcy. He did not complain to the House of Lords. He appealed to the public—the ultimate source of power in a democracy. If central banks are left unchecked, they have too much power and may use it with devastating consequences for the citizen.

The notion of central bank independence is a sacred myth. As we have learnt from the current controversy the Central Bank engages in a variety of activities related to monetary policy and the financial system. Their relations and interactions with the political authorities are equally complex.

The Supreme Court ruling has not resolved the crisis of confidence. The Law is clear on cheating, stealing and fraud. The law is not clear on moral ambiguity. One of the eminent Presidents Counsel appearing for the Central Bank appeared in a writ petition filed by Mr.Chandra Jayaratne regarding the impeachment of the 43rd Chief Justice. ‘Barbarians are at the gates’ he intoned then. Susan Sontag writing on ‘Pain of others’ says “One person’s ‘barbarian’ is another person’s ‘just doing what everybody else is doing. “

George Tridimas Professor of Political Economy, University of Ulster explains “The successful operation of markets is founded on the rule of law and monetary stability. Both, however, are threatened by opportunistic governments which may violate the rights and freedoms of citizens and generate inflation to pursue their own objectives.

Application of the rule of law and monetary stability require that credible constraints are imposed on the discretionary powers of the government so that it will not transgress against citizens and it will not engage in inflationary finance.” He concludes “Adherence to the rule of law, monitored by an independent judiciary, and an independent central bank, provide two such credible mechanisms of constraining the government.”

The truth is often uncomfortable. It is often at odds with what we would like to believe. But our preferred version of truth does not determine what’s true.
Is it not unusual that the largest state owned bank submits a bid for a primary dealer when the dealer can submit bids on its own? Was the Primary Dealer short of funds to support its bid and therefore arranged a credit line with the Bank of Ceylon for Rs.3 Billion.

Did the Bank of Ceylon conclude an appropriate credit appraisal before it approved the credit line to the primary dealer associated with the Son in Law of the Governor of the Central Bank?

Since bids have to be paid by the successful Primary Dealer the credit line should have been approved by the Bank of Ceylon before in less than five minutes.
It is customary for the Tender Board to maintain a time schedule of movements in and out of the committee room. Hence the insulation of the Governor from the decision of the tender board as determined by the three handpicked legal minds can be ascertained by all who entertain doubts on the matter, including this writer.

Insider trading, and flexible exercise of regulatory discretion are white collar misdemeanors. The rub is that their bottom lines run in to millions and billions.
Such occurrences tend to create genuine and honest doubts in the minds of the observer as to whether what transpired is morally wrong.

In such cases, the moral ambiguity tends to favour the perpetrator. Judges, Jurors and Journalists are then gripped with a grand sense of moral complexity. The average citizen cries out “ I am hurt. A plague a’ both your houses! I am sped.”

Professor Stuart P Green of the Rutgers School of Law examines the moral implications of lying, stealing and cheating and the strict legal construction of offences wrapped in ambiguity. In this seminal work he analyses insider trading, bribery, tax evasion and perjury.

The principal argument of Professor Green is based on the question whether President Clinton committed perjury during his deposition in the Paula Jones case. The allegations of perjury were concerned with some discrete statements. The most pivotal was President Clinton’s answer to the question: “Have you ever had sexual relations with Monica Lewinsky, as that term is defined in Deposition Exhibit 1, as modified by the Court?” Clinton’s answer was unequivocal: “I have never had sexual relations with Monica Lewinsky.”

In his subsequent impeachment for perjury, Clinton’s lawyers conceded that Lewinsky had performed fellatio on the President. But this, they said, did not make Clintons response perjurous. Exhibit 1 specified that “a person engages in ‘sexual relations’ when the person knowingly engages or causes (1) contact with the genitalia, anus, groin, breast, inner thigh, or buttocks of any person with an intent to arouse or gratify the sexual desire of any person.”

Assuming that fellatio is the only sex act that Lewinsky and Clinton had engaged in, then Clinton had not engaged in “sexual relations” with Lewinsky (as the term was defined, by reference, in the deposition question) even though she had engaged in “sexual relations” with him. Professor Green explains that under contemporary American law which is in accord with the law of Australia and England, a statement cannot be perjurous unless literally false.

Since it was Monica who labored, Clinton’s statement was literally true. He did not perjure himself. Strict legal constructionism has its merits.

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