What is Moral suasion?

"Moral suasion" is the act of convincing a person or group to act in a certain way through implicit or overt calls, speech, or public threats, as opposed to coercion. or coerced by force. In economics, it is sometimes also used to refer to the central banks.

In principle, anyone can use mental persuasion to try to persuade another party to change their attitude or behavior, but in economic contexts, "moral suasion" often refers to the use of tactics by central banks in the pursuit of particular policies.


In the US, the term is also known as "jawboning" because it is primarily a verbal use, as opposed to more forceful measures that the Federal Reserve and other policymakers could take. More specifically, the mentally convincing is the central bank's efforts to influence inflation rates without the need for open market operations.

The Long-term Capital Management case and the first "moral suasion" measure

A well-known example of the use of "moral suasion" was the New York Fed's intervention in the Long-term Capital Management (LTCM) bailout package in 1998. LTCM is a very successful hedge fund, creating a series of double-digit annual returns in the 1990s. However, the fund was highly leveraged, with a debt of about $ 30 per dollar of capital at the end of 1997. Finally, the Asian crisis has pushed it to a dead-end, leading to fears that a sell-off of their assets will devalue and leave creditors - most of the big Wall Street banks - in huge loans yet. math on their books.


Instead of directly injecting money publicly, the New York Fed held a meeting at the offices of three banks that lent LTCM. These banks decided to cooperate to bail out the loan, and the Fed helped to coordinate but not finance. After all, a consortium of 14 banks underwrote LTCM $ 3.6 billion. Two years later, the fund was liquidated and the banks got a slight return.

Although the New York Fed was criticized for making the LTCM "too big to fail", the decision to pressure banks to bail out was seen as an alternative. The alternative to more aggressive - and potentially more damaging - tactics is doing nothing.

How is "moral suasion" used in practice?

"Moral suasion" can be used in public as well as after secret meetings. The criticism of the prevailing economic state of 1996 as "irrational exuberance" by Alan Greenspan - former governor of the Federal Reserve (Fed) is considered a classic example of used to convince the spirit of the Fed.


Alan Greenspan - Former Governor of the Federal Reserve (Fed)

But when the price of financial assets collapsed in 2000, many criticized Greenspan, arguing that everything he did was too little and not enough to control the excitement in the 1990s - even with interest rate adjustments. interest rates, margin lending requirements, or moral persuasion measures.

In recent years, the Fed has tried to get more public exposure, which can be seen as an attempt to increase transparency or to promote the power of moral persuasion. Ben Bernanke has been trying to communicate Fed policy more clearly than previous Fed presidents and has opened press conferences since 2011.

Increasing moral persuasion may be needed amid a weakened possibility of a Fed rate cut - as US Federal interest rates have been close to zero between December 2008 and December 2015.

As the use of traditional monetary policy tools is becoming more and more difficult, the Fed has, whenever possible, tried to persuade markets of its willingness to verbally support sustainable economic recovery. because of action.


The tactic of persuasion is not used by America alone. In 2012, European Central Bank President Mario Draghi said the Bank will do "whatever it takes" to protect the euro.

Epilogue

Hopefully, with the above explanations and actual situations, you will have a better understanding of the term "moral suasion", so they can be warier of messages from central banks that have influence in the market school!