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 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.