The Alchemists: Three Central Bankers And A World On Fire, by Neil Irwin, Penguin (RRP£25, RRP$29.95)
More than five years into the crisis we remain in Super Mario land, where central bankers are called upon to ditch their inherent conservatism and flex their one superpower – to print money in potentially infinite quantities.
Gone are the days when they could aspire to the “boring is best” approach advocated by Sir Mervyn King, outgoing Bank of England governor, at the height of the “great moderation” that ended with the global financial crisis. Monetary policy makers, in the past a reserved, cerebral bunch, have been thrown into the spotlight as they have assumed the role of firefighting saviours.
Chief among them are the protagonists of The Alchemists: Ben Bernanke, US Federal Reserve chairman, Sir Mervyn and Jean-Claude Trichet, European Central Bank president until Mario Draghi took over in November 2011.
Neil Irwin, a Washington Post journalist, focuses on the heavy interventions undertaken by the leading central banks that have caused the balance sheets of each to balloon. He attempts to enlighten us on the characters of all three men – we find out, for instance, that Mr Bernanke likes to wear jeans when he ventures into the Fed on a weekend. We are also given a tour of the institutions they represent. The Bank for International Settlements (BIS), the so-called central bankers’ bank in Basel, is well described as “a fortress of a building that might have been designed as a workplace for George Jetson”.
The book is scattered with titbits offering insight into the clubby, privileged, globe-trotting lifestyles of leading monetary policy makers. While in Basel, for example, they “drink with generous pours of Bordeaux and Burgundies, which attendees jokingly refer to as ‘grand cru BIS’ ”.
Few, however, are truly revelatory. Indeed, there is little that close followers of the world’s central banks will find new – although one tale reveals that Axel Weber, president of the Bundesbank, was the first to suggest that the ECB should venture into the government bond markets in an attempt to soothe market panic.
This is striking because Bundesbank presidents are renowned in the popular imagination for their hawkishness. In public, Mr Weber and Jens Weidmann, his successor, have both publicly criticised the ECB’s decision to buy bonds of the eurozone’s troubled sovereigns. But, according to Irwin, it was the former Bundesbank president, now chairman of Swiss bank UBS, who came up with the idea at a meeting of the central bank’s governing council in May 2011 in Lisbon. Mr Weber cooled on the idea the following day. Flying home, he fired off an email explaining his about-turn to his fellow policy makers in vain.
Irwin casts all three central bank chiefs in the mould of superheroes, though to varying degrees (Sir Mervyn comes in for most flak for failing to act fast enough at the start of the crisis). Mr Bernanke, in particular, is portrayed in a glowing light.
Yet the extreme measures undertaken by the central banks have led to sharp reprimands. Of the three, the Fed chairman has come in for the harshest, notably from the right of the US Republican party, where he is seen more as an arch-villain than saviour.
Irwin is dismissive of most of these barbs. He portrays former Congressman Ron Paul, author of End the Fed, as a free-market nut with a penchant for conspiracy theories, noting a hearing of the House financial services committee where he suggested the US central bank was involved with both the Watergate break-in and funding Saddam Hussein in the 1980s. Former vice-presidential candidate Sarah Palin is subjected to similar mockery.
However, more valid criticisms of central banks’ actions have been voiced in different quarters of late. The International Monetary Fund has joined the BIS in warning of the risk that central banks’ actions risk stoking credit bubbles. And Mr Draghi and Sir Mervyn, among others, have acknowledged this.
Central bankers have been brave. In Japan, Haruhiko Kuroda has deployed shock-and-awe tactics to devastating effect by pledging to double the monetary base by the end of next year. But their balance sheets remain bloated – the Fed’s stands at $3.25tn – and their actions have not been without risk to the financial markets and economies they are tasked to manage; or to their own reputations and independence from politicians. Their credibility will ultimately depend on how smoothly they are able to tighten policy.
The alchemists have pulled off an almighty trick. Their aggressiveness and innovation have helped stave off another Great Depression. For that they should be congratulated. But if the world starts to believe that their money printing is all a con, then they may find history casts them in a far harsher light than Irwin.
The writer is the FT’s economics reporter