Christine Lagarde, the managing director of the International Monetary Fund, had this to say Tuesday as she opened a conference to discuss the economic policy lessons of the last six years.
“Since the crisis, who have been the heroes?” Lagarde asked. “The heroes have not been heads of state, the heroes have not been ministers of finance . . . the heroes have been presidents, chairmen of central banks.”
So is Lagarde right? Are the global central bankers the heroes of the crisis? It's a question I’ve grappled with a great deal in writing a book about their efforts through the crisis and its long, ugly aftermath.
First things first: The word “hero” makes me uneasy, all the more so in a week in which brave people ran toward a horrible blast to rescue the maimed. Whatever you think of the performance of Ben Bernanke and Mervyn King and the rest, there is an enormous difference between sitting around ornate office buildings and debating interest rate decisions and the heroism of firefighters and soldiers.
But it is also the case that the job of the central bankers is an extraordinarily difficult one, with immense stakes. When they succeed, societies prosper. When they fail, the results can be catastrophic, never more so than when failures by the central bankers of the 1930s led to Global Depression, the rise of Nazism, and world war.
A great central banker must have a rare combination of skills, and the crisis and its long aftermath have taxed each of them. They must be a superb economist, able to reason through the correct judgment as to what ails an economy and what policy tools would help or hurt the situation. They need the leadership skills to guide a committee of fellow policymakers to agree with those judgments. They must be a skilled diplomat and politician, able to persuade political authorities to make sound economic policy that complements the work of the central bank. They need to be savvy about workings of the financial markets, able to parse what markets will do and how to communicate in ways that help policy work better.
There is no question that the leading central bankers acted with remarkable unity and common purpose during the final months of 2008, when they deployed trillions of dollars, euros, pounds, and yen to contain the most intense phase of the global financial panic. They were widely attacked, then and now, for deeply unpopular steps to rescue a financial sector that had caused the crisis to begin with; one survey in 2009 found that the Federal Reserve was less popular than the IRS.
There were plenty of mistakes made during that fall, starting with the Fed and the Bush administration failing to prevent the failure of Lehman Brothers to begin with. But it is hard to disagree with the broad thrust of what the global central bankers did during this period, of erecting a wall of money to stop the financial panic from spiraling into something much darker.
The record since then is more uneven.
Jean-Claude Trichet, the former president of the European Central Bank, made some major economic misjudgments, including two interest rate hikes in 2011 at a time that Europe began to slide toward a deeper crisis and recession. Bank of England Governor Mervyn King used his bully pulpit and political influence to be a leading voice for fiscal austerity starting in 2009; with hindsight, and given the stagnant British economy since then, it seems to have been premature.
The more successful of the leading central bankers in the aftermath of the Lehman crisis have been Mario Draghi and Ben Bernanke. Draghi, who succeeded Trichet as ECB president in November 2011, has used a deft diplomatic touch to build support (both within the ECB and among German political leaders) for an open-ended promise to act to keep the 17-nation currency area together; Trichet had been only willing to buy bonds as a smaller-scale, tactical strategy.
And Bernanke has repeatedly pushed the Fed to examine why the U.S. labor market hasn’t improved much, why earlier rounds of Fed policy hadn’t had more effect, and found new approaches to communication and bond-buying to try to get a better result. Whether it will work is still an open question, but in contrast to Britain and continental Europe, the U.S. has not dipped back into recession, and neither have fears of Bernanke's easy money policies sparking inflation materialized.
It’s easy to understand where Christine Lagarde is coming from in viewing these actions as a form of heroism, and had the central bankers not had the courage to take some bold actions over the last six years, the world would almost surely be in a darker economic place. At the same time, I wonder if there is a soft bigotry of low expectations at work.
The activism and boldness of the central bankers is, as Lagarde says, a contrast with the work of heads of state and finance ministers, which has been consistently been behind-the-curve and, with notable exceptions, not on par with the scale of the crisis. It was the European political leaders who couldn’t agree to a unified backstop of the continent’s banking system in the fall of 2008, and American politicians who failed to create a financial rescue fund until after Lehman had gone down. The central bankers were clearer-eyed about the risks facing the world economy, and more decisive and timely in addressing them.
So are the central bankers heroes? No. They’re guys who did their jobs, in some cases quite well, at a time that plenty of other key leaders didn’t do theirs.