Central Bankers: More Like Samurai Than You'd Think
WHY YOU SHOULD CARE
Because they are quietly — and sometimes not so quietly — changing the way governments create the money that you and I use every day.
By Steven Butler
Fire the boss and bring in an outsider. Football teams do it. Banks, manufacturing companies, tech giants. Central banks? The latest class of internationally itinerant technocrats is now roaming the globe, shaking up the staid world of central banking, carrying bold ideas across borders and shining light in dark corners.
They are modern-day rōnin — roaming samurai warriors without a master — only instead of swords, they’ve got PhDs in economics, done stints at major international organizations such as the International Monetary Fund, and hold teaching positions at top universities.
And they are powerful — because they make money, actually create it … or not. It’s their call. Who are they? Central bankers.
The title may not sound cool, but, boy, do governments in trouble need them. Central banks set basic interest rates, control the money supply, provide credit to commercial banks and are often responsible for monitoring bank health and rescuing them when needed.
They have very specialized skills, and there’s not a huge pool to draw from.
Last year, the Bank of England broke a 319-year-old tradition when it appointed its first non-Brit, Canadian Mark Carney, 49, to head the bank. India recalled one of its own — Raghuram Rajan, 51 — after his prominent career as chief economist at the IMF and professor at the University of Chicago. And Stanley Fischer, 70, has been nominated to join the U.S. Federal Reserve Board as deputy chair — fresh from eight years running the Central Bank of Israel, preceded by positions at the IMF, the World Bank and MIT. A true international itinerant: he was born in current day Zambia to a Jewish family and became active in Zionist youth movement.
Why trust an international set to manage one of the most important functions of government — money and banking?
“They are highly trained guys who are experts in their field,” says Richard Grossman, author of Unsettled Account, a history of banking since 1800, and an economics professor at Wesleyan University. “They have very specialized skills, and there’s not a huge pool to draw from.”
What’s more, many central banks have a long history of shielding their practices from outside scrutiny, relying on the secrecy that banks maintain as part of their standard operating procedures.
“I worry more about people being too parochial,” says Grossman, arguing that bringing in outsiders is critical to shaking things up and modernizing institutions.
As a result, central banking is changing and becoming more open. Only in 2000 did the Fed start releasing statements after each scheduled meeting. Last year the Fed issued an inflation target, 2 percent, for the first time.
With bankers moving around the world, central banks are coming have a common view of key issues. Transparency, inflation targeting, forward guidance, independence (from politicians) — these are buzzwords that were debated for years. Change comes hard to powerful institutions that have long operated in a dome of secrecy. But as more nations open their economies, they’re forced to dance to the Fed’s tune because of the prominence of the dollar. They need not just to understand the Fed — but to anticipate it. And for that, they need expertise and smarts that aren’t necessarily home-grown.
“The walls are breaking down all over the world,” says Arvind Subramanian, senior fellow at the Peterson Institute for International Economics.
So far the record of rōnin bankers is good, but sooner or later someone might bigfoot the locals and spark a backlash, or just plain fail. Let’s look at the four top players:
The Bank of England helped pioneer the use of outside expertise, but bringing in a foreigner to head the bank broke all precedent. Mark Carney, son of a high school principal and born in Canada’s Northweest Territory, saw his career take him to Goldman Sachs and the Canadian Finance Ministry. He headed the Canadian central bank beginning in 2008. He foresaw the leveraged-loan crisis that broke later in the year and cut interest rates in advance, followed by other aggressive steps that shielded Canada’s economy from the worst of the crisis. Britain hopes he’ll bring his magic touch to the second-oldest central bank in the world (after Sweden’s).
Raghuram Rajan is the son of a senior government bureaucrat and studied electrical engineering in college. He raised eyebrows in 2005 when, as chief economist at the International Monetary Fund, he warned about excessively rewarding financial managers who take on high risk, thus creating dangers for the entire financial system. His view — unpopular at the time — was prescient during the 2008 global collapse of financial market. That, plus a prominent academic career, gave him big chops when he took over the Reserve Bank of India last summer. The rupee, under severe pressure, jumped when he arrived, and he’s swiftly moved to reform India’s antiquated, state-dominated banking system. “His reputation has been a big plus,” says Subramanian. “He’s done things that others wouldn’t dare to.”
Haruhiko Kuroda, 69 – born just a year before Japan’s surrender in World War II – became governor of the Bank of Japan last year after eight years as head of the Manila-based Asian Development Bank. His previous career in Japan’s Finance Ministry may make him less of an outsider, but he swept in as a radical reformer, helping to deliver a jolt to Japan’s zombie economy and earning widespread international applause. The yen started to tumble as he took office — making Japanese manufacturing exports competitive again — as he began imitating the Fed’s “quantitative easing” program on steroids, promising to double Japan’s monetary base in two years and lift inflation to 2 percent to reverse 15 years of falling prices. Consumer prices have begun to rise modestly, and urban land prices increased last year for the first time since 2008. But the economy remains sluggish and the country is mired in government debt. Whether the nation can climb out of its hole depends on radical policy changes that Kuroda doesn’t control, and if the effort fails, Japan could be even worse off.
Stanley Fischer’s nomination to be Fed Chairman Janet Yellen’s deputy might be the least radical of all the appointments, which only underscores the new normality of roving central bank technocrats. He earned widespread plaudits for his tenure at the Israeli central bank, helping to keep the economy strong throughout the worldwide financial crisis. But he was already a prominent economist and technocrat in the United States, including a stint at Citibank, before heading abroad. Among his star pupils at MIT: former Fed Chair Ben Bernanke and European Central Bank President Mario Draghi.
The planet’s shrinking fast if you’re a central banker. Will the trend continue? Probably, if the performance of these rōnin bankers keeps pace with their pedigrees. They speak a language that’s devilishly hard to decipher, but success speaks for itself.