Tower of Basel: The Shadowy History of the Secret Bank That Runs the World (38 page)

ECB officials argue that the European Parliament’s lack of power over the ECB does not take into account its specific role as a unique, supranational bank. “This does not imply that the ECB might be less accountable than the other central banks . . . it merely points to specific features of the European way of holding the bank accountable.”
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The ECB says that it enjoys “input legitimacy,” as an institution established through the treaty that brought the European Union into existence. However “input legitimacy” is less impressive than it may sound. As the crisis in the Eurozone has worsened the ECB’s “input legitimacy” has steadily evaporated.

In a nod to democracy, it was decided that the Maastricht Treaty needed to be ratified by all twelve EU members. But only three of the signatories trusted their citizens sufficiently to hold a referendum. Perhaps the politicians anticipated the results. Denmark narrowly rejected the treaty in 1992, with 50.7 percent voting no. France stunned the federalists when just 51 percent of the population voted in favor. Only Ireland was enthusiastic, with a 68.7 percent vote. The remaining nine members delegated the vote to their parliaments, all of which approved the treaty. Denmark voted again the following year. Copenhagen negotiated four opt-outs from the treaty, including the right not to join the European Union. This time the yes vote won, with 56.7 percent.

The ongoing experience of European union seemed only to dampen its citizens’ enthusiasm. In 2005 France and the Netherlands both voted no in referenda on the new European constitution, which would have replaced previous treaties and further accelerated the federalization process. European officials then stepped around this by renaming the constitution as the Lisbon Treaty and arguing that it merely amended previous treaties—thus there was no need for referenda. Only Ireland held a referendum on Lisbon, in June 2008, when 53.4 percent voted no. After sufficient political and pressure was applied, a second referendum was held in October 2009. This time Irish voters voted yes.

The more the European politicians and officials talked of democracy, it seemed, the less the citizens of the continent were able to exercise it. But the course of events in postwar Europe had been decided decades before the ECB opened for business.

Back in October 1941, Thomas McKittrick had received an inquiry from a friend of his living in Louisville, Kentucky, asking about the plans for the postwar financial system. The BIS president replied, “People everywhere are talking about federalisation accompanied by partial abrogation of national sovereignty. . . . The extent to which national sovereignty in this direction is limited must fix the boundaries of international financial authority.”
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For Europe at least, those bounds were now fixed, permanently, at the ECB’s headquarters in the Eurotower at Willy-Brandt-Platz, in downtown Frankfurt. But despite the technocrats’ best efforts, real life was proving more complicated than the bank’s monetary framework for the new Europe. Germans saved; Greeks spent. Italians did not pay their taxes. The French refused to give up their six-week holidays. Germany and France both broke the Stability and Growth Pact’s rules governing public debt. But some things were immutable. The ECB’s price obsession, engraved in its statutes, to keep inflation below 2 percent, forced Eurozone governments to slash public services and cut public spending. That in turn reduced consumer demand,
stalled economic growth, increased unemployment and triggered a slide into recession that has resulted in Europe’s gravest political and economic crisis since 1945.

AS THE GLOBAL
financial crisis deepened, the politesse at the BIS governors’ meetings began to crack. There is no formal policy coordination at the bimonthly gatherings, but the central bankers try to harmonize their monetary policies for maximum benefit where possible. Yet, paradoxically, as the world’s economy has become more globalized, central bankers are turning to local solutions. It has become clear that since the crash of 2007 the governors—who, after all, govern
national
central banks—will work to protect their countries’ interests first, even if that has deleterious effects on other nations’ economies.

Insiders have said that the divide between those countries that shape the global economy and those that are buffeted by decisions taken in Western capitals is now ever more evident at the Global Economy Meetings. The United States, Japan, and Britain have been injecting trillions of dollars’ worth of liquidity into their economies to try and boost growth. The theory is that asset purchases known as “Quantative Easing” will boost commercial banks’ balance sheets, increase liquidity, and encourage more lending, which will in turn boost spending, growth, and create jobs. At the same time, the United States, Britain, Japan, and the European Central Bank are implementing a loose monetary policy of ultralow interest rates.

This results in an outflow of hot money, chasing better returns around the world, which causes asset bubbles in the destination economies and distorts exchange rates, making currencies such as the Malaysian ringgit and the Korean won more expensive and thus affecting exports from those countries. “The disagreements on this were more pronounced,” said a former central banker, who wished to remain anonymous, of the governors’ meetings in late 2012. “Most of the developing countries were saying, ‘We don’t see that low interest rates are adding to your economic growth and at the same time it causes us problems because of the capital inflows. Our exchange rates go up and we are
having real estate bubbles.’” The central bankers remain polite. “Everyone is very careful because you cannot tell other countries what to do. But the developing countries are saying, look, this is what these policies are doing to us. They are causing us problems.”
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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.
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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.”
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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.
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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.”
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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.
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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.
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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.
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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.”
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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?’”
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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.”
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