The well-known American humorist paid tribute to central banking with these words: “The three greatest inventions of mankind are fire, the wheel and central banking.” If he wanted to be precise, the humorist should have said “good central banking.” And if he wanted to be even more precise than that, Will Rogers should have said “good central bank governors.”
During the last three years the most powerful woman in the world has been, not the Managing Director of the International Monetary Fund (Christine Lagarde) or the Chancellor of Germany (Angela Merkel) or the head of the British Commonwealth of Nations (Queen Elizabeth II), but the economist who is the chairman of the US Fed (Federal Reserve Bank), which is America’s counterpart of central bank governor. Janet Yellen succeeded fellow-economist Ben Bernanke in 2013.
In 2008, halfway through Bernanke’sterm, the US was struck by the worst downturn to hit the US economy since the Great Depression of the 1930s. Between them, Yellen, Bernanke and the boards that they headed put an end to an economic occurrence that drove tens of thousands of people to unemployment, financial delinquency and bankruptcy and brought suffering and misery to millions of Americans. And since the US is the principal driver of the world economy, the severe flu in America quickly translated into a bout of full-blown pneumonia for the world economy.
Displaying enormous savvy, sharp judgment and steel-like guts, Ben Bernanke and his board steered the US economy slowly but surely back to stability and, eventually, to growth. Bernanke had a wide array of monetary tools, including changes in interest rates—the basic interest rate is called the Fed funds rate—and required reserves, open-market operations and special deposit requirements, America’s central bank undertook the tricky task of restoring order to financial and property sectors roiled by the scandal in the sub-prime housing mortgages market. The Bernanke Fed settled on two tools, namely, a zero Fed funds rate and open-market operations consisting of an announced program of scheduled Fed purchases of US government bonds. The first tool was intended to bring down the level of market interest rates; the second tool was intended to reinforce the first by increasing the availability of funds for corporate and personal lending by otherwise timorous financial institutions.
The strategy of the Bernanke Fed was slow to take effect. Given the depth of the economic downturn, that was not surprising. But in the end the financial and capital markets realized that the Fed meant business and began to take advantage of the regime of the unprecedented monetary ease. Even so slowly the American economic ship began to turn around.
Financial markets around the world were apprehensive that Bernanke would be followed into the Fed chairman’s office by an individual who would not be equal to the task. But in no time were their apprehensions allayed, for Bernanke’s successor, Janet Yellen, quickly showed herself to be possessed of the right stuff. Against the advice and opinions of many bankers and economists, and anxious that the Fed should not take its foot off the accelerator, chairman Yellen maintained the steady-as-you-go strategy of Ben Bernanke. Speculation in the world financial community about the Yellen-led Fed’s interest rate intentions has caused the Fed chairman’s name to be the name most often mentioned in wherever and whenever finance people meet.
Another display of central banking chutzpah and savoir-faire was made early this year shortly after the announcement of the victory of the pro-exit side in the March 23 referendum of continued British membership in the European Union. Seeing the negative reactions of the financial markets to Brexit (British exit), Mark Carney, the non-British of the Bank of England, lost no time in announcing that Britain’s central bank would make available all the funds that the financial markets reasonably required—with an initial commitment of 35 billion pounds—to cope with the expected outward movements of funds. That Bank of England gesture quickly calmed the markets, and the steady slide of the pound soon came to a halt.
The examples discussed above portray central banking at its very best. They constitute awesome displays of the finest in monetary management. Will Rogers was essentially right: good central banking is one of the man’s greatest inventions.
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