Moral Suasion
Candlefocus EditorFor example, the New York Federal Reserve intervened in the bailout of Long-Term Capital Management (LTCM) in 1998 as a form of moral suasion. The New York Federal Reserve issued a public statement urging commercial banks and major investors to become involved in the bailout. The sentiment behind the decision was to protect financial stability and the solvency of private financial institutions and other firms. By preventing large-scale losses, the Federal Reserve sought to avoid a potential chain reaction of bankruptcies or other liquidity issues.
In general, the use of moral suasion by central bankers is done via verbal signalling through central bank minutes. These verbal messages are picked up and analysed by analysts and journalists to better understand the intentions behind the moral suasion. The intent of these messages is to create a feeling of confidence in the stock markets regarding their understanding of the central banker's policies and capacities for action.
The effectiveness of moral suasion is debatable, but the implementation of such policies by central bankers has been seen to often produce the desired outcome. In the case of the intervention in the LTCM bailout, an agreement was reached to ensure the financial stability of the banking system and avoid a potential crisis. Central bankers vaunt moral suasion as one of the main tools of economic stabilization.
Moral suasion is a powerful tool in the hands of central bankers, who use it as a form of influence over the public and the markets. This approach has the ability to create public opinion, by signalling to the markets that they are in control. While the ultimate success of such policies may be somewhat up to chance, central bankers continue to employ this concept in their efforts to control the economy and steer a path of sustainable progress.