WILL THE '90S SWAMP CENTRAL BANKERS?
THE CONFIDENCE GAME
By Steven Solomon
Simon & Schuster
THE CENTRAL BANKS
By Marjorie Deane and
Viking 369pp $29.95
THE VANDALS' CROWN
By Gregory J. Millman
Free Press 305pp $23
For central bankers, the past year or so has been a hair-curler. First, the U.S. Treasury-bond market crashed. Months later, the Mexican economy imploded. Then the dollar, the lira, and several other currencies collapsed to record lows against the mighty Japanese yen, German mark, and Swiss franc. But that's not the half of it. A tidal wave of global borrowing and a massive deregulation of financial markets sent trillions of dollars washing in and out of economies from Argentina to Thailand to Sweden, causing currencies to gyrate wildly and making mincemeat of everyone's growth forecasts. In this crazy environment, financial volatility became so commonplace that even the collapse of Baring Securities Ltd. in a spectacular $1 billion derivatives scandal failed to slow the markets for more than a few days.
That none of this has brought the world economy to its knees is a tribute to the resilience of markets nowadays. It's also a testimonial to the powers and crisis-management skills of the world's central bankers. Unelected, often uneasy in the spotlight, and frequently reviled by politicians and public alike, these men and women are nonetheless the power behind the global economy. True, traders have the resources and skills to thwart central bankers' wishes in the short run. But over the long haul, there can be no growth without credit--and central bankers are the ones that come up with credit day after day.
The wild and woolly '90s, however, present central bankers with challenges that are many times greater than those they have faced during 50 years of fairly steady expansion. There's the roughly $20 trillion worth of high-tech derivatives on the books of global banks and corporations, for example. A warp-speed foreign exchange market is trading $1 trillion a day, much of it largely unrelated to the mundane business of financing world trade, and, in the U.S., a $2 trillion mutual-fund industry is rapidly changing the definition of banking. Finally, a financial system in one country alone--Japan--is carrying at least $1 trillion in unbooked losses, left over from the "bubble economy" of the '80s. Heaven knows what will pop up next.
Whether central banks are up to the task of managing these burdens is the primary theme of three new volumes that approach their subject from very different angles. The Confidence Game explores how central bankers, through trial and error, have learned to be crisis managers. The Central Banks is a comprehensive treatment of the history and art of monetary control. And The Vandals' Crown emphasizes the role of the trader.
All three books provide straightforward accounts of the age-old battle between governments seeking to debase their currencies for quick growth and bankers fighting to maintain sound money. But Confidence Game stands out as the most readable of the trio. Starting with a gripping, 91-page account of the efforts by Federal Reserve Chairman Alan Greenspan and former New York Fed President E. Gerald Corrigan to contain the damage of the 1987 global stock-market crash, freelance financial writer Steven Solomon has written a page-turner that at times reads more like a thriller than a treatise on monetary affairs.
Pay close attention to Solomon's blow-by-blow account of Paul A. Volcker's daring, seat-of-the-pants experiment with "practical monetarism" in 1979 that stopped runaway inflation and a cratering dollar. By resolutely targeting money growth and sticking to his guns, even as U.S. interest rates soared and the economy sank, Volcker set an example of independence that other central bankers are still trying to follow.
In keeping with the thriller motif, even the significance of Solomon's title remains a mystery for more than 100 pages. That's a long way to travel for an answer, but the mystery is worth unraveling. It seems that, down deep in their hearts, central bankers have to have a bit of the classic con man within them. To illustrate the point, Solomon recounts the tale of how the world's moneymen had to scramble when the 1974 collapse of Frankfurt's Herstatt Bank nearly sparked a panic on Wall Street and threatened to shut down much of the global financial system.
Dumbfounded, the central bankers converged on Basel, the Swiss home of their unofficial club--the Bank for International Settlements--and cobbled together an enigmatic statement that they hoped would restore order. Their terse declaration indicated merely that central banks would supply cash to the Eurobond market "if and when necessary." Truth be told, notes Solomon, the bankers had no idea what they might be able to come up with if push came to shove. But just saying they might be willing to act immediately calmed traders worldwide. It was "`a real central-bank confidence trick,"' Solomon quotes a satisfied Bank of England official saying.
With Volcker leading the way, central bankers' efforts to maintain the markets' confidence in their powers have intensified over the years. One way to gain such faith is to make sure a central bank is independent of politicians' control, as are the Fed and Germany's Bundesbank. This quest for autonomy is a theme that Marjorie Deane, former central-bank watcher at The Economist, and Robert Pringle, former editor-in-chief of Britain's The Banker magazine, explore in detail as they trace the roots of central banking back to 17th century Holland.
Their dry prose and intense detail, however, become overwhelming at times. Few readers, I suspect, will spend much time on Deane and Pringle's dissertation on the fledgling central bank of Estonia and those of other former Soviet states. And while Central Banks serves as a useful text for students of monetary affairs, it gives short shrift to the one force already eroding central bankers' authority: the boom in trading.
My appetite whetted for more on this subject, I turned eagerly to freelancer Gregory J. Millman's Vandals' Crown (its title refers to the ancient barbarians who laid waste to Western Europe). Millman sees today's highly paid traders and rocket scientists as modern-day vandals, bringing monetary chaos wherever they tread.
Millman writes with a light touch and laces his volume with such familiar stories as the ascent of Philadelphia's manic currency traders and the triumph of George Soros over the European Monetary System. But he saves the best for last: the little-known tale of how one rogue New York currency trader nearly succeeded in hiding $70 million in losses from his employer, Holland's ABN Amro Bank.
That disturbing episode points out the huge risks that may be lurking in the global economy as barriers to trade and finance fall and trading explodes. For all their moves toward independence and victories over inflation, the world's central bankers are still struggling to get a handle on the increasingly scary force of the market. In the new monetary order, acknowledge Deane and Pringle, "the cost to the financial system [of a major meltdown]...gets ever larger as different markets are linked." Perhaps the central bankers were just lucky when they saved the day after the Herstatt collapse 21 years ago. Whether they can continue to con the markets--or whether the markets break the central banks--will be the story of 21st century finance.WILLIAM GLASGALL