The Alchemists: Three Central Bankers and a World on Fire (54 page)

The men who guided the world’s leading central banks through the megacrisis had different assumptions, challenges, and approaches to leadership. But their common legacy is this: As ugly as the global economy looked five years after the onset of crisis, no war had broken out among the great global powers. Europe remained united. There had been no confidence-shattering hyperinflation or, outside of perhaps Greece and Spain, economic depression. None of this was a certainty. Peace and prosperity are never as deeply entrenched as they may seem at times when things are going well. Rather, they require people like Bernanke, King, and Trichet to safeguard them, often by doing things that are wildly unpopular. It may seem like damning by faint praise, but a catastrophe averted is no small thing.

The central bankers’ judgments were far from perfect, and their mistakes—allowing the collapse of Lehman Brothers, endorsing early fiscal austerity in Britain, moving with such hesitation and delay in the face of the eurozone crisis—will do lasting economic damage. Each will be leaving his institution a very different place from the one he inherited, more deeply entrenched in the vagaries of politics, more thoroughly intertwined in the workings of high finance, with so many Rubicons crossed that there can be no hope of going back. No one can say that the Fed will never bail out an investment bank, or that the Bank of England will never try to preach to Parliament about how to manage its books, or that the ECB will never prop up government finances.

Adam Posen, on his final day as a member of the Bank of England’s Monetary Policy Committee, responded to Michael Woodford’s Jackson Hole paper with a stirring rebuttal of the idea that central banks should let precedent or politics stop them from doing what they need to do to keep their economies healthy. “It is . . . quite literally a prehistoric argument in monetary terms to assert that central banks are engaged in experimental, unprecedented, or somehow scandalous and dangerous policy maneuvers today—we should stop giving such trumped-up rhetoric any credence,” said Posen. “The idea that there are somehow pristine, virgin central banks, expected by the public to be like a vestal priesthood, that will be tainted forever by intervening in a given financial market, is . . . a truly primitive and antirational way of thinking about both economics and the beliefs of the general public.”

Ben Bernanke, Mervyn King, and Jean-Claude Trichet learned from the failures of Rudolf von Havenstein and Montagu Norman, of Arthur Burns and Masaru Hayami. Their successors will learn from their failures. Democratic societies entrust central bankers with vast power because some things are so important yet so technically complex that we can’t really put them to a vote. We’re wrong to expect perfection. But we must demand progress. The story of central banking is also the story of civilization: discovering in fits and starts how to manage a just and prosperous society, forever taking small steps toward a better world.

I
n 1660s Sweden, Johan Palmstruch’s Stockholms Banco introduced the first banknotes, shown here, bringing paper money to Europe. The Palmstruch bank collapsed and was replaced by what would become the Swedish Riksbank, the nation’s central bank to this day.

W
alter Bagehot, editor of
The Economist
in the mid-nineteenth century, wrote about the Bank of England’s efforts to combat the financial panic that followed the collapse of Overend, Gurney & Co. in 1866. His lessons add up to Bagehot’s dictum, an idea that modern central bankers followed during the crisis that began in 2007.

T
he central bankers of the 1930s, including Hjalmar Schacht
(left)
, president of the German Reichsbank, and Montagu Norman, governor of the Bank of England, were unable to contain the great financial crisis of their generation, setting the stage for years of economic depression and, eventually, a global war. Their failures haunted their modern successors.

A
rthur Burns, chairman of the Federal Reserve in the 1970s, lacked the willpower—or the independence from the Nixon administration—to take the painful steps needed to contain the burgeoning inflation of that era. Inflation approached 9 percent in his final year in office.

P
aul Volcker, chairman of the Fed starting in 1979, aggressively tightened the money supply to stop inflation—causing a deep recession in the short term but laying the groundwork for a generation of prosperity known as the Great Moderation.

E
uropean leaders spent the second half of the twentieth century building bonds of unification among their nations, aiming to prevent the kinds of conflicts the continent had experienced in the first half of the century. Here, in February 1992, they gathered in Maastricht, the Netherlands, and agreed to use a common currency. The European Central Bank would be created in 1998 to manage what would become the euro, the most visible symbol of European integration.

B
y 2007, when the first tremors of panic were felt, the leading Western central banks were led by Mervyn King
(
lef
t
)
, governor of the Bank of England; Ben Bernanke
(center)
, chairman of the U.S. Federal Reserve; and Jean-Claude Trichet
(right)
, president of the ECB. Their partnership would shape the course of the global economy.

T
he world’s central bankers met regularly at the Bank for International Settlements in Basel, Switzerland, where they had long discussions about economics and bank regulation and shared intimate dinners in the evenings over great food and wine. Between the meetings in Basel, on the sidelines of global economic summits, and economic conferences such as one each August in Jackson Hole, Wyoming, one central banker remarked that he seemed to see the other central bankers more often than his wife.

W
hen Ben S. Bernanke joined the Federal Reserve Board of Governors in 2002 after a long career in academia, he was very much the professor; he envisioned only a brief foray into government service. Four years later, he became one of the most powerful men in the world as chairman of the Fed.