The Alchemists: Three Central Bankers and a World on Fire

by Neil Irwin

  Trichet was part of a generation of leaders determined—and newly able—to learn from the mistakes of their parents and build a different order for Europe. He was the consummate European, which for elites of his generation meant being devoted to an identity beyond one’s status as a Frenchman or German or Italian. As a child, that meant traveling to Germany, Austria, and Italy with a favorite uncle and having a pen pal in Britain. As an adult, it meant quite a bit more. As Trichet told French news magazine L’Express, “It was . . . a very emotional moment” when on June 17, 2004, he held his first telephonic meeting of the ECB’s General Council, a sprawling group that includes even central bankers from European countries that don’t use the euro. “I went round asking if everyone was there. The governor of Estonia? ‘Yes, I’m here.’ Lithuania? Malta? Cyprus? They were all there. That’s what Europe is all about, and it is impressive.”

  The son of a professor of Greek and Latin, Trichet displayed an early enthusiasm for literature and philosophy. After parental encouragement to study mathematics and the sciences, he served an engineering traineeship deep underground in a coal mine. But he was drawn to politics and soon left mining to study at the École Nationale d’Administration, the finishing school for the French civil service. It was a time of tumult, coming just after clashes between radical students and police in 1968. Like many, Trichet was involved with left-wing student activism. For his dedication to workers’ rights, his fellow members of the Unified Socialist Party nicknamed him “Justix,” a punning reference to the indefatigable Gallic hero of the Asterix cartoon series. Trichet finished near the top of the Administration class of 1971—fifth out of one hundred—began a long career at the French treasury, and married Aline Rybalka, a Ukrainian-born translator for the French foreign ministry.

  Trichet came of age as a policymaker during the arduous negotiations toward European unity, in which sheer stamina—the ability to stick to a position into the wee hours of the night—could be as important as anything else. He led the ECB governing council, a sprawling group of twenty-three central bankers, using all that experience, using control over the agenda and the clock to almost always guide interest rate decisions in his preferred direction. He was a master of using whatever advantages his role as chairman offered: He once led negotiations with representatives from twenty-seven nations on bank capital rules in 2011. The meeting started first thing in the morning, but as the lunch hour passed and staffers put out sandwiches in the hallway, Trichet didn’t call for a break. By late afternoon, the increasingly hungry negotiators were more willing to yield, if only so they could get something to eat.

  Depending on the situation, Trichet could deploy not only persistence, but also arm-twisting, head-knocking, logrolling, or whatever he might need to close the deal. These were the skills that enabled him to rise to head of the treasury sixteen years after graduation and to governor of the French central bank six years after that. “If I had to choose any of us to represent me in a complicated transaction, to negotiate on my behalf, it would be Trichet, without hesitation,” said one of his fellow central bankers. He was among those representing France in the negotiations over the Maastricht Treaty, which would create the euro. From 1985 to 1993, he was chairman of the Paris Club, a group of global financial officials that negotiates debt restructuring for troubled Latin American and other developing nations.

  From that experience, Trichet was as prepared as anyone on earth for the kinds of difficult talks between banks and governments that arise when a nation’s finances get out of control and its economy hovers on the brink. “Crisis is part of his DNA,” Finnish Central Bank governor Erkki Liikanen once said of him. More diplomat than economist, by 2007, he was as experienced a manager of financial crises as anyone on earth.

  With his mellifluous accent and stylish attire, Trichet could be a charmer as well. “With slightly condescending flattery and a touch of the well-appointed courtier, Trichet greets interlocutors with unfailing respect,” noted longtime ECB watcher David Marsh. “He kisses ladies’ hands with old-fashioned gallantry—whether they be [German] Chancellor Angela Merkel or the wives of Frankfurt-based journalists—and flamboyantly addresses former British Chancellors of the Exchequer as ‘Monsieur le Chancelier.’” Yet even people who’ve spent hundreds or thousands of hours in his company professionally have said they felt little sense of a strong personal bond. Trichet remained, whatever the situation, formal and proper, relentlessly on message, reluctant to show even a hint of self-doubt. He was easy to respect but hard to know.

  As head of the Banque de France, Trichet oversaw the logistical details of preparing for his nation’s incorporation into the eurozone, frequently clashing with politicians who viewed his franc fort (“strong franc”) policy as damaging to French exports and hence jobs. It was said that Trichet “spoke French with a German accent,” meaning that despite being a Frenchman by birth, he had the same hard-money philosophy as a German—which made him a perfect choice to be one of the initial leaders of the ECB when it was established in 1998.

  After being exonerated in a scandal over disclosures of information by the large commercial bank Crédit Lyonnais while he was at the treasury, Trichet was appointed to his eight-year term as ECB president in 2003. An exceptionally hard worker, he was attuned to every detail of managing the central bank, personally reviewing department budgets and tweaking language in press releases in an institution with sixteen hundred employees.

  “My life compass has been the deepening of European unity based upon reconciliation and a profound friendship to the service of prosperity and pace,” Trichet once said. The crisis that began with a phone call to Saint-Malo on August 9, 2007, would scramble that compass, as the currency he’d helped create to unify a continent would instead threaten to pull it apart.

  • • •

  Unlike Trichet, whose career was one long ascent through the ranks of European leadership, Ben Shalom Bernanke was in many ways an unlikely titan of the global economy. Born in Georgia in 1953 and raised in tiny Dillon, South Carolina, he showed uncommon intelligence at an early age, skipping the first grade, representing South Carolina in the 1965 National Spelling Bee, and getting the highest SAT score in the state, a near-perfect 1590. His achievements were enough to win him admission to Harvard, but his mother was reluctant to let him go to college so far away. She relented only after being assured by Kenneth Manning, a young African American from Dillon who had himself attended the school and encouraged Bernanke to apply, that “there were Jews up in Boston.”

  Bernanke excelled at Harvard, winning an award for best undergraduate economics thesis. He went to graduate school at MIT in a time when the institution was turning out a slew of PhDs who would go on to be significant shapers of economic policy. In 1977 alone, the program produced Mario Draghi, Trichet’s successor as ECB president; Olivier Blanchard, the International Monetary Fund’s chief economist; and Paul Krugman, the Nobel laureate and influential New York Times columnist. Bernanke finished two years after them, studying under Stanley Fischer, later an IMF chief economist and head of the Bank of Israel and something of an intellectual godfather to a generation of central bankers.

  “If you had known Ben Bernanke as a student you would have never picked him as a future central banker,” Robert Solow, a Nobel laureate economist at MIT, later told Bloomberg News. Bernanke didn’t even look the part, Solow added: “He had a lot of hair, and when I say a lot of hair, I mean a lot of hair.”

  Indeed, in the early years of his career, Bernanke showed little inclination to be anything other than a first-rate academic. He married Anna Friedmann, a Wellesley grad who would go on to be a seventh-grade Spanish teacher, and they moved first to California and then to New Jersey, where he became a star economist at Princeton. He wrote important papers on the intersection of finance, economics, and monetary policy, exploring the policy failures that created the Great Depression and emerging as an advocate of “inflation targeting,
” or establishing a goal for how much prices should rise and adjusting monetary policy accordingly.

  But even as he produced outstanding academic work, Bernanke began to discover his talent for guiding groups of people to a decision. A skilled listener and persuader, he became economics department chair at Princeton in 1996. It is a thankless job, with all the responsibilities of leadership but little explicit power—high-powered academics, after all, don’t like being told what they should teach or research. Bernanke often joked that his biggest responsibility was deciding whether to bring bagels or doughnuts to faculty meetings, though that undersells the scope of his duties. He navigated the faculty through decisions on, for example, whether to increase course offerings in finance, in such a way that everyone could feel like part of the process, even if he or she disagreed with the ultimate decision.

  Bernanke also served on the Montgomery Township, New Jersey, school board at a time when it was deeply divided over whether to raise taxes to build more schools. The issue was so hard-fought that a fistfight broke out outside one meeting. Bernanke’s instincts were to side with the low-tax group, former colleague Dwight Jaffee told the Washington Post, but “he would look at the numbers and make computations about whether it made sense to build new schools. . . . He really has faith in doing the numbers right and then living with them.” His was ultimately the tie-breaking vote for a bond issue that raised local property taxes.

  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.

  • • •

  Mervyn 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.