The Alchemists: Three Central Bankers and a World on Fire (38 page)

While the academics talked in a conference space next to the Boston Fed’s cafeteria, the senior Fed officials in attendance quietly slipped out at around 2:30 p.m. and took an elevator upstairs to Rosengren’s office suite. There, they logged in to a secret video teleconference of the Federal Open Market Committee. The regularly scheduled FOMC meeting was still two weeks away, and the idea that there would be a QE2 was fully expected by the market after Bernanke’s speech that morning. But the chairman wanted to hold this session to ensure plenty of time to discuss the technical details of how to carry out the program. Should the Fed announce one giant number up-front for the amount of Treasury bonds it would buy, say $500 billion or $800 billion? Or should it revisit it at every FOMC meeting, for example, starting with $100 billion and then either announcing another $100 billion or cutting the number to zero depending on what the economy did in the interim? (This was the approach favored by St. Louis Fed president James Bullard.) A final option, which drew some interest from Bernanke but never took off among fellow committee members, would be to target some particular longer-term interest rate and then buy bonds in whatever amounts necessary to hit that target. The attendees also debated whether the Fed needed to improve how it communicates its goals to the public, such as by making its target for inflation more explicit or having Bernanke begin holding press conferences.

The three-hour conference had the practical purpose of determining which strategies had wide support among committee members and which didn’t. But it was also one of the last acts in a strategy that had combined persistence with patience. Between the August and September FOMC meetings, the smaller sessions in Bernanke’s office, and this special videoconference, the QE2 decision had been so fully aired that by the time the November 2–3 policy meeting rolled around, no one on the committee could have argued that his or her voice had gone unheard. Bernanke, from that August meeting on, had been constantly pushing toward new easing, even while giving his more recalcitrant colleagues time to come around to his view. Before taking this new plunge into unconventional monetary policy, however, he had a few more people to convince: the finance ministers and central bankers of the twenty most powerful nations on earth.

Located in the southeast corner of South Korea, with no airport of its own, two hours by train from Seoul and an hour by car from Busan, the small city of Gyeongju was, for most of the officials scheduled to meet there for the Group of 20 economic summit on October 22 and 23, 2010, rather difficult to get to. Bernanke had wanted to skip the meeting entirely. With round-trip travel, the two days of meetings occupied five days on his schedule. (The Fed chairman usually flies commercial; if he were to routinely catch a ride on the treasury secretary’s Air Force jet, it could be seen as compromising the central bank’s independence.) But in the interest of diplomacy, he needed to explain the imminent QE2 to the world.

It was an unwieldy gathering: Each of the twenty member nations sent its finance minister plus its central banker. Each of those forty officials brought a deputy. Some also had interpreters. And there were various “honorary” attendees, ranging from international groups like the International Monetary Fund and the World Bank to larger non-G20 countries like Spain and Vietnam. All told, there were around a hundred people in the room, hardly an intimate gathering.

The South Korean finance minister began, welcoming the attendees and taking care of administrative announcements. Then, by long tradition, the United States was given the floor, asked to explain what was going on with the world’s largest economy. Normally, Treasury Secretary Geithner would have dominated this part of the discussion, but this time he gave the prime speaking role to Bernanke, who set out to explain the policy move that by this point it was widely expected the Fed would soon take. He and Kevin Warsh, there as Bernanke’s deputy, worried that the briefing could prompt political criticism: Why should the Fed involve the rest of the world in a domestic policy decision? So Bernanke took care to say only that the Fed was likely to consider new asset purchases, without suggesting that it was an absolute certainty. Still, who knew what that might sound like through the filter of a journalist speaking to a foreign official?

The possible move, he said, was about adjusting U.S. monetary policy to properly match U.S. economic conditions. It wasn’t about trying to manipulate the value of the dollar, even if a reduced value of the dollar on foreign exchange markets was one likely result. I’m not trying to start a currency war, Bernanke argued, I’m just trying to stop deflation and economic contraction from taking hold in the United States.

Several of the officials in the room—from the same countries who would raise vocal public objections three weeks later—were having none of it. The Germans argued that the Americans were tempting inflation on a mass scale and new financial bubbles, which to Bernanke just sounded like the usual German hard-money fetishism. The Chinese and Brazilians argued that the hundreds of billions of dollars the Americans would soon unleash would find their way into oil markets, driving up energy prices, as well as into stock markets in emerging economies that were already dealing with vast inflows of “hot money” and a risk of bubbles. Bernanke was sympathetic to the Brazilians, though less to the Chinese: All they had to do to avoid importing inflation from the United States was to end their policies of intervening in markets to depress the value of their own currency relative to the dollar, which was exactly what the United States government wanted them to do. The emerging markets’ arguments, in Bernanke’s view, boiled down to the idea that the U.S. government should do what was best for them, not what was best for the U.S. economy.

•   •   •

A
s they do eight times a year, the men and women of the Federal Open Market Committee who came to Washington from out of town for the two-day meeting that was to begin on November 2 checked in to the Fairmont Hotel, then piled into vans for the mile-long drive to the Eccles Building. The financial news networks were in full hyperventilation mode, alternating between assessing the impact of massive Republican wins in congressional elections that Tuesday and the QE2 announcement expected the next day. They parked their satellite trucks around the Fed’s building in Foggy Bottom; there would be nothing to report until Wednesday afternoon when the meeting concluded, but having the white marble edifice of the Fed’s headquarters behind their reporters lent gravity to the broadcast.

“
Good afternoon, everybody
,” Bernanke said a bit after 1 p.m. that Tuesday. He welcomed Sarah Bloom Raskin, a newly confirmed governor, who was participating in her first in-person meeting. To laughter, he noted that Janet Yellen, while newly confirmed as vice chairman, had been to “a few meetings” before. And so the meeting began.

There is always a certain formality to FOMC meetings. Committee members gather in a grand room and follow a rigid agenda: First the briefings from staff, then go-rounds in which each official speaks for a few minutes about his or her view of the economy and policy. The participants, who might be “Ben” or “Bill” over coffee in the hallway, are “Chairman Bernanke” and “President Dudley” when the FOMC is in session. And ever since the 1995 decision to begin releasing transcripts of the meetings with a five-year delay, the gatherings have been somewhat stilted, with officials reading prepared remarks rather than engaging in extemporaneous discussion. Even when there is little controversy over policy, committee members meticulously split hairs over how to phrase their postmeeting statement. Did the U.S. economy grow “modestly” or “moderately” in the previous six weeks? Only the FOMC could spend several minutes debating the distinction.

The QE2 meeting was a little different.

The “Will we act?” question had been more or less resolved at the September meeting, at which the tide shifted toward an answer of “Yes.” And the conference call two weeks earlier had been enough to work through the details of the program. All that was left, really, was for the policymakers to make their last, best arguments for the directions they favored. When the transcript is released in early 2016, it will show the strongest advocates of more easing—Yellen and Dudley, plus Charles Evans of the Chicago Fed and Eric Rosengren of Boston—making their case in sometimes moralistic language about the necessity of doing
something
to put more of the then 15.1 million unemployed Americans back to work at a time when inflation was too low.

The inflation hawks—Richard Fisher, Jeffrey Lacker, Charles Plosser, and Tom Hoenig of the Federal Reserve banks in Dallas, Richmond, Philadelphia, and Kansas City, respectively—will come across as even more impassioned. They painted an ugly picture of what QE2 could do: fuel bubbles in the stock market and commodity prices and compromise the Fed’s independence by putting it in the position of effectively printing money that would help fund government deficits. The central bank, they said, shouldn’t take ownership of an economic dilemma beyond its power to solve. Warsh, normally Bernanke’s closest ally, related his objections with a vehemence that would make his
Wall Street Journal
op-ed seem reserved. Twice people jokingly called him “Axel” for his hawkishness—implying that he sounded like German Bundesbank chief Axel Weber.

It wasn’t grandstanding, exactly, on either side of the debate. It was accepting that a decision had been made and ensuring that the historical record would contain no ambiguity on where each man and woman stood. They went around the room, voicing their final votes. Of the hawks, Warsh voted with the majority out of loyalty to Bernanke (and with the knowledge he would spell out his views in a
Wall Street Journal
op-ed a few days later), and of the rest only Hoenig had a vote. The decision was made ten to one, the statement hammered out, and the fax readied for transmission to the press room in the basement of the Treasury Department.

Glenn Beck, YouTube, and the continued dismay of certain members of the G20 awaited.

•   •   •

T
he huge, Florentine palazzo–styled headquarters of the Federal Reserve Bank of New York, a few steps from Wall Street in lower Manhattan, is an imposing building. It has thick stone walls and, suitably for a building whose basement contains the largest stockpile of gold in the world, thick iron grates guarding the windows on its lower floors. During the 1930s, as ominous clouds appeared in Europe and Asia foreshadowing a second world war, the governments of the world one by one decided that New York would be a safer place to keep their gold than at home. The New York Fed was happy to oblige, offering up its vault, hard against the bedrock of Manhattan Island eighty feet below street level, as a location for storage. There are 122 cages containing gold stored for many of the world’s governments and central banks—their exact identities a closely held secret. In total, they hold about $350 billion worth of gold at early 2012 prices, more or less the annual economic output of Thailand.

That’s exciting for tourists who want to hold a gold bar (worth about $600,000 at recent prices, and even heavier than you’d expect) and for movie producers who want to create an elaborate heist scene (as in
Die Hard: With a Vengeance
). But for the New York Fed, it’s just a sideline business—the equivalent of a local bank branch renting out safe-deposit boxes in an otherwise unused corner of its vault. The real money is two hundred feet above, in a conference room that could be in any office in the world: white walls, a single window, a light-colored wooden table that seats ten. That’s where, on a Friday in November 2010, Dina Marchioni and her band of young traders set about executing QE2.

The FOMC can only set the direction for policy. It falls to the staff of the New York Fed to actually intervene in the financial markets, buying and selling securities, to enact that policy. The directive from the committee after the November 3 meeting was to buy $75 billion worth of longer-term Treasury securities each month for eight months, for a total of $600 billion. But what securities exactly, and from whom would they be purchased? The answers on November 12 were: any Treasury bonds maturing between 2014 and 2016, and whoever offered the best price.

Marchioni often brings Danishes or bagels on special occasions, which the start of QE2 certainly was, although it is lost to history what breakfast pastry was on offer that Friday. Three “trader/analysts” sit in Aeron chairs at computer terminals facing the wall. Marchioni sits behind them at the conference table, observing. An IT person sits off to the side, there in case the computers fail. Josh Frost, a slim man in a dark suit and Marchioni’s boss, stops by most days to make sure everything goes smoothly. There are a huge flat-screen television airing CNBC, a digital clock, accurate to the second, and, along one wall, three workstations, each with three flat-screen computer monitors, one displaying current market data through Bloomberg’s financial information service, the others indicating offers from investors around the globe routed through twenty major financial firms known as “primary dealers.”

When the Fed is ready to buy, a special sound emanates from the computers on trading floors at each of the primary dealers. It’s a strange, fluttering tone—the musical note F, followed by an E, followed by a D, in rapid succession. F-E-D means that the Fed is in the market. The dealers then have forty-five minutes to put in their offers—the Fed is indifferent as to whether they involve securities the giant banks own themselves or those owned by their clients. Marchioni’s staffers monitor the incoming offers, and when one comes in that doesn’t make any sense—the bank is offering to sell bonds to the Fed either way above or way below the market price—they press a button on an elaborate phone known as a turret (the one in front of Marchioni has a sticker on it identifying it as the Super Turret) that immediately connects them with the trading floor at J.P. Morgan or Barclays or Goldman Sachs or whichever dealer may have put in the offer.