by Adam LeBor
Much of the criticism was directed at the United States, with the main complaints coming from Southeast Asian countries and some Latin American countries. “The more successful they are, the more upset they are. This policy is creating large capital flows into these developing countries, which they don’t necessarily need.” The governors at the Global Economy Meeting never speak publicly about the discussions that take place inside the BIS, but similar debates are happening in other fora, where they feel less constrained. In December 2012 Glenn Stevens, the governor of the Reserve Bank of Australia, gave a speech in Bangkok that was seen as a barely veiled attack on the Federal Reserve, the Bank of Japan, and the European Central Bank. Stevens even accused the three of “exporting their weaknesses” in language unlikely to be used at a governors’ dinner.19
But there was more optimism about the euro. “Everyone was waiting for Mario Draghi’s magic touch,” said the former central banker. A Greek exit from the Eurozone looked less likely. Bailout funds were being released, and Greece’s fiscal targets were being relaxed. The European Stability Mechanism (ESM), the 700 billion euro rescue fund for Greece, Ireland, and Portugal, is now a permanent institution. Mario Draghi did, indeed, seem to have a “magic touch.” By stating that the ECB would do “whatever it takes” to stop the euro breaking up, and by stating that the bank was ready to buy “unlimited amounts” of short-dated bonds of indebted countries provided the country met certain conditions, the bank’s president reassured the markets. Spain and Italy’s borrowing costs quickly fell.
Draghi’s plan was a move of “genius,” according to the former central banker. “The ECB says it will buy debt, but the conditions the bank has imposed make it next to impossible for it to actually make the purchase. But the market applauds them and says all the problems are solved. This is the ultimate result that a central bank can achieve. You say something, and without doing anything, without spending one cent, you totally change the market sentiment. Every central banker dreams of this. It is close to a miracle.”20
DRAGHI WAS NOT the only central banker basking in media attention. Central bankers are now the rock stars of the financial crisis. The men—they are nearly all men—in sober suits have “achieved a new prominence and become pivotal members of the policy-making establishments of both national and intergovernmental organizations,” noted a report co-authored by Ernst & Young, a financial consultancy, and the Official Monetary and Financial Institutions Forum (OMFIF), a forum for central bankers and regulators.21 The financial crisis and the subsequent need for rapid, coordinated global responses have blurred the traditional distinction between governments’ fiscal policies (taxes and public spending) and the central banks’ mandate of monetary policy (interest rates and control of inflation). In many countries, central bank governors are “as well known as the government leaders they serve, and their words and deeds are the subject of heated debate in newspapers, bars, and taxicabs.”22
When Mark Carney, the governor of the Bank of the Canada, was appointed governor of the Bank of England in November 2012, he received the kind of media coverage usually reserved for royalty and soccer players. The Sunday Times newspaper ran a hagiographic profile, under the headline “A Superhuman to Push the Old Lady,” meaning the Old Lady of Threadneedle Street in the City of London, a synonym for the Bank of England. Carney, who is trim and photogenic, was the first foreigner to be appointed to the job since the bank was founded in 1694. The article enthused that he had “charm, talent, and [George] Clooney looks.” He even had a social conscience and had made understanding noises about the Occupy Wall Street movement.23 This winning combination brought Carney a salary package worth around $1.4 million per year, and he will enjoy a substantial expansion of powers: the bank will now have regulatory control over Britain’s commercial banks and insurers.24
Carney is a well-known figure at the BIS. He is a member of the board, representing the Bank of Canada. He has served as chairman of the BIS Committee on the Global Financial System, which is a forum for central banks to coordinate polices on monetary and financial stability. He is also chairman of the Financial Stability Board (FSB), which coordinates international financial supervisory and regulatory policies. The BIS hosts the FSB, and insiders say it is likely to assume increasing importance, reflecting the growing mandate of central bankers. Some are now required to supervise national commercial banks, oversee risk management and national financial systems, and stand ever ready as a backstop should disaster strike. “The idea that central bankers should have a primary responsibility for financial stability, as well as price stability, was considered a pretty dramatic break with orthodox central bank thinking, especially in the United States,” said Malcolm Knight.25
Carney’s years at the BIS have brought him a priceless network of personal relationships, nurtured at the bank’s dinners and lunches. These connections and the mutual trust that grows between the central bankers fostered by the BIS “matter a great deal,” said Sir Mervyn King. “They bring personal trust and confidence, which is very important. Finance ministers do not have the same length of tenure and so do not get to know each other so well.”
The governors’ personal relationships are crucial in times of crisis. When President Kennedy was shot in 1963, Charles Coombs, of the New York Federal Reserve, was able to take immediate, decisive action to save the dollar, knowing he would be supported by his European counterparts. The same held true after the terrorist attacks on September 11, 2001. King recalled, “We can say things to each other, knowing they won’t be leaked. You can do things without going through all the formalities. After 9/11, Alan Greenspan was out of the United States, and Roger Ferguson was in charge of the Federal Reserve. He and I were able to negotiate a swap agreement to supply liquidity in dollars for banks that needed them but could not get them at the Fed. The fact we could do that personally because we trusted each other enabled us to give confidence to our banks that they would be able to get dollars. That is a good example of where an informal connection can make a connection in practice, and that cannot happen unless you have had a long period of personal contact and interaction.
“Normally in that sort of situation, without that personal trust you would have to wait until all the legal details had been sorted out before you can tell someone it can go ahead, by which time it would be too late. Our ability to step in and say, ‘Don’t worry—it’s going to be all right,’ was very important.”
The governors’ weekends are a kind of sanctuary, says Nathan Sheets, who served as head of the Federal Reserve’s division of International Finance from 2008–2011. “You are there with like-minded people, and there really is a sense of central bankers’ brotherhood. At many other international meetings there is a sense of ‘You Americans are doing this’ and ‘You Europeans are doing that.’ At the BIS, the questions are what kind of challenges do we face? And how can we solve these together? Those relationships make it easy to pick up the telephone and call counterparts abroad. The governors know each other, they like each other and they know how each other think, thanks to these meetings.”26
The BIS gatherings can bring constructive criticism, said Peter Akos Bod, a former governor of the National Bank of Hungary. “If something happened in your country, and you did or did not do something, the others raised questions. You had to face some friendly criticism if your inflation was out of line. The Bundesbank president, for example, would say, this measure that you have taken, why didn’t you do that instead? And you would go home, and ask your staff, ‘Why didn’t we do that?’”27
The influence of the BIS is indirect but real, said a former central banker. “You hear things, they stick in your head, you come home, and you use them. Central banking is a very special business because you don’t have competitors. If you are a car producer and you meet another car producer, you hide your cars. If you meet another central banker, you ask questions because you have a hell of a lot to learn, and he has no reason to hide from you. From that point of view
, these discussions are extremely useful.”28
The governors’ sense of common interest and their mutual trust has proved especially important during the crisis. King said, “We have adopted different forms of communication with the markets, and learned from the experience of others about what worked and what didn’t work. The BIS meetings have helped us to formulate views about what we should do, and about the financial instruments we use. All the governors feel they benefit from sharing experiences, which is different from just getting documents.”
Nonetheless, the governors’ meetings are still dominated by a tight-knit, inner-core of the governors of the Federal Reserve, the ECB, and the Bank of England, who share decades-old connections. Ben Bernanke, Mario Draghi, and Sir Mervyn King all spent time at the Massachusetts Institute of Technology economics department. Bernanke and Draghi earned their PhDs there, while King taught there for a short time in the 1980s and shared an office with Bernanke.29 The emphasis on status and hierarchy adds to the mystique of the BIS, said Pennant-Rea. “When you strip down the membership, only a relatively small number really matter. The United States above all, Germany and Britain to a minor extent. There is a very strong sense of pecking order.”
But like all self-referential groups that rely on each other for mutual advice and reinforcement, the central bankers, cocooned in luxury and discretion at the BIS, can easily forget that they are public servants, said Andrew Hilton, the director of the Centre for the Study of Financial Innovation, a think-tank based in London. “It’s a tricky one because you don’t want them to be affected by day-to-day populist pressures. On the other hand, you do want them to know how much a pint of milk costs. The fine line you have to draw is between not being pressured by what’s happening on the street, but also being aware of it. It’s all too easy as a central banker to float over the political economy and throw bread to the masses. Central bankers should probably never be allowed to go anywhere in a limousine. They should take the Basel tram.”30
Those central bankers who implement austerity programs do not personally suffer the consequences. Jean-Claude Trichet served as president of the ECB from 2003 to 2011. Europe’s economies have slid into recession in part because of the ECB’s relentless demands to keep inflation below 2 percent. Despite his role in the unfolding Eurozone crisis, Trichet is now a much sought-after speaker on the international conference circuit.
In May 2012 Trichet spoke at the Peterson Institute for International Economics in Washington, DC, offering his thoughts on the “Lessons from the Crisis.” To an outsider the scene seemed an extraordinary spectacle: as Spain’s economy began to collapse, neo-Nazis patrolled the streets of Athens, beating immigrants, and an entire generation of young Europeans faced years of unemployment and poverty. Trichet, however, was garlanded with praise and lauded for his insight. The French banker, said Peter G. Peterson, “played a decisive role in the Europe crisis as president of the European Central Bank until he stepped down last fall,” which was indeed true, although not in the sense that Peterson intended.
The solution to the Eurozone crisis, argued Trichet, was not less supranationalism and technocratic rule, but much more. Trichet called for what he described as “a quantum leap” of economic governance, to accelerate the next stage of European integration. If a Eurozone member refused to obey instructions “coming from the center”—meaning European authorities—there should be the “activation of a federal government by exception.” This policy, which even Trichet admitted would be at the “very, very, limit” of what would be acceptable, would mean that if “Your parliament is not behaving properly, we fine the country.”31
Apparently oblivious to Europe’s growing backlash against rule by technocrats, Trichet will have plenty of time to further hone his ideas for the end of national sovereignty in his new position as chairman of Bruegel, one of the foremost think tanks on European economic integration. The first president of the ECB retired having wreaked “the sort of destruction on the European economy that hostile powers could only dream about,” said Dean Baker, of the Centre for Economic and Policy Research, a liberal think tank. Trichet embodies the type of central banker who sees the economic crisis as something quite distinct from their responsibilities, said Baker. “Their job is to get inflation down, to 2 percent. The economic crisis is something bad that happened. It would have been nice if it did not happen, but it was not their responsibility, you cannot hold them accountable for it, and they don’t have the tools to deal with it.”32
Central bankers strongly reject this argument. Inflation, they say, is not a tap to be turned on and off when governments like to stimulate growth. “This is not something that you toy with,” said one former central banker. “It is very easy for politicians to basically rob people of their savings by creating inflation. It is immoral, and anyway capital is much more mobile than it was ten or thirty years ago. The money will say you are creating inflation, goodbye, we are going to China or wherever, in a few seconds. It is much cleaner if we deal with the problem head on and do the painful things.”33
Or as Stephen Cecchetti, the head of the BIS Monetary and Economic department, said, high debt levels are a “drag on growth.” There can be no growth without structural repair and a gradual but credible reduction in debt levels. “As we have learned from years of experience with crises in both emerging market and advanced economies, the choice between austerity and growth is a false one. The true choice is between austerity and collapse. And that really is no choice at all.”34
But the BIS’s view is outdated. There is a choice, as even the IMF now argues.
CHAPTER SIXTEEN
THE CITADEL CRACKS
“And they said, ‘Come, let us build a city, and a tower with its top in the heavens, and let us make a name for ourselves, lest we be dispersed across the whole earth.’” 1
— Genesis 11.3, The Tower of Babel
The story of the Tower of Babel is often read as a parable of the price of arrogance. Its builders started to construct the tallest building in the world, one that would reach to the very heavens as a physical manifestation of their greatness and ambition. Things ended badly.
The BIS tower, at Centralbahnplatz 2, in Basel does not reach to the heavens, but many of those working inside believe themselves possessed of a near-celestial mandate. Now seventy-three years old, the bank has evolved into one of the world’s richest and most influential anachronisms. Montagu Norman’s “cozy club” has sixty members. They circle the globe, from Colombia to the Philippines, Iceland to the United Arab Emirates, although the developing world remains underrepresented. The BIS employs around six hundred staff from more than fifty countries. Thousands of central bankers and their officials flock every year to the bank’s numerous committees, meetings, and conferences.
Since 2007 the ongoing financial crisis has neither reduced the value of the BIS’s assets nor dented its profits and prestige. The bank makes much of its money from the fees and commissions that it charges central banks for its services, such as short-term liquidity and credit, gold swaps, and by providing a range of investment opportunities and instruments. The BIS is a much sought after commercial partner. Its record is solid and conservative, its credit rating superb. In Basel at least, the crisis has, overall, been good for business. For the financial year ending in March 2009 the bank made net, tax-free, profits of 446.1 million Special Drawing Rights, the equivalent of around $650 million.2 Its total equity was valued at the equivalent of almost $20 billion.3 By the end of March 2012, profits had nearly doubled, to the equivalent of around $1.17 billion—almost $100 million a month—and the bank’s total equity had increased by 40 percent to around $28 billion.4 These are extraordinary sums for a single financial institution with just 140 clients and two local offices, in Mexico City and Hong Kong.
Even at a time when the IMF, not usually an advocate of generous public spending, has warned publicly and repeatedly against excessive austerity, at the BIS the legacy of Hjalmar Schacht, Montagu Nor
man, and Per Jacobssen endures.5 The bank’s managers regularly warn against the dangers of excessive lending and inflation. Austerity is seen as a necessary medicine, no matter how unpleasant its consequences. Such warnings are listened to.
The bank’s influence is profound: the BIS is one of the world’s most effective instruments of soft power. The bimonthly governors’ meeting gathers central bankers from countries that control more than four-fifths of the world’s GDP. The discussions at the Basel weekends have shaped the debate about the global financial crisis and the world’s response to it. The committees hosted at the BIS are rebuilding the world’s financial architecture and coordinating regulatory and supervisory policies. The Basel Committee on Banking Supervision oversees the capital requirement of commercial banks. Its work, wrote Ezra Klein, a columnist for the Washington Post, “will shape the future of global finance, and, by extension, the economy.” Klein awarded the committee the title of the “Most Obscure-Yet-Important Regulatory Agency of the Year,” noting, “its actions may only rarely make the front pages, but the work done in Basel is crucial to creating a more stable world economy.”6 “Obscure yet important” surely brought knowing looks and quiet smiles at the BIS headquarters.
The bank’s annual reports are regarded as essential reading in the world’s treasuries and governments. The head of the bank’s Monetary and Economic Department, who writes and oversees the annual reports, is one of the world’s best read and most influential financial and economic analysts and commentators. The BIS hosts one of the world’s largest restricted databases of banking information. Its mainframe computers sweep up data about the flow of transnational finance, including money flows in and out of offshore domiciles. Such information is of great interest to governments. Three months after 9/11 the Basel Committee on Banking Supervision hosted a meeting to coordinate central banks’ and regulatory authorities’ strategies on the prevention of terrorist financing and the sharing of records to prevent terrorist financing.7