From the U.S. to Europe, the stewards of monetary policy are tending to the financial system with greater nimbleness, creativity and maturity than their political counterparts or any other societal actor.
FROM THE ATLANTIC | DECEMBER 13, 2012
The Federal Reserve just announced a new round of measures designed to keep the money flowing. Central bankers -- not to be confused with the heads of private banks that have received so much opprobrium for their role in the financial crises of the past years - are not noted for their charisma or their communication skills, but their role in shaping today's world, shadowy at times, could hardly be greater. The question is: Are they helping or harming?
Almost exactly a year ago, on the night of Nov. 30, 2011, the world's central bankers acted swiftly to stave off yet another near-collapse of the global financial system. In the weeks before, equity markets had sold off hard as the eurozone continued to simmer, but that was a mere warning. The real crisis was soaring costs of borrowing for Italy and Spain combined with a nearly complete halt of lending between banks. That too had been the critical moment in the fall of 2008 -- once banks stop lending to one another, there is only so much cash on hand. Once depleted, that's it. No checks cleared, no money at ATMs, nada. You can easily imagine what happens then.
The actions the bankers took in the dark of night were relatively simple: They told the world's banks that they would be able to go to each central bank and get funds. That may not seem like much, but in the world of finance, it was enough, and it was everything.
Over the past four years of financial crisis, central bankers worldwide have been the only true stewards of international stability. In a world where finance has supplanted the military as security's prime guarantor and threat, central bankers are like generals: They guard and they protect. Of course, also like generals, they can and certainly have failed spectacularly in the past, with unenviable consequences.
Today they are not failing. They are tending to the financial system with greater nimbleness, creativity and maturity than their political counterparts or any other societal actor.
If you read that statement and react with incredulity, sputtering "wait a minute, inept central banks have been flooding the world with money, creating a massive debt bubble, kicking the can down the road and setting us up for unbearable years of inflation and depression in the years to come," well, take a number.
Bankers may be the stewards, but they are doing a lousy job convincing people of it. Multiple excoriating critics see in today's Ben Bernanke, Mario Draghi, Mervin King and their counterparts in Japan, China, India and elsewhere the same blinkered crew who mishandled the financial system in the 1920s and helped bring on the Great Depression. Long-time Wall Street watcher Brian Wesbury summed it up well when he said ahead of yesterday's Federal Reserve announcement about continued measures to provide funds, "I wish the Fed would just go away." That was more polite than many others, who dismiss the Fed, the European banks, and indeed all bankers in words often unprintable. As Jim Rogers, the maverick, motorcycle-riding, Singapore-based commodity king once told me, "Ben Bernanke couldn't manage a corner lemonade stand let alone the U.S. financial system."
Much of the verdict will depend on the future. If over time the global system establishes a new equilibrium of lower growth and less debt in the developed world, juxtaposed with higher growth and less savings in the developing world, then the actions of today's central banks will be lauded and seen as a key element in making that transition possible. If, however, we are simply in a lull of a multi-year crisis that will get substantially worse before it gets significantly better, then today's banks will be seen not as stewards but as successors to the same crowd that abetted the Depression and mismanaged inflation in the 1970s.
Given that none of us know the outcomes here, current views are dictated by ideology. If you think fiat currency and excessive debt have become detached from organic economic growth and that bankers are, as some critics have claimed, dealing heroin to sovereign addicts, you're unlikely to consider them anything but fools and knaves. But the other perspective is just as credible. In a world where mature leadership is lacking in legislatures around the world, the bankers are proving to be giants among pygmies.
Think of the so-called fiscal cliff negotiations: Imagine a conclave of Republicans, Democrats, the president, economists, labor and business leaders having a series of summits about the long-term challenges of revenue versus expenses versus demands placed on governments and societal needs. Imagine seriously different viewpoints subsumed under the general umbrella of "we must create solutions and we are entrusted by the people to do so." Imagine a similar guiding principle animating the leaders of the European Union when they meet for their leader's summits. Well, imagining that is just about as starry-eyed idealistic as a John Lennon song.
Yet, that is precisely what the world's central bankers tend to do. As this recent report in the Wall Street Journal showed, they have been engaged in nearly constant dialogue and debate over the past years with one guiding principle: Keep the financial system intact and functional, especially given the paucity of clear and consistent responses coming from elected governments. Mario Monti's technocrat government in Italy, soon to end, was the closest thing to economic stewardship that we've seen of late in actual governments. And now he's retiring.
Unlike some elected officials, central bankers have also been keenly aware that whatever they do is bounded and limited. They also seem to be much less ideological about solutions than either their own predecessors or today's political parties. The critique of the bankers of the 1920s was that they were more wedded to economic orthodoxies about how the world should work than economic policies to help the world actually work. The same can be said of political parties today. Opposition to raising taxes, sharing economic burdens, and tackling labor market or social spending issues ends not in problem-solving but ideological rigidity.
The bankers, in short, are doing what everyone in a position of influence should do: attempting within the limits of their abilities to provide for the common good. Yes, they are guilty, Bernanke included, of technocratic arrogance at times, with an alarming certainty that they know how to manipulate the levers of finance. The future may prove today's critics correct. Until then, those critics are but one voice, no matter how loud, passionate and angry. In the past four years, central bankers have been less arrogant than creative, and they have tried to craft answers to intractable questions. For the moment, at least, they have kept the dogs of anarchy at bay. A modest achievement, perhaps, but one we'd all like to surpass.