Central bank transparency: a delicate balancing act

Central bank transparency has increased these past two decades since the former MI6 agent Richard Tomlinson made public the consequences of secretive monetary policy

Ex-MI6 employee and whistle-blower Richard Tomlinson in 1998, after his dismissal from the British Secret Service
Ex-MI6 employee and whistle-blower Richard Tomlinson in 1998, after his dismissal from the British Secret Service 

“I enclose a document describing some of MI6s operations against member states of the European Union,” reads a letter addressed to the Intelligence Services Select Committee in 1998 and written by the ex-MI6 employee Richard Tomlinson. Since his dismissal from the British Secret Services in 1995, the New Zealand-born, Cambridge University-educated individual has been hounded and even imprisoned by his former employer on account of spilling state secrets and making supposedly spurious accusations against the agency.

As a consequence, the former spy today ranks among the world’s most audacious whistle-blowers, and while his accusations fall short of Bradley Manning and Edward Snowden in terms of scale, the ramifications have been similarly impressive.

Intelligence as an economic tool
“I would like to draw your attention to MI6s operations against fellow member states of the European Union,” wrote Tomlinson in one of his many statements made against his former employer. “It is my belief that many, if not all, of such operations would be illegal under European law as it is illegal for UK government officials to bribe government officials of fellow European states.”

“His motive is entirely financial, and he is paid very substantially”

In the letter, Tomlinson went on to describe project “Jetstream”, which apparently encompassed the entirety of MI6s anti-European operations, alongside the specifics of the ORCADA operation. “ORCADA is a German national and a senior officer in the Bundesbank, with access to all of Germany’s most sensitive economic and financial information. ORCADA was recruited by MI6 in approximately 1986 and has since then been a fully conscious agent.

“His motive is entirely financial, and he is paid very substantially. Indeed, he is among the best paid and most important of any of MI6s agents. He provides regular and detailed intelligence on all German interest rate movements, and provided detailed information on the German negotiating position during the Maastricht treaty negotiations.”

Tomlinson’s ORCADA allegations came only a short couple of months after he fled Britain, having served six months in prison for breaking the Official Secrets Act, and served as an indication of the extent by which intelligence was being put to use as an economic tool by UK secret services. The simple fact remains that for as long as sensitive economic and financial information is hidden from view, there will be interested parties whose goal it is to expose this precious resource, with some even going so far as to employ illegal means to that end.

Agency experts have since claimed that the accusations fall within the remit of MI6, whose statutory task is to protect “the economic wellbeing of the UK”. Sir Richard Dearlove for one – who was head of the Secret Intelligence Service from 1999 to 2004 and then known as ‘C’ – made his feelings clear on the usefulness of intelligence as an economic tool in 2011. “I don’t think we should be squeamish about using all means to protect ourselves financially,” he said at the Global Strategy Forum in July of that year.

If Tomlinson’s allegations are true, then MI6 has almost certainly uncovered classified information by illegal means. However, the methods by which MI6 obtained sensitive data are not the biggest issue here, and the agency’s purported actions should be seen quite simply as a symptom of a time in which disclosure between central banks was frankly inadequate.

Lack of transparency
According to Tomlinson, ORCADA was recruited in the wake of Black Wednesday in 1992, at which time the then conservative government was made to withdraw pound sterling from the European Exchange Rate Mechanism (ERM), and the UK economy was forced to take a hit of £3.3bn. The incident here serves as a lesson of what lack of central bank disclosure can bring in terms of financial consequences, and goes some way to explain why MI6 would undertake such extreme measure in order to accrue classified data.

Known facts about M16:

During the First World War the British secret services were divided into sections: MI5 for counterintelligence and MI6 for secret intelligence services.

The Security Service (MI5) is the UK’s security intelligence agency and deals with homeland threats. The Secret Intelligent Service (MI6) operates globally.

Formed in 1909, the existence of MI6 was not officially acknowledged by the British government until 1994.

The MI6 chief is known as codename ‘C’.

MI6 is funded through a single budget called the Single Intelligence Account (SIA). The annual budget for the organisation has been near $2.3bn.

MI6 agents do not have the power to arrest, but rather are to work with law enforcement.

The National Security Council, chaired by the David Cameron, oversees all aspects of Britain’s security including the work of the intelligence and security agencies.

An unwillingness on the part of central banks to disclose pricing and portfolio decisions is understandable, taking into account their beginnings as privately-owned suppliers of credit to government. However, the changing role of the central bank and its present standing as a democratic institution has asked that transparency be improved upon in order to better reflect national interests.

In 1929 the then director of financial enquiries at HM Treasury, Otto Niemeyer stated: “In pre-war days a change in bank rate was no more regarded as the business of the Treasury than the colour which the bank painted its front door.” The perception of monetary policy has since transformed, and today the public demands that central banks disclose their objectives, outlooks and policy strategies in full.

“Transparency is the most dramatic difference between central banking today and central banking in earlier historical periods,” according to a report put together by Nergiz Dincer and Barry Eichengreen, entitled Central Bank Transparency: Where, Why, And With What Effects. “If financial globalisation and political democratisation are here to stay, then so too is greater transparency in the conduct of monetary policy.

“When a central bank is more transparent about its economic outlook and about how that outlook is related to its policy stance, monetary policy decisions are less likely to come as a surprise,” writes Professor Dincer. “Investors are less likely to be caught unawares by policy actions. Policy changes are less likely to cause sharp movements in asset prices that cause financial distress.”

One major development that has taken hold since the late 1990s was with regards to inflation targeting, which makes clear monetary strategy and requires central banks meet on a regular basis with government and the public to define their objectives. With this development and greater transparency has come the ability on the part of central banks to stabilise inflation expectations and inspire greater confidence in economic stability.

“Transparency gives credibility to the central banks,” says Dincer. “Therefore, when atypical conditions arise, central bankers would be more flexible to use unexpected monetary policy tools, since it will be clear to the public that the deviation is temporary and not inconsistent with the longer-run pursuit of the monetary policy target.”

Secretive tendencies from central banks serve only to heighten suspicions about the legitimacy of their intentions and outright willingness to act in the public’s best interest. In short, the very fact that central banks are governed in accordance with democratic principles means that they must make public their policy direction if they are to be held accountable for their actions and be trusted to act independent of political ideology.

“Democratic principles demand that, as an agent of the government, a central bank must be accountable in the pursuit of its mandated goals, responsive to the public and its elected representatives, and transparent in its policies,” agreed Ben Bernanke at the Institute for Monetary and Economic Studies International Conference in 2010. “Central bankers must be fully accountable to the public for their decisions, but both theory and experience strongly support the proposition that insulating monetary policy from short-term political pressures helps foster desirable macroeconomic outcomes and financial stability.” Put quite simply, increased transparency, accountability and independence protect against spats of public uncertainty and the many financial consequences that could lie in wait as a result.

Too much transparency
Many have, however, argued against the extent by which the public should be let in on the dealings of central monetary authorities, and posited that exposing sensitive economic information to outside parties could have disastrous consequences. What is most important is that central monetary authorities communicate clearly their objectives and policy decisions in order to uphold the democratic nature of central banking and inspire confidence that it is in fact aligned with society’s best interests.

Nonetheless, the fact remains that the business of central banking is a complex one, and something that very few individuals are qualified to pass judgement on, so institutions must take care not to give the impression that monetary policy is dictated by the masses. While greater transparency does have a number of notable benefits – among them being accountability – failing to deliver on previously stated targets could incur major consequences for central banks in that their credibility could be hit and public trust could fail.

The issue of disclosure therefore constitutes a careful balancing act, in that the public need necessarily be let in on monetary policy, without their financial decisions being overly swayed by the institution’s stated objectives. Whereas on one hand central banks have the power to settle uncertainties, they can on the other spark unrest and even financial downfall.

What’s more, “some suggestions for increased transparency, particularly a central bank announcement of its objective function or projections of the path of the policy interest rate, will complicate the communication process and weaken support for a central bank focus on long-run objectives. Transparency can indeed go too far,” writes Frederic Mishkin in a working paper entitled Can Central Bank Transparency Go Too Far?

What must be achieved is a happy medium whereby outside parties are made to feel as though their best interests are being met, while at the same time there is ample room for central banks to fall slightly short of their objectives without there being huge ramifications for the economy.