The man­darins of money

A NEW­BOOK ON THE WORLD’S KEY CEN­TRAL BANKERS OF­FERS PLENTY OF IN­SIGHT, BUT IS PER­HAPS TOO QUICK TO EN­DORSE THEIR HAN­DLING OF THE GLOBAL FI­NAN­CIAL CRI­SIS.

The Australian - The Deal - - Cover Story - BY ADAM CREIGHTON Neil Irwin’s The Al­chemists: In­side the se­cret world of cen­tral bankers is pub­lished by Head­line. Adam Creighton is The Aus­tralian’s economics cor­re­spon­dent.

The prospects for eco­nomic growth both in Aus­tralia and over­seas in­creas­ingly de­pend on the de­ci­sions and Del­phic pro­nounce­ments of cen­tral bankers. In May, the Aus­tralian dol­lar com­menced a steep de­pre­ci­a­tion af­ter con­fu­sion over the word­ing in US Fed­eral Re­serve chair­man Ben Ber­nanke’s semi­an­nual tes­ti­mony be­fore Congress and in the ac­com­pa­ny­ing min­utes.

Neil Irwin’s The Al­chemists: In­side the se­cret

world of cen­tral bankers is a grip­ping tale of the in­ter­ac­tions, de­ci­sions and mo­ti­va­tions of the three key cen­tral bankers guid­ing the global mone­tary sys­tem dur­ing and af­ter the worst fi­nan­cial cri­sis since the Great De­pres­sion.

Irwin has done for the GFC what Li­aquat Ahamed did so well in his 2009 Lords of Fi­nance, which chron­i­cled how the mis­guided poli­cies of cen­tral banks ex­ac­er­bated and pro­longed the Great De­pres­sion in the 1930s. “When cen­tral bankers fail, so do so­ci­eties,” Irwin writes. But, in con­trast to Ahamed, Irwin gives to­day’s crop a tick, at­tribut­ing the world’s rel­a­tively suc­cess­ful emer­gence fromthe GFC mainly to their ef­forts to stem the re­ces­sion­ary tide with a “wall of money”.

The chief pro­tag­o­nists are Mervyn King, the Bank of Eng­land’s stub­born gover­nor; Jean-Claude Trichet, the ur­bane, tech­no­cratic chief of the Euro­pean Cen­tral Bank; and, most im­por­tantly, the charm­ing Ber­nanke, whose aca­demic re­search into the causes of the Great De­pres­sion made him par­tic­u­larly well qual­i­fied to help bring the world’s fi­nan­cial sys­tem back from the eco­nomic abyss. Ber­nanke, a Repub­li­can who has gone on to be­come a favourite of the Obama ad­min­is­tra­tion, turned out to be a con­sum­mate po­lit­i­cal op­er­a­tor, too.

The Fed­eral Re­serve’s mys­te­ri­ous “money print­ing” and bank bailouts were deeply re­sented by most Amer­i­cans in the wake of the GFC, prompt­ing Congress to pro­pose tough leg­is­la­tion to curb its pow­ers. The Fed, which cel­e­brates its cen­te­nary this year, had be­come a mon­ster, ac­cord­ing to Irwin. “Its ten­ta­cles turned out to be so tightly wrapped around Amer­i­can busi­ness and pol­i­tics – large and small, national and lo­cal – that it was al­most im­pos­si­ble to kill,” he writes. Through some as­sid­u­ous lob­by­ing, the 12 banks scat­tered around the US that make up the Fed­eral Re­serve were able to neuter the ef­forts of Congress.

Across the At­lantic, the ECB was di­vided over whether to start buy­ing Ital­ian, Greek and Por­tuguese govern­ment bonds on the sec­ondary mar­ket and break the spirit of the ECB’s found­ing char­ter, which clearly ruled out the fi­nanc­ing of pub­lic deficits by print­ing money. Axel We­ber, for­mer Bun­des­bank pres­i­dent and Ger­many’s best can­di­date to suc­ceed Trichet, re­signed in dis­gust. For Trichet, though, fi­nan­cial sta­bil­ity was ev­ery­thing and he re­lent­lessly fore­cast an eco­nomic apoc­a­lypse if bond­hold­ers were forced to take a “hair­cut” on in­vest­ments in dodgy south­ern Euro­pean govern­ment bonds. Irwin, economics cor­re­spon­dent for The

Wash­ing­ton Post, writes well and the book teems with fas­ci­nat­ing anec­dotes. Bri­tish econ­o­mist David Blanch­flower’s colour­ful ar­gu­ment with King about the need to cut in­ter­est rates is a stand-out.

Al­though this book is ex­cel­lent over­all, it pos­si­bly de­liv­ers a pos­i­tive judg­ment too soon. The full ram­i­fi­ca­tions of the de­ci­sion to pump bil­lions of dollars into fi­nan­cial sys­tems around the world are not yet clear. All three men had to up­end prin­ci­ples of cen­tral bank­ing that had been con­sid­ered sacro­sanct for decades. Cen­tral banks were meant to be lenders of last re­sort to banks that had a tem­po­rary liq­uid­ity cri­sis, not ones that were fun­da­men­tally in­sol­vent. Paul Vol­cker, an ear­lier chief of the Fed, has had ma­jor mis­giv­ings about de­part­ing from this prin­ci­ple.

Irwin does point out the ques­tion­able moral­ity of cer­tain cen­tral bank poli­cies since the GFC, how­ever. The ECB, for in­stance, was adamant that the wealth­i­est en­ti­ties in so­ci­ety – the banks and in­vest­ments funds that will­ingly lent to Greece, Spain, Por­tu­gal and other strug­gling Euro­pean coun­tries – should be bailed out en­tirely with money from or­di­nary tax­pay­ers. Fi­nan­cial sta­bil­ity at all costs has ut­terly de­stroyed any no­tion of a free mar­ket in the fi­nan­cial sec­tor, to the enor­mous ben­e­fit of those whowork in it.

Aus­tralia re­ceives scant men­tion in the book, a re­minder of how vul­ner­a­ble the coun­try is to the de­ci­sions of un­elected of­fi­cials at the world’s key cen­tral banks. Cen­tral bank­ing is held in high es­teem in­Aus­tralia, mainly be­cause the Re­serve Bank has not been forced into un­ortho­dox “money print­ing” to try to stim­u­late eco­nomic growth. How­ever, if the re­sources boom ends as soon as ex­pected, the RBA may have to con­sider such po­lit­i­cally con­tro­ver­sial poli­cies. With of­fi­cial in­ter­est rates al­ready at rock bot­tom, it could have lit­tle op­tion but to pur­sue its own quan­ti­ta­tive eas­ing, a pol­icy on which nei­ther ma­jor po­lit­i­cal party has formed a view.

Jean-Claude Trichet (left), Ben Ber­nanke (cen­tre)

and Mervyn King.

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