August 26, 2013
For those of you who are partial to a bit of history – and particularly the history of this part of the world in the years before the Plantation – Wolf Hall, the 2009 Booker Prize winner by Hilary Mantel, is a must-read. It is the story of Thomas Cromwell, Henry VIII’s confidant and adviser – and the man who, possibly more than most, was responsible for the Reformation in England.
This, we Irish readers already know, has enormous implications for us. However, the most interesting aspects of the book are the intrigue, the diplomacy, the mendacity and the downright nastiness of the court of the king.
To the modern reader, one of the characteristics which jumps out of the pages was the blind faith which the people had in the church, the scriptures and of course the ever-present threat of heresy, hell and Satan.
The flip side of the fear of heresy is of course the belief in the notion that all heretics could be burned to repent, and in repentance all would be fine, the old order would be restored and civilisation could carry on.
Reading the book (one of my summer reads), I couldn’t help noticing the similarity between the old clerical hierarchy of the Middle Ages and today’s economists, particularly central bankers.
Back then, the priests held sway over the people by suggesting that they and only they could understand the word of God and that the word of God was so unbelievably sacred that only men of great learning were in the position to interpret it. The real fear of Lutherans was that they would break the privileged position of the church hierarchy by saying that the gospel could be printed and given out to commoners so that the common man could talk to God himself without the need of the priest to mediate.
This move, of course, would break the mystique of the church and would thus smash the hold it had over the people. In order to preserve the mystique of the ancient church, the priests talked in riddles, in Latin – a language that the commoner didn’t understand – and they kept the sacred texts secret or at least declared the gospel so difficult that only men of great academic learning could possibly understand this. All this was designed to ensure their exclusive access to the truth.
Sometimes when I hear my fellow professional economists talk, I am reminded of the medieval priests. Many economists use similarly contorted language, many worry about the same hyper-academic sensitivities and pretensions and many seem to believe in the infallibility of certain doctrines which are maintained by rituals, ceremonies and closed-door conferences where only the learned meet to discuss the finer points of economic doctrine.
This weekend, there will be one such gathering of the learned and, at the end of it, a carefully orchestrated press conference will be the economic equivalent of white smoke in the Vatican. At the press conference, the conclave of the world’s most powerful economists will reveal the conclusion of their deliberations.
The reverence with which this huddle of central bankers – the annual Federal Reserve meeting at Jackson’s Hole this weekend – is handled in the media and the wider financial market reinforces this notion of the cult of the banker.
In recent years, the notion that the central bankers of the world – largely the same people who missed the greatest asset bubble in history in the Noughties – are now in some way infallible has taken hold.
Today, after five years of printing money hand over fist to get the world economy going again, the theological difficulty facing the high priests of economics is how to end the money-printing episode without causing the financial markets to crash again.
By printing money, the central bankers erred from their own true gospel, and while many tolerated this experiment because of the unforeseen and exceptional circumstances they, like true believers, want to get back to the one true path of sound money.
The great recession of 2008-2012 was the central bankers’ equivalent of Henry VIII’s marital problems and male succession dilemmas which allowed the English church to bend the rules on divorce expediently and in so doing set the Reformation in train in Britain.
Most of the clergy that went along with the monarch truly believed that this would be a temporary issue, a bit of rule-bending to get over the present difficulties. Few believed it would permanently change the way their world worked, and few still understood that the threat to their power was total and would be calamitous for them.
Today, the world’s central bankers are also caught in a theological dilemma. By printing money hand over fist, they suspended central banking dogma in the face of an immediate and present threat – deflation and recession. Now the question is: can they find the path back to the way things were before or is the cat now out of the bag?
The miracle of money-printing was that it had been a cheap way of trying to kick-start the economy. Now that the US economy is showing signs of growth across the board, the central bankers are struggling with how to end this unorthodox deviation.
The problem for the central bankers is that once they allowed the cult of the central banker to take hold and once they positioned themselves as the last line of defence against economic Armageddon, the financial markets now believe that they have all the answers. But they don’t.
Here’s the tricky bit. The huge rally in financial markets in the past few years is due to the billions of freshly printed dollars, yen, pounds and euro. But this cash has driven a wedge between financial markets and asset prices on the one side and the underlying economy, which has to deliver the growth rates to justify the elevated asset prices, on the other.
Now if the economy doesn’t grow sufficiently, the taking away of the stimulus – known now as ‘tapering’ – will precipitate a market crash that the very process of printing money was supposed to prevent in the first place.
This is the conundrum. In recent weeks the US economy is showing that the recovery is in train, but it’s weak and fitful. The markets have twigged the central bankers’ dilemma and have sold off the emerging market countries in advance of the end of the unorthodox regime. But, again, this very sell-off means that the end of the unorthodox regime will come at great cost.
Like the medieval church, once they started tinkering with theology and their own ancient truths about how the economy works, the high priests of economics have revealed that their old rules actually might not have been hard and fast rules after all.
This is why the boss of central bankers is a bit like a medieval Pope. He first has to keep his conclave together, but he has to acknowledge that the old world might not ever be the same again and, finally, he has to deal with pesky heretics from within his own ranks who believe that the evidence of the last few years means that the old economic rules no longer apply.
It’s a big ask even for someone like Ben Bernanke, who has proved himself to have the dexterity of a Medici bishop of Rome, but who may well be heading an economic Reformation without even knowing it.