Irwin is on target in describing the Fed’s famous 2005 Jackson Hole meeting and the procession of economists lionizing Greenspan as the greatest Fed chairman ever. Even monetary economist Allan Meltzer, among the great historians of the institution and a staunch conservative, genuflected before Greenspan. Yet even in 2005, the cracks were starting to appear in the U.S. banking system. Officials from the Fed and their colleagues in the economic profession congratulated themselves with supreme confidence that inflation, jobs and growth were all manageable via the right government policies. The U.S. federal debt grew unabated and excesses were visible in the housing market, but low unemployment and buoyant economies around the world blunted complaints.
Only when some of the major Wall Street firms started to implode in 2007 did Fed officials really begin to understand that the idea of global bureaucrats managing economies and avoiding serious financial corrections was an illusion. Irwin notes that officials at the Federal Reserve Bank of New York dismissed warnings about the housing sector as early as 2005—a policy of deliberate ignorance that has received far too little attention. The fact that serious economists could ignore the special demographic factors underlying the period of the “great moderation” remains a source of wonderment to this reviewer. The housing bust that began in 2007 was largely the result of a phenomenon that began six decades earlier, when World War II soldiers came marching home, started families and had lots of babies. As the baby boomers reached retirement, an inevitable decline in housing sales was the result.
THE BERNANKE Fed has been distinguished by greater openness and transparency than previous regimes, but this does not necessarily mean greater understanding on the part of the public about what central bankers do. By focusing on Trichet, Bernanke and King, Irwin has indeed placed our attention on the key policy makers in global finance over the past decade. The largest part of The Alchemists is devoted to telling the story of how these men navigated the crises that seemed to cascade across the U.S. economy and then Europe. Irwin is not particularly critical of Bernanke, former New York Fed president and later Treasury Secretary Timothy Geithner, or any of the other players in this financial and economic drama. The role of Geithner, for example, in the bailouts of American International Group and Citigroup is treated in generous and approving terms. Irwin essentially says a government rescue was the best course. “We came very, very close to a depression,” Bernanke warns. “The markets were in anaphylactic shock.” This sort of logic is used frequently by Fed officials to justify virtually all of their actions and omissions from 2007 onward.
Respectful references are made to Bernanke’s studies of the Great Depression, especially his conclusion that allowing large firms to fail is bad. But the only lesson learned by the former Princeton economics lecturer seems to be that bailouts and deficits are the best course. Five years after the crisis, the FOMC continues to subsidize the structural fiscal deficits enacted by Congress. Echoing the arguments of most Fed officials, the author bemoans the fact that Lehman Brothers was not somehow saved and that fiscal austerity has followed decades of libertine fiscal delusion in the industrial nations. Like the intellectually pugnacious Nobel laureate Paul Krugman and Bernanke himself, Irwin seems to suggest that printing money and issuing new debt were reasonable policy choices.
But the sad fact is that Lehman Brothers could not be sold and had to fail. And nations such as Britain that lack sufficient economic growth must restrain their spending. Compare the resolution of Lehman to the continued “anguish” of Bank of America over time and economic resources lost because of litigation over legacy mortgage-backed securities. Citigroup, likewise, wallows in Japan-like torpor under the weight of hundreds of billions of dollars’ worth of moribund assets. The litigation against Bank of America could still force a legal restructuring à la Lehman Brothers, depending upon how the courts decide key issues related to billions of dollars in claims.
Bernanke and his counterparts in Europe have worked tirelessly to keep under wraps situations such as Bank of America and many others like it in the EU, but this merely keeps those situations unresolved. King, for example, faces a UK banking system that has been crippled since 2007, and the final disposition of several large banks remains up in the air. The main players among the central bankers never actually seem to get around to dealing with real-world problems such as zombie banks, those economically deformed financial institutions whose net worth is less than zero but which continue to operate because they are shored up by governmental credit support. If there is a weakness in this thorough book it is that, while the author makes a number of useful observations as part of a largely journalistic narrative, he could have provided more critical analysis of the actions taken and not taken by his three main protagonists. I’d like to know more about what the author thinks of these events and issues.
The decision to build a wall of money, as Irwin accurately describes it, to meet the crisis was no doubt a practical choice. It also put Bernanke, Trichet and King, however, in the position of picking winners and losers, and ultimately making highly significant political decisions that once required democratic assent. The most recent 2013 Fed bank stress tests, for example, had one purpose: to present a convincing facade as to the health of zombie banks such as Citigroup and Bank of America. The central bankers’ support for rescues of countries such as Greece and their de facto embrace of the concept of “too big to fail” work against the public’s interest in terms of economic efficiency and long-term growth. Without restructuring, there is little chance for growth.
Irwin describes the clubby atmosphere at private meetings and dinners in which the central bankers foster an environment where bailouts are considered routine while tough questions are often avoided. A reader of this book could contrast the sharp rebukes of Mervyn King to the UK government over its runaway deficits with the accommodation of Bernanke’s FOMC and Trichet’s ECB toward their respective host governments. Using Irwin’s own criteria from his tough judgment of Arthur Burns, Bernanke has shown a lack of courage to face the necessity of restructuring the big banks and ending Washington’s fiscal dysfunction. King emerges in this book as the clear leader in force of advocacy and in courage.
Is there another Paul Volcker waiting in the wings, prepared to slap sense into spendthrift American politicians on federal spending? Perhaps, but was Volcker really so radical a departure from Burns? Or Greenspan after them? In terms of their willingness to bail out large banks, Volcker is the father of “too big to fail,” and Bernanke seems little different. The alchemists led by Bernanke, Trichet and King were right to buy time with the wall of money, but they erred by not using that precious time to restructure the economies of the United States and Europe. By following the philosophy of Volcker and Bernanke—that it is bad to allow big enterprises to fail—we have missed an opportunity to restore a more stable, sustainable path to the future. The rise of the alchemists among central bankers has given us less political accountability, less economic restructuring and renewal, and far fewer real possibilities for growth in the global economy. The reality remains that nobody can spin straw into gold, not even central bankers.
Christopher Whalen is a writer and investment banker who lives in New York City. He is the author of Inflated: How Money and Debt Built the American Dream.Pullquote: Since the 2007 crisis, while Congress has hid its head in the sand with respect to fiscal issues, the Federal Open Market Committee effectively has managed both fiscal and monetary policy.Image: Essay Types: Book Review