Myth #4: The leading central banks, international financial institutions, credit-rating agencies and other economic policy makers are neutral expert bodies.
This myth assumes the regulatory, oversight and assessment functions of our central banks, international financial institutions and other economic policymakers are being carried out effectively, properly and legitimately because these experts know best about complex fiscal and monetary matters. The world???s largest and most influential credit rating agencies meanwhile are often revered as perfectly objective and impartial arbiters of the financial performance of businesses and governments, their assessments serving as the backbone for decision-making of the global financial sector. We should trust their technical expertise, it is assumed, and accept their prescriptions for our future because no-one else can understand the complexity of the modern financial economy.
Reality Check
The central banks and banking regulators of the US, UK and Europe as well as the IMF were disastrously wrong about the basic ???efficient market hypothesis,??? which stated that private financial actors should not be regulated because, out of a sense of self-interest, they would not risk over-leveraging themselves. They were also wrong about the fallacy of composition in limiting financial regulations to individual companies while neglecting system-wide risks (macro-prudential regulations). As mentioned above, these institutions neglected to take meaningful steps to address the growing threats posed by the high levels of over-leveraging in financial markets in the years prior to the financial crisis, despite several warnings from influential economists. What???s more, most of them supported comprehensive financial deregulation which gutted the normal post-Great Depression rules of transparency, anti-fraud requirements, and basic exchange-based regulations. If these institutions could have been so wrong on these fundamental issues, there is little reason to have confidence they are correct today about prioritizing inflation-targeting over employment-support in the midst of a slow recovery and low price stability. Although these entities are often shrouded in a mystique of infallibility, we have little reason to accept their claims on face value, and should instead take their policy advice with skepticism while considering all other possible alternatives.
Credit-rating agencies meanwhile played a significant role in the making of the financial crisis which sparked the current global economic crisis. By giving AAA-ratings to many of the mortgage-backed securities structured in the shadow banking system (non-bank financial institutions), these agencies encouraged investors (including pension funds and other socially-minded bodies) across the world to buy enormous quantities of what later turned out to be "toxic" and worthless assets. Why would credit ratings agencies make such bad judgments? It???s a simple question of who pays the piper, according to experts. The fact that credit rating agencies were paid by the very owners of the assets they were rating led to conflicts of interest in which the raters were prevented from giving impartial, reliable grades. Today, the three major credit ratings agencies are joining the army of deficit hawks by reinforcing the ???cut to grow??? myth (#2 above) by downgrading or threatening to downgrade the bonds of many governments which have borrowed funds in the bond markets to stimulate their economies into recovery. Such actual and threatened downgrades have important political ramifications, empowering politicians and the business lobby to put pressure on governments to cut spending ??? even in the midst of a recession. Since these ratings agencies are treated as serious, neutral and objective evaluators of whether a country???s economic policies render a sovereign default more or less likely, they are seen as impartial arbiters of a government???s financial performance, and thus beyond the realm of public (or political) scrutiny.
Political factors very often drive economic policy-making. Why would central banks ignore the negative employment consequences of their efforts to keep inflation so low? Why has the US adopted a policy of maintaining such a strong US dollar despite its impact in a worsening trade imbalance and lost jobs at home? Why has the US, UK, the IMF and the ECB prioritized pushing the costs of bank bailouts onto their citizens in the form of increased deficits over supporting debt restructuring? Arguably, the answers to such questions have much more to do with politics, policy capture and the political power of financial interests than they do with basic insights and principles of economics or econometric models. Even researchers within the IMF have admitted as much in a stinging account of the influence of financial lobbying in the lead-up to the 2008 financial crisis: ???our analysis suggests that the political influence of the financial industry can be a source of systemic risk???the prevention of future crises might require weakening political influence of the financial industry.???
Today advocates of policies that will best enable governments to protect and fulfill economic and social rights must ask pressing questions about the degree to which those who are calling for fiscal austerity are basing these demands on sound, empirically-founded economics, or instead are merely taking advantage of the crisis to reduce the types social spending that they are opposed to for ideological reasons. In some cases, the answers to such questions are strictly political in nature. For example, if central banks enabled higher levels of employment and growth by allowing moderately higher inflation, it would improve the lives of tens of millions immeasurably, and simultaneously generate much more resources for economic and social rights-related expenditure. For the financial industry, however, even a modest rise in the inflation rate would be bad news, reducing the value of their assets and the real value of their future interest income. If the US allowed the dollar to fall in value, it could mean millions of US jobs, along with higher wages and strengthened bargaining power for organized labor. Yet, there are powerful interest groups that do not necessarily want to see the dollar fall. Many US banks and financial entities, for example, are likely quite happy to have their stronger dollars go further in buying Chinese assets, and major retailers are probably not anxious to see the prices of the goods they import increase by large amounts. Lastly, imagine the IMF and ECB allowed for significant debt restructurings in many European economies. It would greatly relieve the pressure on public spending across Europe and enable a much less painful and quicker recovery that would better safeguard ESCR obligations. Doing so however would mean a sharp loss in profit for those investors holding bonds and other government debt, as was unavoidable in Greece.
"In light of the irresponsible behaviour of many private financial market actors in the run-up to the financial crisis, and costly government intervention to prevent the collapse of the financial system,??? declared UNCTAD???s Secretary General recently, ???it is surprising that a large segment of public opinion and many policymakers are once again putting their trust in those same institutions to judge what constitutes correct macroeconomic management and sound public finances."
Human rights response
Human rights advocates should question the myth that economic policy is an objective, neutral science conducted by benevolent technocrats. Economic policy-making is a highly contested terrain heavily influenced by political considerations and ideological preferences. As such, human rights law and policy can have a fundamental role to play in exposing economic and social injustice, checking against the misuse of power as influential and unaccountable today as any dictatorship in decades past, and promoting economic alternatives centered on norms of human dignity and prioritizing the most vulnerable among us.