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 understanding moral suasionanyone 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 1in 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 23in 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 i seem unduly clear to you you must have misunderstood what i said 4 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 5increased 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 6 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 is not limited to the u s in 2012 european central bank ecb president mario draghi said the bank would do whatever it takes to preserve the euro which served to underpin the beleaguered currency and led to its subsequent rebound 7moral suasion examplea 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 89rather 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 8the 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 10