If you face difficulty in deciphering the meaning behind the actions of the Central Bank, then the Central Bank is not doing its job properly.

Years ago when we were working to establish the Economic Policy Research Foundation of Turkey (TEPAV), an American friend of mine said, "It is very difficult to found and operate a think-tank in Turkey. May God make it easy for you!" As he argued, the people of Turkey "first take a side and then started thinking." "In the US, however," he said, "the think-tank tradition is based on thinking and reaching results first and taking a side on the subject matter afterwards." TEPAV became operational in December 2004 and I have never forgotten what my friend told me.

These days I am following the traces of the tradition of "not debating" in the context of the so-called "proactive policy framework of the central bank." Some commentators say, "The Central Bank is acting proactively. Well done!" But they do not know completely what the Central Bank of Turkey (CBT) is up to. The opponents of the actions of the CBT, on the other hand, check the to-do list for normal circumstances, see that the actions does not match and then criticize the CBT. However, we are not faced with normal circumstances. The biggest evidence of this is that the S&P has downgraded the credit rating of the US and Moody's has declared that they also might take the same path. Given the signs of doomsday, you cannot criticize the CBT by arguing that it is not sticking to the regular to-do list. This is what I see: Everyone takes a side in the debate according to his temperament. They first take a side and then make a suitable explanation. I am getting tired of this.

Let me start with some key findings: If you face difficulty in deciphering the meaning behind the actions of the Central Bank, then the Central Bank is not doing its job properly. This is what I learned about central banking in the last two decades:  central banking is like a dance. Rhythm and steps might change occasionally. A good central bank has to train its dancing partners regarding the steps of that particular dance. A bad central bank, however, performs a number of figures on the stage while its partner stands as still as a statue. The Central Bank of Turkey (CBT) recently has been acting like a bad one. No seller should speak a language unknown to the customer. The CBT, however, avoids this principle. Let me stress that this mistake has nothing to do with the global circumstances. This is the first point to state.

We are going through an unprecedented period. A couple of years ago, the US underwent a major financial crisis, the type of which we had seen generally in developing countries. Last week the S&P downgraded the credit rating of the US. Before the explosion, the S&P had rated asset-based securities that "leaked sewage water to the main water system" with AAA. The problems of the institutions at the core of the system continue. A rush towards Italian and Spanish government debt securities would have started if the European Central Bank had not stepped in. If such a rush had taken place and everyone had tried to sell the securities at hand and run away, estimations for the debt stock of the said countries would have reached the sky and the perception that they could not repay the debt would have become widespread. These must be taken into account while trying to figure out the plans of the CBT.

This is the third point: It must be noted that the CBT is not the only central bank that tries out new policy tools in the face of the complex global agenda. Brazil has tried different capital control mechanisms since 2008. Even a higher number of countries use reserve requirements on bank deposits as well as capital requirement to ease the impacts of capital inflows and control credit expansion. The relevant section of the IMF report published recently names a number of countries from Croatia to Korea, Peru and Uruguay. ¹ These measures generally have not worked successfully. The trials are listed in the report. Therefore, trying out new measures is not unique to Turkey.

Then, what is all the fuss about? The problem is that the actors cannot understand the long-term strategy on which the policy mixture Turkey implements supposedly is based. What we are seeing is tactical steps that meet the necessities of the day. But the CBT cannot control everything. Monetary policy is not a panacea. As the harmony of the dance weakens, the risks grow.

What is a risk? If you stray from the herd and if you do not know the way back, you will be eaten by the wolf.

¹IMF Staff Discussion Note, "The Effectiveness of Capital Controls and Prudential Policies in Managing Large Inflows", 5 Ağustos 2011.

This commentary was published in Radikal daily on 09.08.2011