Neil Irwin is the author of “The Alchemists: Three Central Bankers and a World on Fire,” He is a Washington Post columnist and editor of Wonkblog.
You knew something had gone horribly awry with the way the world works when traders, financial journalists and officials who track economic policy focund themselves obsessing over a vote in the Slovenian parliament.
It was late September 2011, and Europe was in a particularly dark phase of its crisis. The governments that use the euro currency had to approve, one by one, a new fund that would shore up the continent’s debt. All 17 of them had to do it, or half a century of progress toward a united Europe could have been thrown in reverse.
And there was a snag in Slovenia.
Yes, a nation of 2 million people and a GDP that rivals that of Rhode Island held in its hand the economic fate of the euro zone’s 332 million residents. And because global markets were jumping wildly on every sign of progress or unraveling, the savings of basically everyone on Earth hinged on what was going down in Ljubljana.
But that episode was more than just one of the stranger moments of the sprawling financial and economic crisis that has gripped the globe for nearly six years. It also exposed something deeper: On both sides of the Atlantic, democratically elected institutions have been helpless, slow or unable to act on the scale needed to protect the leading Western economies. And time and again, the central bankers — a group of secretive, unelected technocrats — have stood up while presidents and parliaments dithered.
In a democratic society, there will always be tension over which decisions should be made by expert appointees, and which by those with the legitimacy and accountability that come with competing for citizens’ votes. The technocrats can make complex decisions quickly, quietly and efficiently. The words “quick, “quiet” and “efficient” are rarely applied to the U.S. Senate or the Italian Parliament — but these institutions are imbued with an authority that comes directly from the people, the explicit consent of the governed.
So, in a crisis, which do you want: unaccountable decisiveness or inefficient accountability?
Consciously or not, we’ve made our choice: The financial crisis and its long, ugly aftermath have marked the triumph of the technocrats.
And the shift of power to the unelected isn’t confined to economic policy and central bankers. In the United States, massive health-care costs threaten to bankrupt the nation if left unchecked; the key method the Obama administration pushed for in its 2010 health-care reform law to deal with the threat was a 15-member Independent Payment Advisory Board, which will recommend ways to reduce Medicare costs that will take effect automatically unless Congress overturns them.
Legislative action to combat global warming has been nonexistent in the United States since 2009. Instead, it is left to bureaucrats at the Environmental Protection Agency to use what legal authority they have to nip around the edges of carbon emissions, and to officials in the Energy Department and a handful of other agencies to help finance companies that can find ways to make the country more energy efficient.
But it is in the economic sphere that democratic ideals have been most neglected, on the greatest scale and with the greatest near-term stakes. Twice during the darkest days of the financial crisis, the Federal Reserve engineered multibillion-dollar rescues of financial firms in mere hours — first the $30 billion bailout of Bear Stearns in March 2008, then $85 billion for AIG in September of that year. In both cases, the closest thing to a blessing the Fed received from democratically elected officials was a letter from Treasury Secretary Hank Paulson supporting the actions. It was a multibillion-dollar permission slip.
Such dramatic actions can be chalked up to the exigencies of time; if the Fed had not pursued its late-night activism, the financial system could well have imploded when the market opened (as it did when the Fed and the Treasury concluded that they couldn’t save Lehman Brothers, allowing it to go bankrupt). After Lehman’s collapse and AIG’s bailout, Paulson and Fed Chairman Ben Bernanke asked Congress for a $700 billion bank bailout through the normal democratic channels.
It took 15 days for Congress to do its work, including one ugly day in which the House initially rejected the legislation, sending the stock market down 700 points. Perhaps the deepest recession in postwar history wouldn’t have been quite so bad if Congress had moved as crisply as the unelected guys at the Fed had, and the flood of money to prop up the banking system had started flowing two weeks earlier.
But more remarkable still is the dereliction of duty by lawmakers in slower-moving crises, not least a U.S. economy that for four years hasn’t grown fast enough to recover lost ground, leaving millions of Americans jobless.
In my conversations with Fed officials during those years of slow, grinding growth, I frequently heard a sense of frustration, even exasperation, that they have been, as Sen. Chuck Schumer (D-N.Y.) put it to Bernanke in a hearing last year, “the only game in town.”
Congress has sat on its hands while the Fed has sought to boost the U.S. economy with tools that are particularly ill-suited. The central bank’s main instruments for boosting the economy — its target for interest rates — has been at rock bottom for four years and counting. It has tried buying trillions of dollars in longer-term securities, which seems to have helped propel the stock market and lower mortgage and other interest rates, but the Fed appears to be getting less bang for every hundred billion bucks it deploys — and the strategy has come at some risk of inflation and new bubbles.
But the way Fed officials have reacted to this frustrating situation is instructive. Their job is to take the world as it is and do the best given the powers they have. Rather than throw their hands up, they have tried to rethink why their earlier efforts haven’t brought a robust recovery, and adjust accordingly.
Bernanke’s real fight at the Fed over the past year has been a war on fatalism, against the sense — apparently held in Congress — that once you’ve tried something and it doesn’t work, the proper response is to announce that it is someone else’s problem.
The less-than-democratic workings of recent U.S. economic policy seem positively Jeffersonian compared to Europe. Since the global financial crisis pivoted to Europe in 2010, the European Central Bank (ECB), in Frankfurt, Germany, has become not merely the institution that controls the value of the euro, but something of a monetary enforcer — using its credibility and bottomless reservoir of euros to demand that European governments toe its preferred line on all sorts of policies.
Along with officials from the International Monetary Fund and the European Commission, ECB officials have been on the ground in Greece, Ireland and Portugal, scrutinizing every aspect of their budgets and regulations. And they mandate, as a condition for the bailouts, that those nations’ governments change their tax policies, labor market regulations and pension programs. When a central bank is dictating to the Greek government that it privatize its electric utility and revamp its health-care billing system, something has gone horribly awry in the birthplace of democracy, too.
Similarly, when the ECB began buying Italian and Spanish bonds in August 2011 to try to stop the crisis from busting up the euro zone, there were strings attached. Then-ECB President Jean-Claude Trichet sent letters to the two nations’ prime ministers, laying out the fiscal policy changes they had to enact to remain in the ECB’s good graces. When Italian Prime Minister Silvio Berlusconi showed signs of wavering in the weeks that followed, Italian borrowing costs spiked. Berlusconi was a kitten chasing a string of yarn, and Trichet was holding the ball.
None of this is a great way to run a society. Like most journalists, I believe in transparency and accountability. I wish the Federal Reserve’s policy meetings were broadcast on C-SPAN. Instead, we get written transcripts five years later. (That still beats Europe, where such information is under lock and key for 30 years.)
Yet, when the world is on the brink, decisive problem-solving trumps the niceties of democratic process. I won’t like it much — but I’ll take it.
Read more from Outlook: