What Is Moral Suasion?
Moral suasion is the act of persuading a person or group to act in a certain way through rhetorical appeals, persuasion, or implicit and explicit threats—as opposed to the use of outright coercion or physical force. In economics, it is sometimes used in reference to central banks.
- Moral suasion seeks to persuade an entity to act in a certain way through rhetorical appeals, persuasion or implicit threats, as opposed to the use of outright coercion or physical force.
- In economics, central bankers use moral suasion to influence market and public sentiment into believing that they are in control of the economy and ready to act if needed.
- Most of this moral suasion involves verbal gestures and signalling through central bank minutes that can be picked apart by analysts and journalists.
- A famous example of the use of moral suasion is the New York Federal Reserve's intervention in the bailout of Long-Term Capital Management (LTCM) in 1998.
Understanding Moral Suasion
Anyone can, in principle, use moral suasion to try to convince another party to change their attitude or behavior, but in an economic context it generally refers to central bankers' use of persuasive tactics in public or private. It is often simply called "suasion" and the motives behind it are not always altruistic, but have more to do with the pursuit of particular policies.
In the U.S., moral suasion is also known as "jawboning," since it amounts to talk, in contrast to more forceful methods the Federal Reserve (Fed) and other policymakers have at their disposal. More specifically, attempts by central banks to influence the rate of inflation without resorting to open market operations are sometimes called "open mouth operations."
Jawboning is becoming increasingly prevalent as many central banks, after years of low interest rates and aggressive monetary policy, have fewer alternative tools left to boost the economy.
Moral suasion can be employed in public as well as behind closed doors. Fed chair Alan Greenspan's criticism of the prevailing economic mood as "irrational exuberance" in 1996 is remembered as a classic example of the Fed's use of suasion, but when asset prices did collapse in 2000, critics attacked Greenspan for having done too little—be it with interest rates, margin lending requirements or jawboning—to check the 1990s' exuberance.
In recent years the Fed has made a concerted effort to engage more with the public, which could be seen as an effort to increase transparency—or to leverage its power of moral suasion. Greenspan advocated a policy of "constructive ambiguity"—arguably the opposite of moral suasion—famously telling a senator, "if you understood what I said, I must have misspoke." Ben Bernanke broke with that approach and made an effort to communicate Fed policy more clearly; he introduced press conferences in 2011 at the suggestion of his eventual successor, Janet Yellen.
Increased jawboning may have been seen as necessary, given the decreased ability of the Fed to cut interest rates—which were near zero from December 2008 to December 2015—or increase the size of its balance sheet much further. With traditional monetary policy tools more difficult to employ, the Fed has attempted to convince markets of its willingness to support a sustained economic recovery through words rather than deeds, when possible.
Moral Suasion Example
A famous example of the use of moral suasion is the New York Federal Reserve's intervention in the bailout of Long-Term Capital Management (LTCM) in 1998.
LTCM was a highly successful hedge fund, generating a string of high-double-digit annual returns in the 1990s. It was highly leveraged, however, with around $30 of debt per dollar of capital at the end of 1997. The Asian financial crisis sent it into a tailspin, leading to worries that a fire sale of its assets would drive down prices and leave its creditors—the bulk of Wall Street's major banks—with massive unpaid loans on their books.
Rather than directly injecting public money, the New York Fed called a meeting in its offices of three banks that had lent to LTCM. These banks decided to cooperate on a rescue, which the Fed helped coordinate but did not fund. Eventually, a consortium of 14 banks bailed LTCM out for $3.6 billion. The fund was liquidated two years later and the banks earned a slight profit.
The New York Fed was criticized for creating the impression that LTCM was "too big to fail," but the decision to pressure banks into providing bailout funds was seen as an alternative to more heavy-handed—and potentially harmful—tactics.