Off the Shelf: ‘Alchemists’ Looks at Central Bankers’ Handling of Crisis

Europe still lurches from one numbing financial debacle to another, with no resolution in sight. For better or (as many say) worse, the European Central Bank has tried to rescue governments from looming defaults on debt, imposing pain and sacrifice on Ireland, Greece, Portugal, Spain, Italy and, most recently, Cyprus. Though critics say the European bank is using monetary policy to force fundamental changes better left to elected politicians, others say that at least it has the backbone to act.

Mr. Irwin, a Washington Post columnist who covered the Fed in the financial crisis, has provided an accessible, engrossing account of the tribulations that Mr. Bernanke, with Mervyn A. King of the Bank of England and Jean-Claude Trichet of the European Central Bank, endured in pulling the world financial system back from collapse. Mr. Irwin’s new book, “The Alchemists: Three Central Bankers and a World on Fire” (Penguin Press, $29.95), describes a learned order of government bankers and economists who meet often, sharing “a closeness unheard-of elsewhere in international relations.”

“They speak the same language,” he says, observing that central bankers “understand more deeply than perhaps anyone else where other countries are coming from.” Why do we care? “Mankind has given them incredible power.”

Many revelations of “what really happened” behind the scenes in politics tend to rely on one or two good sources who blab. Not true of this one. Mr. Irwin seems to have talked with everyone, read the right scholarly papers and interviewed important dissenters in the Fed, the European Central Bank, the Bank of England and the Bundesbank. Much of his sourcing was on “deep background,” but he has produced a well-rounded account.

He has a nice touch for translating central banking’s mysteries, opaque and forbidding, into understandable English. He is astute in describing the internal and external politics of institutions traditionally expected to remain above politics of the usual sort. He may tell you more than you want to know about the subtleties of picking a new president for the European Central Bank. But he shows how in its hour of need, the Fed, supposedly a political naif, was more than a match for its Congressional foes in the financial crisis.

In 2009, after the wildly unpopular bailout of big banks, political rage toward the Fed was bipartisan and extreme. Christopher J. Dodd, the Democratic chairman of the Senate Banking Committee, planned to build a landmark regulatory reform bill around stripping the Fed of its power to regulate banks. The libertarian Representative Ron Paul, a Republican, was pushing a proposal for Congress to audit the institution, a mandate that sailed through the House. Mr. Bernanke’s first term as chairman was running out.

Senator Dodd saw his proposal melt like ice in the noonday sun. Timothy F. Geithner, the Treasury secretary, insisted that the very largest banks remain under the Fed’s watch. Smaller banks lobbied to keep the Fed’s 12 regional reserve banks as their regulator, making a populist case that the arrangement was a counterweight to dominance by Washington and New York.

One Dodd proposal would have required presidential appointees, rather than each bank’s board of directors, to select the 12 reserve bank presidents, including the powerful New York Fed president, but that idea went nowhere. The Paul demand was watered down to tolerable. And Mr. Bernanke, easy to denounce but too capable to be spared, comfortably won reappointment.

Though the book’s accounts of the euro zone’s crises are at least as intricate, savvy and detailed, the Fed inevitably takes center stage. Mr. Irwin is by no means a starry-eyed acolyte, yet there is little doubt his sympathies lie with Mr. Bernanke. He admires the chairman’s efforts to devise novel ways to pump money into a faltering economy. “The Fed created so many emergency lending facilities,” Mr. Irwin says, “that a document just listing and summarizing them required a legal-size piece of paper covered in small type.”

Mr. Bernanke’s Fed did what he decided it had to do, and never looked back. “For nearly a century, the Fed had been lender of last resort to American banks,” Mr. Irwin writes. “In the space of three months, it expanded that role to encompass both banks headquartered across Europe and the masters of the investment universe on Wall Street.”

The author has written a squarely centrist account, echoing conventional wisdom that might place Mr. Bernanke second only to the sainted Paul A. Volcker in the pantheon of Fed chairmen. The book mentions but never really explores concerns by more conservative bankers that the central banks have fatally jeopardized their independence by plunging into political thickets beyond their brief.

Nor does the book give more than passing attention to criticism from the left, voiced most insistently by Paul Krugman, who in New York Times columns loudly deplored “Europe’s Austerity Madness.” Though Mr. Bernanke vowed that the Fed would never repeat its dreadful mistakes of willful inaction during the Depression, Mr. Krugman accused him last year of doing just that, being intimidated into an “abdication” by irate Republicans.

Yet there are limits to the central bankers’ accomplishments and an apt double meaning to Mr. Irwin’s title, “The Alchemists.” Wizardry, yes, but the true alchemists never succeeded in transforming ordinary metals into gold. For all the bankers’ learned theories and late-night deliberations, American economic growth remains sluggish and Europe still suffers from rising unemployment and stagflation.

So, Mr. Irwin writes, their triumph is what didn’t happen: “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.” As he puts it: “It may seem like damning with faint praise, but a catastrophe averted is no small thing.”

Article source: http://www.nytimes.com/2013/05/05/business/alchemists-looks-at-central-bankers-handling-of-crisis.html?partner=rss&emc=rss