The Alchemists: Three Central Bankers and a World on Fire (21 page)

Bernanke’s experience as a scholar of the Great Depression gave him credibility, and his clear, methodical speaking style made him persuasive. He viewed his role as not to advocate for a specific law, but to explain the economics of the situation and the necessity for immediate, bold action. Although Bernanke wasn’t involved in the detailed negotiations over the TARP—he figured out that an initial vote on the proposal had failed in the House when he glanced at the Bloomberg data terminal on his desk and saw a giant dive in the stock market—he would be forever associated with the unpopular legislation by both lawmakers and the public.

Congress finally passed the TARP on October 3. Ten days later, Paulson summoned the heads of nine of the biggest and most important banks in the United States into the Treasury building. He lined them up, each with a nameplate, on one side of a twenty-four-foot mahogany conference table. They had been told the night before to be there at 3 p.m. without being told why; a few resisted the last-minute request, though by 2:59 all were lined up in their assigned spots. Paulson, Bernanke, Geithner, and FDIC chair Sheila Bair entered and took the seats across from the bank executives. Paulson ran the meeting: The banks would each be taking billions of new capital from the new government bailout program, he said. Any who refused would surely be hearing from their regulators on the matter—here the presence of Bernanke and Bair strengthened the implicit threat. Geithner read off how much capital each bank would be taking: $25 billion for Citigroup, $10 billion for Morgan Stanley, and so on. Some of the executives, worried about diluting existing shareholders and the new restraints that might come on their own salaries, raised various objections. Bernanke, ever the conciliator, said, “
I don’t really understand
why there needs to be so much tension about this.”

The TARP was among the most unpopular programs
the U.S. government has ever undertaken; when Paulson and Bernanke had their meetings with the bankers, CBS and the
New York Times
were conducting a poll that would show only 28 percent support of the newly passed bailout plan, and even two years later senators who voted for it were pummeled by their opponents for doing so. The whole point of the program was to shift the burden of rescuing the banks away from Bernanke and the Fed and into a program that had more democratic legitimacy. But by standing by Paulson’s side at every step of the way—on Capitol Hill, and in telling the bankers about the money they would be taking—Bernanke would be haunted by the TARP and its political taint for many years to come.

•   •   •

I
n Europe, Trichet was also being forced into the political arena.

In the early morning hours of Tuesday, September 30, the leaders of Ireland, a nation of four million people and the world’s fifty-seventh largest economy, with a GDP smaller than Louisiana’s, made a decision that set in motion events that altered the history of Europe. The country’s banks were overburdened with bad loans for Irish and British real estate, and the people who funded the banks—both ordinary Irish savers and the global investors who bought the banks’ debt—were fast losing confidence.

Trichet had called Irish finance minister Brian Lenihan to deliver a stern message. “
You must save your banks
at all costs,” Trichet said, Lenihan recalled later. Trichet warned Lenihan and Bank of Ireland governor John Hurley that the panic that had started with Lehman was rapidly spreading to the banks of Europe. Plenty of institutions were in trouble—in Germany, the Netherlands, and France. But on that Monday, Ireland was hit particularly hard. Anglo Irish Bank shares declined a whopping 46 percent to lead a national stock market crash of nearly 13 percent—the worst one-day drop in the country’s history.

Lenihan called a meeting of the heads of the biggest Irish banks that evening to figure out what to do. The government decided, at about 4 a.m., and without consultation with anyone outside the borders of this small country, to guarantee the liabilities of six major Irish banks—to guarantee that all the bondholders and depositors owed money by these private concerns would be made whole, at the government’s expense.

Hurley called Trichet at 6 a.m.
to tell him of the plan. British chancellor of the exchequer
Alistair Darling found out about it on the BBC morning news
. The reaction across Europe was of shock—and, as time passed, anger. For one thing, Trichet and his colleagues thought that the extensive steps they had taken to funnel euros (and dollars, through the swap lines) to banks would be enough to keep them from experiencing runs. For another, Ireland had just taken a step that would expose its government to huge expense if the banks’ losses turned out to be worse than it appeared. And Ireland had created a situation in which its banks had stronger state guarantees than other European banks.

It would take more than a year for investors to ask the important question: Could the Irish government even
afford
to guarantee its banks? At the time, money gushed into Irish banks—and out of banks in the rest of Europe, particularly Britain. Darling called Lenihan at about nine that morning, telling him that the actions had placed Britain in an “
an impossible position
,” inasmuch as the British government had no desire—or, it feared, resources—to create a similar guarantee for its own massive banking system. European nations were grappling with the sudden realization that not only were their banks more exposed to the United States than they would have imagined—“
What were they doing screwing around in the United States
?” French president Nicolas Sarkozy was said to have asked his staff after a $9.2 billion bailout of the Franco-Belgian bank Dexia)—but also that the crisis could soon turn into an every-man-for-himself situation in which money flitted from nation to nation depending on which was offering the best guarantees.

In private conversations with European finance ministers and heads of state, Trichet argued for consistency. It simply wouldn’t do, he told them, for every European nation to have a different set of policies for guaranteeing the obligations of its banks. National leaders agreed with that idea in principle; they just couldn’t agree on the details of how to abide by it. Sarkozy called leaders of Germany, Britain, and Italy to the magnificent Élysée Palace in Paris the following weekend to try to hammer out a coordinated plan. The French were floating the strategy of creating a pan-European backstop for the banks, a single authority backed by the whole of the union that would make it unnecessary for Ireland and Belgium and every other country to take action independently.

There were huge technical and political challenges to enacting such a sweeping plan with the kind of speed needed. But most significantly, Germany, the largest economy in Europe, wasn’t on board. It preferred to keep bank rescues a strictly national affair. It’s no coincidence that under such a scheme, Germany would likely end up covering the costs of a bank bailout in a smaller, less economically powerful country like Ireland. “
To put it mildly
, Germany is highly cautious about such grand designs for Europe,” said German finance minister Peer Steinbrück just before the summit in Paris. “Other countries are free to think about it. I just don’t see any German interest in it.”

Sarkozy reportedly turned to his aides after meeting with German chancellor Angela Merkel and whispered, “
If we cannot cobble together a European solution
then it will be a debacle. But it will not be my debacle; it will be Angela’s. You know what she said to me? ‘
Chacun sa merde
.’” To each his own shit.

Like Bernanke during the TARP debate, Trichet played the role of influencer, not decider. At the summit, he emphasized the importance of making new financial backing for banks consistent among nations. But he wasn’t a vigorous advocate for socializing the cost of bank bailouts across the EU, as the French government preferred. Whatever his true preference at the time, he was the consummate dealmaker, and he saw no deal to be made given the vehemence of the opposition from Germany. Said one European official who observed Trichet at work, “He is very adaptable. He has a skill for adjusting his position according to what is possible at the time.”

Publicly, Trichet was dismissive of the idea that Europe’s lack of a central government hampered its response to the banking crisis. “Who can say we’ve done worse than the other side of the Atlantic?” he told reporters on October 6. “There is no lack of coordination—there is a European spirit. We have different governments, and they have different means of intervention.”

The meeting in Paris closed with agreement on a strategy so vague as to be meaningless. Sunday night, Angela Merkel rushed back to Berlin, where adviser Jens Weidmann warned her that
people were withdrawing 500-euro notes
at a remarkable pace; the beginnings of a German bank run were under way. Merkel went on television to reassure her public. “I’m telling all citizens with savings that their deposits are safe,” she said. “The federal government will guarantee that.” A spokesman later explained that she wasn’t announcing a specific legal guarantee of German banks, but merely stating a broad principle. That didn’t matter much, though: It sounded to the rest of the world like she’d just announced that Germany would be doing exactly what she’d spent the previous six days attacking Ireland for doing.

Over the ensuing days, European leaders would reach a broader agreement on how deposit guarantees should work. But it had no hint of common financial resources. That is to say, Germany would back German banks, Spain Spanish banks, and so on. This was particularly problematic for countries that had banking systems that were huge relative to their economies: Ireland’s bank guarantees meant putting the government on the hook for bank liabilities that added up to four years’ economic output!

Bernanke would spend the three years that followed dealing with fallout from his successful lobbying of Congress on bailing out the banks. Trichet would spend his time dealing with the results of European political leaders’ failure to act in concert for the same purpose.

•   •   •

I
n the run-up to the Lehman bankruptcy, the differences in monetary policy on the two sides of the Atlantic had become stark, with the ECB having raised interest rates in July 2008 to tighten the money supply, the Bank of England having left them unchanged for six months, and the Fed having lowered them in early 2008 to loosen the money supply. But in the frantic days of September and October 2008, signs were everywhere that the economic damage from the crisis could become severe—though how severe no one knew yet. There were new reports of mass layoffs seemingly every day, both in the United States and Europe. Global trade was plummeting, according to data from shipping companies. And the inflationary pressures that so worried Trichet and King the previous summers quickly abated—oil, $145 a barrel in July, would drop to about $40 a barrel by the end of the year.

All signs were pointing to a global economy that was crashing on the rocks of recession or even depression. It was time for the central banks to stop worrying about high inflation and start pumping money into the economy. Bernanke and King, the old officemates at MIT, figured that if all the major central banks acted together, they would have a greater impact than if any one of them acted alone, or even if they all did the same thing separately. And by moving as one, they could eliminate any distortions that might result in currency markets if they moved separately—something Trichet was particularly concerned about. If the ECB cut interest rates, he worried, the euro could decline excessively. By early October, though, he was ready to stand with Bernanke and King. Just three months after raising rates, Trichet prepared to reverse his decision.

The triumvirate spoke with some of their colleagues at the smaller central banks—Bernanke with Mark Carney at the Bank of Canada, King with Philipp Hildebrand of the Swiss National Bank, and Trichet with Stefan Ingves of Sweden’s Riksbank. Bernanke called a special meeting of the Fed policy committee, via a videoconference system that arrayed the policymakers’ faces across the screen in squares like in the intro to
The Brady Bunch
.

The joint announcement released at 7 a.m. New York time on October 8, 2008, of the first globally coordinated monetary easing in history, left little doubt where the Boys of Basel had ended up, whatever their differences had been in the run-up to the crisis. “Throughout the current financial crisis, central banks have engaged in continuous close consultation and have cooperated in unprecedented joint actions such as the provision of liquidity to reduce strains in financial markets,” it read. After noting that inflation pressures had diminished, it continued, “Some easing of global monetary conditions is therefore warranted. Accordingly, the Bank of Canada, the Bank of England, the European Central Bank, the Federal Reserve, Sveriges Riksbank, and the Swiss National Bank are today announcing reductions in policy interest rates. The Bank of Japan expresses its strong support of these policy actions.”

With the course of action established by that cooperative effort, the banks continued to lower rates individually over the coming weeks. As the Bank of England’s monetary policymakers prepared to gather in November, analysts expected them to cut rates by another half a percentage point. But the economic numbers were even worse than in-house pessimist Danny Blanchflower had imagined. In advance of the meeting, he met with Tim Besley, a Monetary Policy Committee colleague who’d been on the opposite side of the interest rate argument just a few months earlier. Besley had pivoted—the economy had deteriorated farther and faster than he’d thought possible. “What are we going to do?” Besley asked, according to Blanchflower’s recollection.

“We’ve got to cut 150,” Blanchflower replied. They should, he was arguing, cut interest rates by a percent and a half, three times as much as markets were expecting. Besley went to speak to the more hawkish, inflation-focused members of the committee. Blanchflower went to speak to King. “This has gone completely mad,” he told the governor. “Unless you cut by 150 the second after the decision, I will call a press conference and immediately lay out what you have done.”