Correction: An earlier version of this article incorrectly described then-Rep. Ron Paul as a senator. This version has been corrected.
In “The Alchemists,” Washington Post columnist Neil Irwin sets out to tell the important story of how central bankers — in particular, the Federal Reserve’s Ben Bernanke, the Bank of England’s Mervyn King and the European Central Bank’s Jean-Claude Trichet — have dealt with the ongoing financial crises here and in Europe. If your first thought is that the inner workings of central banks are like the inner workings of computers — incomprehensible and unimportant to all but the initiated — remember that, in late 2010, Jon Stewart featured Bernanke’s policies on “The Daily Show.” This stuff affects all of us.
At the end of the book, Irwin writes this about his central characters: “Each will be leaving his institution a very different place from the one he inherited, more deeply entrenched in the vagaries of politics, more thoroughly intertwined in the workings of high finance, with so many Rubicons crossed that there can be no hope of going back. No one can say that the Fed will never bail out an investment bank, or that the Bank of England will never try to preach to Parliament about how to manage its books, or that the ECB will never prop up government finances.”
We are in uncharted waters, and Irwin’s narrative, which presumes no previous knowledge on the part of his readers, explains through some fascinating characters how we got there. There’s Johan Palmstruch, who created prosperity and then panic in 1660s Stockholm when he introduced paper money and started to print it with abandon. There’s Rudolf von Havenstein, who ran the German Reichsbank after World War I and whom Irwin calls “very likely the worst central banker in history” for arguably creating the hyper-inflation that helped lead to the rise of Adolf Hitler. And there are the men who gathered on Jekyll Island in 1910, a meeting that eventually led to the creation of the U.S. Federal Reserve System despite enormous resistance.
At the core of the book are the people who have run these institutions in modern times. Irwin quotes Trichet, who stepped down as the head of the ECB in 2011, as saying, “I am convinced that economic and cultural affairs, that money and literature and poetry, are much more closely linked than many people believe. Poems, like gold coins, are meant to last, to keep their integrity, sustained by their rhythm, rhymes, and metaphors. In that sense, they are like money — they are a ‘store of value’ over the long term.” Meanwhile, King, Irwin says, “viewed his stewardship of the Bank of England and the British economy as something like directing a great musical performance.” And Irwin shows the more prosaic Bernanke’s quiet power in bringing other policymakers at an often fractious Federal Reserve around to his way of thinking.
There are several places where Irwin adds greatly to the understanding of the crises and their aftermath. He explains that part of the problem Bernanke was trying to fix in 2007 and ’08 was the deep exposure of European banks to the problems in the United States. “Since its founding, the Federal Reserve has been the lender of last resort for the United States,” he writes. “In late 2008, Ben Bernanke’s Fed became the lender of last resort to much of the world.” Later, in 2010, as the burden shifted from the Fed to the ECB, at a private meeting in the ECB president’s office in the Eurotower Bernanke put his finger to the Frenchman’s chest and said, “Now, Jean-Claude, it is your turn.”
Irwin also explains what happened when Congress was drafting the new regulatory regime that has become known as the Dodd-Frank Act. Chris Dodd, then a Democratic senator from Connecticut, initially tried to curtail the Fed’s power. At the same time, Rep. Ron Paul started a movement called Audit the Fed, which was an effort to make the institution’s inner workings more transparent. Although this was at a time when both Bernanke and the Fed were massively unpopular, the Fed mobilized its supporters, and in the end, nothing changed. Irwin reports that even Goldman Sachs CEO Lloyd Blankfein made a call to Sen. Bob Corker, a Republican from Tennessee, pushing for Bernanke’s confirmation to a second term. “What allowed this deeply unpopular agency to emerge from the crisis scratched and bruised but, if anything, more powerful than it had been before?” Irwin asks. “Its tentacles turned out to be so tightly wrapped around American business and politics — large and small, national and local — that it was almost impossible to kill,” he answers.
There are also some lovely touches. Irwin recounts how a 2011 celebration, held at the Alte Oper, Frankfurt’s historic opera house, to mark Trichet’s retirement, devolved into an argument among European leaders. As “Trichet and Merkel and Sarkozy hammered at each other in their back room, no resolution to be found, the notes of Mendelssohn’s finale echoed through the building, the music as jolly as the outlook for Europe was looking dismal.” Earlier, in 2007, at the annual meeting of central bankers at Wyoming’s Jackson Lake Lodge, a local rancher who was supposed to demonstrate the effects of horse whispering by getting a mare to submit to a saddle couldn’t perform. “The parallels with the financial crisis then just starting to unfold were so obvious that a murmur went through the crowd: Central bankers were whispering to the financial markets, trying to calm them. But just as in the show, soothing words might not be enough.”
Irwin is a true believer in central bankers. He thinks that they are all-powerful — hence the title — and that they are unequivocally a force for good. For instance, he writes, “Central bankers determine whether people can get jobs, whether their savings are secure, and, ultimately, whether their nation prospers or fails.” Hmmm. Some might argue that even the most spectacular central banker can’t make something from nothing. And while Irwin admits that some of the judgments made by Bernanke, Trichet and King were “far from perfect,” he also writes that the “story of central banking is also the story of civilization: discovering in fits and starts how to manage a just and prosperous society, forever taking small steps toward a better world.” Irwin’s book won’t convince those who aren’t already convinced.
Indeed, his own narrative undercuts his belief at times by pointing out just how clueless the Fed was as the financial crisis was brewing, and just how many mistakes the ECB made as Europe’s crisis intensified. Irwin wants his heroes to be heroes, but people in Ireland and Greece might disagree, as might people in the United States once the price for Bernanke’s cheap money policies becomes clear — because everything always has a price. Nor does Irwin acknowledge the deeper argument that the Fed actually played a role in creating the crisis, both by utterly failing in its supervisory role and by instilling a belief that the central bank will always step in to save the market, thereby contributing to a misallocation of capital. In other words, it’s too soon to be so sanguine. Someday in the not too distant future, we might be calling central bankers the anti-alchemists.
Three Central Bankers and a World on Fire
By Neil Irwin
Penguin Press. 430 pp. $29.95