Fraga GS ’85 awarded James Madison Medal

Arminio Fraga GS ’85, an investor and the former president of the Central Bank of Brazil, was awarded the James Madison Medal, the University’s highest honor conferred on an alumnus of the Graduate School, during Saturday’s Alumni Day proceedings. In his acceptance speech, Fraga argued for the importance of preserving the independence of a nation’s central bank.

Fraga described the history of his home nation of Brazil as “a laboratory of what not to do in central banking,” citing experiences of inflation and hyperinflation. Fraga, who was dubbed the “Alan Greenspan of Brazil” in a 2001 Newsweek article, received a Ph.D. in economics from the University. He described his experience at the University as “the best training I could have possibly imagined.”

From his experience as the president of the Central Bank of Brazil from 1999 to 2002, Fraga said that he learned two important lessons about central banking that he hoped leaders would look to in dealing with future national economic crises.

“One of the lessons was [that] you have to have a central bank focused on keeping things stable, being in charge of price stability,” he said. “The other practical lesson was that monetary financing of [government] budgets, budget deficits, was a no-no.”

To illustrate these lessons, Fraga described in detail the hyperinflation, weak financial institutions and high unemployment that plagued the Brazilian economy in the 1980s and 1990s. While he said that measures enacted by the new government elected in 1994 lessened the effects of hyperinflation for several years, Brazil was plunged back into crisis when the value of its currency, the real, fell drastically in 1998.

During his tenure as president of the central bank, Fraga was credited with reigning in severe inflation and restoring financial stability to the country, according to a University press release.

Fraga said that when he began work at the central bank in 1999, he and his colleagues decided to try a more “conventional treatment,” putting in place a combination of fiscal responsibility laws, imposing an inflation target and allowing the currency to float.

Though Brazil’s economy is now booming, Fraga said that the government has recently been placing more pressure on the country’s central bank to change its policies because “the government is frustrated, [and] we’re not growing as fast as we’d like.” He related this observation about compromised central bank independence to the experience of other countries and warned that leaders should not forget the Brazilian historical experience.

“Sometimes it seems to me like the governments are trying to abolish the business cycle,” he said. “I am convinced that too much is being asked of central banks … They’re being asked to do a lot, and they really can’t do it all at the same time.”

However, he concluded by saying that he “wouldn’t be pushing the panic button yet.”

A member of the Council on Foreign Relations, Fraga has taught international finance at several universities and has published widely in the field. Fraga also formerly served as the managing director of Soros Fund Management, the hedge fund management firm founded by billionaire and philanthropist George Soros. He founded an investment management firm in 2003 and has served as the chairman of BM&F Bovespa, a Brazilian stock exchange, since 2009.