Wednesday, May 15, 2013

The Alchemists: Three Central Bankers and a World on Fire by Neil Irwin

By Professor Jeffery Atik

Neil Irwin's The Alchemists delivers on its promise: the book is a central banker's view of the 2007/2008 Financial Crisis and the more recent (and related) Euro Crisis. Only the subtitle disappoints: The Alchemists isn't quite the story of the three central bankers depicted on its cover (Bernanke, Trichet and Mervyn King). Rather, The Alchemists offers a thorough treatment of Bernanke's crisis-plagued tenure at the Fed and insightful coverage of the ECB's Trichet - until Trichet morphs into Mario Draghi just in time for the worst of the Euro Crisis. Plus the odd bit of Bank of England's Mervyn King thrown in for comic relief. No doubt Irwin's project was inspired by Liaquat Ahamed's Lords of Finance, winner of the 2010 Pulitzer Prize, which treats four central bankers (their philosophies and their quirks) from the 1920s: the UK's Montague Norman, France's Emile Moreau, Germany's Hjalmar Schacht and the Fed's Benjamin Strong. Now these were central bankers: they dominated the monetary policies of their day.

Our contemporary central bankers lack some of the color of their predecessors (save Mervyn King, who is pretty darn colorful). Moreover, their field of action is much more circumscribed. They can be checked by other personalities within their respective institutions, by intimidating political leaders, and by uncooperative markets. These bankers do manage, at least in this account, to largely have their way in responding to the crises, through will and manipulation, and by playing on the palpable belief that no one else has any better idea of what to do.

Irwin's story begins with the shudders in the market in late 2007, when BNP is the first major institution to admit it had no real idea how much those tricky mortgage-backed securities were worth. The response by Trichet is immediate - and is the precursor of many more ECB interventions. Things get much much worse in the following year with the fall of Lehman Brothers. Lehman's collapse is marked by the surprising non-intervention of the Fed. Irwin's account of the abandonment of Lehman Brothers is thin - but he suggests that the Fed may have felt it had no clear legal basis to act. Bernanke no doubt learned many things from the Lehman Brothers fiasco, including (perhaps) the advantages of being a bit less scrupulous in respecting the limits of the Fed's authority.

Irwin clearly admires his subjects. These are very bright, very forceful and public-spirited individuals. They seem devoid of political agenda - but this may be due to their positions of power that sets them above ordinary politics. They are consummate technicians - they do things because they believe them to be the correct course of action. They ignore opinion polls, but cannot, of course, ignore the markets.

Bernanke, Trichet and King are the kind of individuals one would expect to rise in a technocracy. The isolation of a central bank from ordinary politics is an accepted design feature of the modern state (China, as Irwin notes, is an exceptional case, where key macroeconomic decisions are directly taken by political leaders). As such, central bankers are not expected to be influenced by popular sentiment. Their actions have important distributive effects, however: the raising of a key interest rate creates winners and losers. And central bankers do have their prejudices: much of the conflict within the ECB in response to a possible Greek default replays almost theological arguments between German inflation-phobes and pan-Europeanists.

As the central bankers confront the crises, we are invited to applaud their audacity, their creativity, and their resolve. Irwin somewhat understates the recurrent slips into illegality. One could of course fetishize legal compliance - and compliance demanded in ordinary times may be inappropriate in emergency. Irwin gets the emergency right - the reader takes away the sensation that, as bad as things were, they could have gone more badly. Still the major interventions undertaken by Bernanke and Trichet (and Draghi) do seem to exceed their respective authority. A technician may enjoy the curative legitimacy that comes with being right.

And central bankers do hide themselves away. While Neil Irwin manages access (at least after the fact), he reports little ongoing respect for transparency beyond Delphic Fed-speak (this is mimicked by the ECB). Irwin seems to relish the secrecy - the dodging of reporters, the misleading feints. This is odd, given Irwin's professional status as a Washington Post editor.

There is much to applaud in The Alchemists. Irwin does a superb job in presenting quantitative easing in its various incarnations and exploring the strange new world of zero interest rates. He is also excellent on the Greek Euro Crisis. One of his finest insights is a speculation: what would have happened had the UK belonged to the Eurozone?

Follow the author on Twitter @jefferyatik.

No comments: