The Alchemists: Three Central Bankers and a World on Fire (15 page)

It took a couple of accidents of timing to turn the number-crunching professor into one of the most powerful men in the world. First, in 2001, Bernanke was a finalist to become Princeton’s provost, the school’s chief academic officer and number two administrator. Had he gotten the job, he would surely have had a different answer when Glenn Hubbard, President George W. Bush’s chief White House economist, called in 2002 about a potential appointment to the Federal Reserve Board of Governors. Bernanke hadn’t seriously considered entering government before, but the idea was appealing, not least because of a new sense of public spirit inspired by the September 11, 2001, terrorist attacks. He was soon confirmed to serve in Alan Greenspan’s Fed, and he displayed a particular gift for explaining the policy board’s thinking to the world. His official photo from 2002 showed him looking the part of the disheveled professor, hair sticking out in all directions, his beard untrimmed and extending all the way down to his collar.

A mere three years later, the seventy-nine-year-old Greenspan decided to retire. It was a time of political weakness for the Bush administration: The government’s response to Hurricane Katrina had been mishandled, the war in Iraq was a still-unfolding disaster, and Bush’s previous high-profile appointment, of White House Counsel Harriet Miers to the Supreme Court, had gone down in flames amid doubts about her stature. The Senate was in no mood to confirm more controversial—and ideologically conservative—possible Fed chairmen like Hubbard or Reagan administration economic adviser Martin Feldstein. As a relative newcomer to Washington, Bernanke became the safe choice for a president with an approval rating of 40 percent and falling.

As one of the most powerful men in the United States, he still preferred quiet evenings at home with his wife to the Georgetown social scene favored by Greenspan. Bernanke wore suits off the rack from the midlevel clothier JoS. A. Bank and took no apparent joy in the little luxuries that came with the office, such as a security detail and a car and driver. He came into the office most Saturdays and Sundays, wearing jeans, in order to think through decisions in a solitude that was impossible to obtain during the week.

There was, of course, also a downside to being a Beltway neophyte. Greenspan had advised presidents on economic policy for nearly twenty years before being named to the Fed chairmanship; Bernanke had to learn the political side of his job on the fly. He seemed genuinely perplexed, aides said, when senators with whom he had warm relations in private would pillory him in televised hearings; it took time for him to learn that this sort of thing was simply the routine hypocrisy of politics.

He may not have looked the part at first; Bernanke is likely the only high official to have been mocked for his socks by both the president of the United States and the
Washington Post,
on separate occasions. (He wore tan instead of navy.) But Bernanke worked to shape a different image on ascending to the Fed chairmanship, to assure the powerful that he was a steady hand at the tiller of the global economy. He attended private events with the giants of finance and politics to better understand their world—going to dinner at the Jackson Hole home of James Wolfensohn, the überconnected former World Bank chief, for example, or traveling to the Bilderberg conference, a subject of great fascination to conspiracy theorists that in practice is just a bunch of rich, influential people getting together to bat around ideas for a couple of days. Bernanke enlisted a speaking coach and worked to stop a quaver that crept into his voice when he was nervous, and he even started looking sharper, getting more frequent haircuts and grooming his beard more carefully. (
He talks baseball with Lenny Gilleo
, the in-house barber at the Federal Reserve’s Washington headquarters, during his trim every three weeks or so.)

But there was one thing Bernanke didn’t need to change: his approach to leadership. At its eight annual meetings, the mighty Federal Open Market Committee—the Fed’s Board of Governors in Washington plus the presidents of its twelve regional banks—can be a fractious group of nineteen (with twelve having a vote at any given time). Although the chairman is always the first among equals, in a formal sense his is only one vote. He isn’t, in a technical sense, the “boss” of any of the other committee members and must lead instead through persuasion and force of intellect. As Bernanke took command of the committee, he turned to the same management techniques he used as an academic department chair and school board member. “It’s not Ben’s personality to pound the table and scream and say you’re going to agree with me or else,” said Alan Blinder, a colleague of Bernanke’s at Princeton, in 2009. “It’s not his way. I’ve known him for twenty-five years. He succeeds at persuading people by respecting their points of view and through the force of his own intellect. He doesn’t say you’re a jerk for disagreeing.”

After presentations from staff, the meetings begin with an initial go-round in which every official presents his or her view of the economy, followed by a coffee break. While his colleagues caffeinate, Bernanke goes into his office next door to the boardroom and types out a few notes about what he’s just heard. When the committee reconvenes, the chairman, speaking from his notes, says something to the effect of “Here’s what I think I heard,” then runs through the range of views. Some of the policymakers who’d frequently found themselves at odds with Greenspan and felt shut out of debates ended up having warmer relationships with Bernanke as a result. “The chair of any committee can respond to comments that challenge his view in ways that inform the committee that the issue isn’t worth discussing,” said Richmond Fed president Jeff Lacker. “This chairman doesn’t do that. He takes other views seriously.”

Bernanke’s academic research hadn’t been discussed when President Bush was weighing his appointment to the Fed chairmanship. But as the crisis emerged in 2007 and deepened in 2008, Bernanke’s work would become all too relevant. He had documented how problems in the financial sector tend not to stay in the financial sector, but to spread to other areas of the economy, slowing down overall growth. This, he argued, was a major cause of the deep downturn of the 1930s, a large part of what made the Great Depression great. When banks and other lenders suffer major losses, as they did with mortgage debt in 2007, they pare back lending of all kinds. That weakens the economy, which causes banks’ losses to mount further, setting up a vicious cycle—the “financial accelerator,” as Bernanke and frequent coauthor Mark Gertler called it. From the earliest days of the crisis, the Fed chief was concerned that the problems in the U.S. housing market could spiral into something very dangerous indeed.

Bernanke’s academic background had prepared him intellectually for what was to come. The question was whether his quiet style of leadership could guide the Federal Reserve through the storm.

•   •   •

M
ervyn Allister King—just “Governor King” at the time, but “Sir Mervyn King” from 2011 on, when he was knighted—may have seemed far removed from his international counterparts in those early days of the crisis, but it wasn’t due to a lack of familiarity. He actually had long-standing connections to both Trichet and Bernanke. King was a student at Cambridge in the 1960s when Trichet visited to study the British tax system and became acquainted with the future governor, and he and Bernanke in the 1980s shared adjoining offices at MIT. Instead, King’s independence in August 2007 was of a piece with the supremely self-confident man who ran the Bank of England.

An armchair psychologist might see his self-assured style as typical of someone whose place among the elite was earned not by birth, but through keen intelligence, hard work, and sheer cussedness. The son of a railway clerk, King was born in 1948 and raised in Wolverhampton, a small city in the West Midlands. At grammar school he displayed a precocious intelligence, and he eventually found his way to King’s College, Cambridge, to graduate study at Harvard, and then to a professorship at the London School of Economics, where he was viewed as among the most promising young British economists of his generation. After joining the Bank of England as chief economist in the early 1990s, he remade the bank in his image: rigorous in its analysis, theoretical in its approach, unsparing in its dismissiveness toward employees or departments that didn’t come into line with his own predispositions and high standards.

He was a great lover of sports, peppering his speeches with references to Aston Villa, and periodically (and with sometimes unfortunate timing) skipping an afternoon of work to take in a tennis, cricket, or soccer match. He’d been an energetic sportsman in his student days, playing intramural cricket and soccer with great competitive fervor, if not necessarily great ability. An apparently inexhaustible source of energy, King played tennis with Alan Greenspan and other leading officials, and often walked the five miles from his Notting Hill flat to the Bank of England’s headquarters on Threadneedle Street instead of taking his bank-provided car service.

His love of competition extended to his work at the bank, and his adversaries there and in the government found clashing with him a very unpleasant business. To his friends in the international economics club or on the London social scene, King was a charmer, with a sharp wit and lively eyes. To his colleagues at the bank, he could be an intellectual bully, sure of his correctness and willing to use every method available to get his way, including isolating and undermining those who disagreed with him. Chancellor of the Exchequer Alistair Darling described him as
“incredibly stubborn” and “exasperating”
and wrote that the core problem of the Bank of England was that King ran it “
as an autocratic fiefdom of the Governor
”—this from a man who had twice given King that position.

King had become the bank’s chief economist in 1991, a low point for the Old Lady of Threadneedle Street. Inflation had been high for decades, and George Soros was just about to “break” the bank by forcing the pound out of the currency bond.

As the bank’s top economist, King set about rebuilding the institution’s credibility as a maker of monetary policy. He hired some of the brightest young PhDs in Britain and shoved out many from the bank’s old guard, who had become better at backslapping than economic analysis. His success at that job helped convince Tony Blair’s Labour government, in 1997, to grant the bank the independence from political influence it had long sought. Thanks in no small part to King’s work, no more would interest rate policy be driven by what elected officials wanted. “He made independence credible by raising the bar on the intellectual caliber of economics at the bank,” said Rachel Lomax, who served on the Monetary Policy Committee from 2003 to 2008. King was rewarded with the newly created job of deputy governor for monetary policy in 1998, and then with the governorship in 2003.

Although his days as a professor were long behind him, he hadn’t abandoned his academic mind-set. As governor, he focused on theories of how the British economy works, debating, developing, and refining economic models. When dealing with some of the more mundane decisions the bank needed to make, he sought to return to “first principles”: What’s the purpose of central banks? How does monetary policy work? And King often urged colleagues to seek advice from academic theorists rather than from those with more practical experience. One recalled when there was a discussion over how the bank should handle the logistics of auctions for newly issued British government bonds. King recommended calling several top researchers in “auction theory,” as opposed to people with actual experience in the market for UK government bonds.

According to colleagues, the governor was privately disdainful of the economic views of commercial bankers and businesspeople without training in academic economics. He was a warm and ebullient presence and a clever wit to the groups of artists, intellectuals, and government leaders for whom he threw intimate dinner parties, but when he was to speak at some big event for financial grandees, he tended to skip the cocktail hour and show up just in time to fulfill his obligation.

In contrast to monetary policy, with its elegant theoretical underpinnings, the regulation of banks is a messy business—one the BOE had largely ceded to the new Financial Services Authority as part of the 1997 deal to gain political independence. “Financial stability became a downplayed part of the institution,” said Kate Barker, a member of the Monetary Policy Committee from 2001 to 2010. Former Bank of England economist Richard Barwell told the
Financial Times,
“
Before the crisis
, working in financial stability was an absolute career graveyard.”

Those who prospered were the economists whose interest in creating theoretical models of how the economy works mirrored King’s own. Employees with other approaches saw their careers stall out and frequently left. “His grip on the intellectual approach of the bank had become very tight,” said Barker. King’s attention to detail and desire for total control extended to the smallest things: At an annual summer gathering for staffers and their families to enjoy barbecue and sports, one former employee told the
Financial Times,
King “
fusse[d] . . . about who has turned up
, who will win the toss, all the little stuff.”

King, judged tone deaf as a child, was viewed as insufficiently musical to join his school orchestra. But as an adult he discovered classical music and took to it with great passion, even serving on the advisory council of the London Symphony Orchestra. He viewed his stewardship of the Bank of England and the British economy as something like directing a great musical performance. “
I think the role of conductor
combines the ability to be a free spirit, to use imagination, as well as to be an intellectual study, which is what I did for most of my life,” King told radio host Gilbert Kaplan in a 2004 interview about his love of music. “The ability to do that and also to lead a team, just to get a team of people playing for you. That’s what I’ve tried to do at the Bank of England and what I think I would have much enjoyed doing as a conductor.”