Review: The Robespierres of central banking

April 5, 2013

By Dominic Elliott

The author is a Reuters Breakingviews columnist. The opinions expressed are his own.

The most lasting inheritance of the 2008 financial crisis may be a change in the purpose of central banks. From the 1980s until 2007, most believed that monetary authorities should primarily use a policy interest rate to combat inflation. Interventions in the markets or in the financial system were outside the remit, or so the orthodox view went. Neil Irwin’s “The Alchemists” shows how that thinking has been turned on its head.

Central banks now have vast power. The European Central Bank, led by Jean-Claude Trichet, flouted the spirit of the Maastricht Treaty by buying bonds of euro zone states; Mervyn King’s independent Bank of England became part of the political debate as it engaged in monetary easing on a vast scale; and Ben Bernanke’s Federal Reserve has experimented with even more radical and creative ways to fix the U.S. economy. Irwin, a Washington Post journalist, underscores just how revolutionary those moves were.

The book breezes through central banking’s troubled history, starting with the first central banker, Johan Palmstruch, a jailed debtor who assumed a new identity. He plunged Sweden into an economic depression and died a much-reviled man. Reichsbank President Rudolf van Haverstein’s unfortunate penchant for monetising German debt during World War One was another low point.

Irwin really provides spice, however, with a blow-by-blow account of the financial crisis and its aftermath. There’s a fine level of detail: Mervyn King dog-sledding at a central bankers’ convention in the remote Canadian territory of Iqaluit, for example. Central banking seems sexy after all, even if the claim that French President Nicolas Sarkozy’s walk at Deauville with German Chancellor Angela Merkel was the “most consequential stroll on a beach in history” is exaggerated.

Still, it’s an achievement to produce a page-turner that also explains the various ideologies of central banking. In essence, central banking has been a game of trial and error. And the seat-of-the-pants decision-making in the euro zone involved many strange manoeuvres. Bundesbank head Axel Weber reneged on his support of Trichet’s bond-buying plan, placing the euro zone in even greater peril. Meanwhile, Dominique Strauss-Kahn, head of the International Monetary Fund, was promising bailout money before he was authorised to do so.

Of the book’s three main protagonists – Trichet, Bernanke and King – only the U.S. Fed chairman comes out remotely well. His openness to new ideas is contrasted with King’s stubbornness and Trichet’s self-importance.

The author could have done more to consider the negative effects of flooding the global economy with cheap money. The concept of eurobonds – an important possible way to fix European finance – is also dismissed without comment. But China’s lack of central banking independence is highlighted as an important counterweight to the Western approach: the government’s authoritarian control of monetary policy helped the Chinese economy snap back with barely a blip post-crisis.

Irwin has produced a book that is highly readable and a riposte to Robert Pringle’s “The Money Trap”, which argues that the financial system is dangerously fragmented. For Irwin, the crisis has pushed central bankers to find solutions in concert. The alchemists may not have produced gold, but they provided enough monetary glue to hold societies together.

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