by Neil Irwin
“Good afternoon, everybody,” Bernanke said a bit after 1 p.m. that Tuesday. He welcomed Sarah Bloom Raskin, a newly confirmed governor, who was participating in her first in-person meeting. To laughter, he noted that Janet Yellen, while newly confirmed as vice chairman, had been to “a few meetings” before. And so the meeting began.
There is always a certain formality to FOMC meetings. Committee members gather in a grand room and follow a rigid agenda: First the briefings from staff, then go-rounds in which each official speaks for a few minutes about his or her view of the economy and policy. The participants, who might be “Ben” or “Bill” over coffee in the hallway, are “Chairman Bernanke” and “President Dudley” when the FOMC is in session. And ever since the 1995 decision to begin releasing transcripts of the meetings with a five-year delay, the gatherings have been somewhat stilted, with officials reading prepared remarks rather than engaging in extemporaneous discussion. Even when there is little controversy over policy, committee members meticulously split hairs over how to phrase their postmeeting statement. Did the U.S. economy grow “modestly” or “moderately” in the previous six weeks? Only the FOMC could spend several minutes debating the distinction.
The QE2 meeting was a little different.
The “Will we act?” question had been more or less resolved at the September meeting, at which the tide shifted toward an answer of “Yes.” And the conference call two weeks earlier had been enough to work through the details of the program. All that was left, really, was for the policymakers to make their last, best arguments for the directions they favored. When the transcript is released in early 2016, it will show the strongest advocates of more easing—Yellen and Dudley, plus Charles Evans of the Chicago Fed and Eric Rosengren of Boston—making their case in sometimes moralistic language about the necessity of doing something to put more of the then 15.1 million unemployed Americans back to work at a time when inflation was too low.
The inflation hawks—Richard Fisher, Jeffrey Lacker, Charles Plosser, and Tom Hoenig of the Federal Reserve banks in Dallas, Richmond, Philadelphia, and Kansas City, respectively—will come across as even more impassioned. They painted an ugly picture of what QE2 could do: fuel bubbles in the stock market and commodity prices and compromise the Fed’s independence by putting it in the position of effectively printing money that would help fund government deficits. The central bank, they said, shouldn’t take ownership of an economic dilemma beyond its power to solve. Warsh, normally Bernanke’s closest ally, related his objections with a vehemence that would make his Wall Street Journal op-ed seem reserved. Twice people jokingly called him “Axel” for his hawkishness—implying that he sounded like German Bundesbank chief Axel Weber.
It wasn’t grandstanding, exactly, on either side of the debate. It was accepting that a decision had been made and ensuring that the historical record would contain no ambiguity on where each man and woman stood. They went around the room, voicing their final votes. Of the hawks, Warsh voted with the majority out of loyalty to Bernanke (and with the knowledge he would spell out his views in a Wall Street Journal op-ed a few days later), and of the rest only Hoenig had a vote. The decision was made ten to one, the statement hammered out, and the fax readied for transmission to the press room in the basement of the Treasury Department.
Glenn Beck, YouTube, and the continued dismay of certain members of the G20 awaited.
• • •
The huge, Florentine palazzo–styled headquarters of the Federal Reserve Bank of New York, a few steps from Wall Street in lower Manhattan, is an imposing building. It has thick stone walls and, suitably for a building whose basement contains the largest stockpile of gold in the world, thick iron grates guarding the windows on its lower floors. During the 1930s, as ominous clouds appeared in Europe and Asia foreshadowing a second world war, the governments of the world one by one decided that New York would be a safer place to keep their gold than at home. The New York Fed was happy to oblige, offering up its vault, hard against the bedrock of Manhattan Island eighty feet below street level, as a location for storage. There are 122 cages containing gold stored for many of the world’s governments and central banks—their exact identities a closely held secret. In total, they hold about $350 billion worth of gold at early 2012 prices, more or less the annual economic output of Thailand.
That’s exciting for tourists who want to hold a gold bar (worth about $600,000 at recent prices, and even heavier than you’d expect) and for movie producers who want to create an elaborate heist scene (as in Die Hard: With a Vengeance). But for the New York Fed, it’s just a sideline business—the equivalent of a local bank branch renting out safe-deposit boxes in an otherwise unused corner of its vault. The real money is two hundred feet above, in a conference room that could be in any office in the world: white walls, a single window, a light-colored wooden table that seats ten. That’s where, on a Friday in November 2010, Dina Marchioni and her band of young traders set about executing QE2.
The FOMC can only set the direction for policy. It falls to the staff of the New York Fed to actually intervene in the financial markets, buying and selling securities, to enact that policy. The directive from the committee after the November 3 meeting was to buy $75 billion worth of longer-term Treasury securities each month for eight months, for a total of $600 billion. But what securities exactly, and from whom would they be purchased? The answers on November 12 were: any Treasury bonds maturing between 2014 and 2016, and whoever offered the best price.
Marchioni often brings Danishes or bagels on special occasions, which the start of QE2 certainly was, although it is lost to history what breakfast pastry was on offer that Friday. Three “trader/analysts” sit in Aeron chairs at computer terminals facing the wall. Marchioni sits behind them at the conference table, observing. An IT person sits off to the side, there in case the computers fail. Josh Frost, a slim man in a dark suit and Marchioni’s boss, stops by most days to make sure everything goes smoothly. There are a huge flat-screen television airing CNBC, a digital clock, accurate to the second, and, along one wall, three workstations, each with three flat-screen computer monitors, one displaying current market data through Bloomberg’s financial information service, the others indicating offers from investors around the globe routed through twenty major financial firms known as “primary dealers.”
When the Fed is ready to buy, a special sound emanates from the computers on trading floors at each of the primary dealers. It’s a strange, fluttering tone—the musical note F, followed by an E, followed by a D, in rapid succession. F-E-D means that the Fed is in the market. The dealers then have forty-five minutes to put in their offers—the Fed is indifferent as to whether they involve securities the giant banks own themselves or those owned by their clients. Marchioni’s staffers monitor the incoming offers, and when one comes in that doesn’t make any sense—the bank is offering to sell bonds to the Fed either way above or way below the market price—they press a button on an elaborate phone known as a turret (the one in front of Marchioni has a sticker on it identifying it as the Super Turret) that immediately connects them with the trading floor at J.P. Morgan or Barclays or Goldman Sachs or whichever dealer may have put in the offer.
On that first day of QE2, the offers were piling up: The dealers were ready to sell $29.039 billion in bonds to the Fed. The traders watched as a computer program sorted the incoming offers to find the ones that offered taxpayers the best deal. After all, a bond maturing in October 2014 should have a different price from one maturing in January 2016, so their job is to ensure that they buy the ones in which dealers are offering the best relative price.
With one minute to go, the traders’ computers begin flashing red. They watch CNBC and monitor the Bloomberg feed to make sure there is no major market-moving news; in that event, they might delay the end of the auction in order to give the bidders time to adjust their offers accordingly. When the clock expires, the Fed’s computer sorts t
hrough all the offers to choose the ones that offer the best deals. On November 12, 2010, of the $29 billion being offered on twenty-four different individual securities being offered, the best prices were being offered for sixteen different securities, such as $141 million for a Treasury bond scheduled to mature on February 15, 2015, that when originally issued offered a 4 percent yield.
The traders had bought billons in bonds, which were now owned by the Federal Reserve Bank of New York. The sellers—the banks and their clients—had billions of newly created dollars sitting in their accounts, money that they could lend out or spend to their heart’s content. The traders would repeat the practice 139 times over the ensuing eight months, until an extra $600 billion was floating around the world economy. Those dollars would, if Bernanke and Dudley were right, create more lending and investment—or, if the hawks were right, higher prices and bubbles.
• • •
As the opposition to QE2 escalated in the days after the decision, Bernanke’s Fed was under siege from all sides—from American conservatives, foreign powers, some of his own colleagues, and financial commentators whose views weren’t too different from those of the animated talking bears. The tradition of keeping quiet and communicating through formal written statements had ill prepared the Fed for a commensurate response. On the afternoon of the decision, Bernanke’s calendar listed two hours of “Calls w/media”—but those were apparently all off the record. Even the efforts to push back were hardly smashing successes.
Bernanke wrote an op-ed for the Washington Post that was published the next day, and in December he sat for another of his rare television interviews, again with CBS’s 60 Minutes. “One myth that’s out there is that what we’re doing is printing money,” Bernanke told anchor Scott Pelley. “We’re not printing money. The amount of currency in circulation is not changing. The money supply is not changing in any significant way.”
Bernanke was being too clever, taking advantage first of the fact that QE2 increased the amount of money in the economy through electronic means, not by literally printing cash. But of course, a hundred dollars in a bank account is just as much money as a hundred-dollar bill in someone’s pocket. His second point, about the money supply, was an extremely subtle one: The Fed’s purchases would increase “monetary base” or “high-powered money,” increasing the number of dollars circulating through the economy only if the banks and individuals with extra dollars in their accounts lent out or spent the cash. This too was disingenuous—the whole action was premised on the hope that they would do just that.
Comedy Central’s The Daily Show with Jon Stewart was the first to point out the contradiction between Bernanke then and what he’d said on the same show, with the same host, twenty-one months earlier. In March 2009, describing the Fed’s earlier round of asset purchases, Bernanke had said that “to lend to a bank, we simply use the computer to mark up the size of the account that they have with the Fed. So it’s much more akin to printing money than it is to borrowing.”
“You’ve been printing money?” Pelley asked in 2009.
“Well, effectively,” said Bernanke then.
Stewart joked that the Fed wasn’t printing money—it was “imagineering” it.
Whatever you call it, by some important measures, QE2 worked. In terms of economic growth and job creation, the next year was stubbornly sluggish. But after a summer in which economic data was pointing to a possible new recession and very low inflation, financial markets responded as quantitative easing shifted from a distant possibility in early August to a certainty in early November. Inflation expectations moved upward from 1.2 percent in August 2010 to right at about 2 percent in early 2011, roughly what the Fed was aiming for. By early 2011, the odds of the U.S. economy slipping into deflation were minuscule, bolstering Bernanke’s theory that a central bank need never allow falling prices.
Yet Bernanke and his colleagues were confronting a new variety of criticism. For generations, central bankers had steeled themselves against politicians who argued that money was too tight, interest rates too high. That’s what it traditionally meant to be independent—to have the courage to raise interest rates when the economy was overheating and inflation was a threat.
But now, up was down, dark was light, and politicians—at least on the right—were clamoring for tighter money at a time of mass unemployment. The Bernanke committee management strategy, of pushing the action through over the course of three months, three FOMC meetings, and a series of speeches, may have been the best way to get a sprawling group with a wide range of views to come together. But it also served to make the action feel like a giant step toward easy money. Similarly, the decision to announce a single gigantic number surely played a role in the blowback. After the U.S. government had enacted a $700 billion financial bailout and a nearly $800 billion, deficit-financed tax-and-spend package in the recent past, the $600 billion in bond purchases sounded to many critics like more of the same—even though the action likely reduced the budget deficit, because the Fed returns the interest earned on the bonds to the Treasury.
The Federal Reserve, as the Dodd-Frank debate had shown all too well, exists at the pleasure of Congress. To have one of the nation’s two major political parties engaged in all-out assault on the idea of “printing money” left many on the FOMC who voted for more easing in the form of QE2 wary of doing so again. The chairman now had a clearer idea of why the Bank of Japan had seemed so timid a decade earlier, when he was urging it toward activism.
“I’m a little bit more sympathetic to central bankers now than I was ten years ago,” Bernanke said in a press conference in June 2011, a weary smile on his face.
Part IV
THE SECOND WAVE, 2011–2012
SIXTEEN
The Chopper, the Troika, and the Deauville Debacle
The Irish press called him “the Chopper.” At 8:45 the morning of Thursday, November 18, 2010, Ajai Chopra departed the Merrion Hotel in Dublin and walked the fifteen minutes to the Central Bank of Ireland for a day of meetings, trailed by photographers. The deputy director of the International Monetary Fund’s European division had suddenly become one of the most famous men in Ireland—and here was a chance to capture an image of the man “ready to rip up the books and offer the country billions” walking past street beggars hoping for some spare change. The symbolic resonance couldn’t be beat.
Ireland had been one of Europe’s great economic success stories of the previous two decades, emerging from relative poverty to become arguably the eurozone’s most dynamic economy. Its free labor markets and low corporate taxes made it a popular destination for international firms looking for a European outpost. Its government was efficient and generally free of corruption, and its public finances before the crisis were impeccable. But when Irish officials decided on September 30, 2008, to give government guarantees to their banks, the nation’s financial situation fell apart with remarkable speed. “What’s the difference between Iceland and Ireland?” asked a joke that went around in 2009, referring to the tiny Nordic nation whose banking system had imploded the year before. The answer: “One letter and six months.”
But while in many ways the joke proved all too prescient, it was the differences between the two nations that had the Chopper in town. First, Iceland had its own currency, which collapsed 58 percent against the dollar in 2008, setting the stage for an economic rebound as exporters became more competitive. That country’s unemployment rate peaked at about 8 percent. Ireland’s unemployment rate rose to 14.8 percent in November 2010. Second, Iceland’s banking system was small enough that its institutions could fail without endangering the entire European or world banking systems. Ireland’s couldn’t—at least that was a widespread view among European officials.
“I’m not used to a situation where I’m so recognizable,” Chopra said in an interview on RTÉ television. “People have come up to me, calling me by my first name as well, but they’ve done
it in a very polite and very gracious way, and they’ve always wished me the best. And I think this pluck of the Irish is coming out in this crisis.”
So were the representatives of various international bodies offering bailout loans in exchange for strict concessions from the government. Klaus Masuch, a German economist with a reputation as a tough negotiator and a proclivity for short-sleeved dress shirts, was in Dublin for the European Central Bank. István Székely, a Cambridge-educated Hungarian who had worked for his nation’s central bank and the IMF, was there on behalf of the European Commission’s Directorate-General for Economic and Financial Affairs. Reporters stationed themselves outside the Central Bank of Ireland and shouted, “IMF? EU? ECB?” at people exiting because, as the Irish Independent dryly noted, “nobody was really sure what the international officials looked like.”
Black humor notwithstanding, the Irish seemed to deal with the coming era of austerity—and even their loss of economic sovereignty—with greater acceptance than the Greeks had. In the Mediterranean nation that spring, protestors had staged a nationwide strike, tried to storm parliament, and firebombed a bank, leaving three dead. By contrast, there was no significant violence in the streets of Ireland, although the chief executive of the low-cost airline Ryanair upstaged the prime minister by showing up at an event to celebrate the opening of a new terminal at Dublin’s airport with a coffin covered by an Irish flag. He announced that the terminal amounted to a “nice welcoming lounge” for IMF officials. It probably helped that the Irish were fast losing confidence in their own elected officials. As the Independent headlined a letter to the editor, “Better Chopra than our hopeless lot.”