Below is a another interesting artilcle of general knowledge from WSJ written by Jon Hilsenrath published on the 12/12/2012
BASEL, Switzerland—Every two months, more than a dozen bankers meet
here on Sunday evenings to talk and dine on the 18th floor of a
cylindrical building looking out on the Rhine.
The world's major central banks are embarking
on an aggressive new phase of policy activism, a course fraught with
economic and political risks. WSJ's Jon Hilsenrath reports on the News
Hub.
Photo: AP Images.
The dinner discussions on money and economics
are more than academic. At the table are the chiefs of the world's
biggest central banks, representing countries that annually produce more
than $51 trillion of gross domestic product, three-quarters of the
world's economic output.
Of late, these secret talks have focused on
global economic troubles and the aggressive measures by central banks to
manage their national economies. Since 2007, central banks have flooded
the world financial system with more than $11 trillion. Faced with weak
recoveries and Europe's churning economic problems, the effort has
accelerated. The biggest central banks plan to pump billions more into
government bonds, mortgages and business loans.
Their monetary strategy isn't found in standard textbooks. The
central bankers are, in effect, conducting a high-stakes experiment,
drawing in part on academic work by some of the men who studied and
taught at the Massachusetts Institute of Technology in the 1970s and
1980s.
While many national governments, including the U.S., have failed to
agree on fiscal policy—how best to balance tax revenues with spending
during slow growth—the central bankers have forged their own path,
independent of voters and politicians, bound by frequent conversations
and relationships stretching back to university days.
If the central bankers are correct, they will help the world economy
avoid prolonged stagnation and a repeat of central banking mistakes in
the 1930s. If they are wrong, they could kindle inflation or sow the
seeds of another financial crisis. Failure also could lead to new
restrictions on the power and independence of central banks, tools
deemed crucial in such emergencies as the 2008-2009 financial crisis.
"Will history decide they did too little or too much? We don't know
because it is still a work in progress," said Kenneth Rogoff, an
economics professor at Harvard and co-author of a book, "This Time Is
Different," examining financial crises over eight centuries. "They are
taking risks because it is an experimental strategy."
The U.S. Federal Reserve now buys $40
billion of mortgage-backed securities each month and appears set at a
meeting Wednesday to spend billions more on Treasury securities. The
Bank of England has agreed to funnel billions of pounds to businesses
and households through banks. The European Central Bank pledged to hold
down borrowing costs of governments that sought help. The Bank of Japan,
under increased pressure to fight deflation, is purchasing ¥91
trillion yen ($1.14 trillion) in government bonds, corporate debt and
stocks.
The goal is to lower borrowing costs and stimulate stock
markets to encourage spending and investment by households and business.
But the method is untested on such a global scale, and central bankers
have labored in behind-the-scenes meetings this year to size up the
risks.
A day after their June dinner here, the central bankers were warned by one of their hosts in a speech to the group.
"Central banks find themselves caught in the middle, forced to be the
policy makers of last resort. They are providing monetary stimulus on a
massive scale," said Jaime Caruana, general manager of the Bank for
International Settlements, where the dinners are held. "These emergency
measures could have undesirable effects if continued for too long."
Another worry: Boosting stock markets and easing credit costs allow
national governments to postpone difficult political decisions to fix
such problems as swelling budget deficits, according to this contrary
view.
Vocal critics include economists at the BIS, an international body
based here that is increasingly an important staging ground for talks
about the postcrisis financial landscape. They say central banks,
seeking faster growth, are stretched too thin.
"Central banks cannot solve structural problems in the economy," said
Stephen Cecchetti, who runs the BIS monetary department. "We've been
saying this for years, and it's getting tiresome."Central banks control the spigot of the world's money supply. When
opened, the flow of new cash heats up economies, driving down interest
rates and unemployment but risking inflation. Closing the spigot, on the
other hand, raises interest rates and cools economies but tamps down
prices.
The central bankers have promised that once the global economy gets
back on its feet, they will shut off the spigots quickly enough to
forestall inflation. But pulling back so much money, at exactly the
right time, could become a political and logistical challenge."We're all very conscious that we're in an environment that's unusual
and we're using a policy weapon that we don't have a lot of experience
with," Charles Bean, deputy governor of the Bank of England said in an
interview.
Central bankers themselves are among the most isolated people in
government. If they confer too closely with private bankers, they risk
unsettling markets or giving traders an unfair advantage. And to
maintain their independence, they try to keep politicians at a distance. Since the financial crisis erupted in late 2007, they have relied on
each other for counsel. Together, they helped arrest the downward spiral
of the world economy, pushing down interest rates to historic lows
while pumping trillions of dollars, euros, pounds and yen into ailing
banks and markets.
Three of the world's most powerful central bankers launched their
careers in a building known as "E52," home to the MIT economics
department. Fed Chairman Ben Bernanke and ECB President Mario Draghi
earned their Ph.D.s there in the late 1970s. Bank of England Governor
Mervyn King taught briefly there in the 1980s, sharing an office with
Mr. Bernanke.
Many economists emerged from MIT with a
belief that government could help to smooth out economic downturns.
Central banks play a particularly important role in this view, not only
by setting interest rates but also by influencing public expectations
through carefully worded statements.
While at MIT, the central bankers dreamed up mathematical models and
discussed their ideas in seminar rooms and at cheap food joints in a
rundown Boston-area neighborhood on the Charles River.
Over Sunday dinners in Basel, which often stretch to three hours,
they now talk of pressing, real-world problems with authority. The meals
are part of two-day meetings held six times a year at the BIS. Dinner
guests include leaders of the Fed, ECB, Bank of England and Bank of
Japan, as well as central bankers from India, China, Mexico, Brazil and a
few other countries.
"That is where it really gets down and dirty," said Nathan Sheets, a Citigroup
economist and former head of the Federal Reserve's international
affairs division. He didn't attend the dinners during his tenure at the
Fed but is familiar with them. "Every one of the dinners was important
through the crisis."
The Bank of England's Mr. King leads the
dinner discussions in a room decorated by the Swiss architectural firm
Herzog & de Meuron, which designed the "Bird's Nest" stadium for the
Beijing Olympics. The men have designated seats at a round table in a
dining area scented by white orchids and framed by white walls, a black
ceiling and panoramic views.
"It is a way in which people can talk completely privately," Mr. King
said in an interview. "It is a big advantage if you have some feel for
how central banks think about questions, what they're likely to do in
the future if certain events were to occur."
Serious matters follow appetizers, wine and small talk, according to
people familiar with the dinners. Mr. King typically asks his colleagues
to talk about the outlook in their respective countries. Others ask
follow-up questions. The gatherings yield no transcripts or minutes. No
staff is allowed.
The 18-member group, formally known as the Economic Consultative
Committee, has only once issued a public statement: a two-line missive
in September, promising to look for solutions in interbank lending
markets, responding to allegations that some private banks had conspired
to manipulate the Libor interest rate.
On Mondays after the dinner, the bankers join a larger group of
central bankers at a large round table on a lower floor of the BIS
building, which is shaped like a rook chess piece. Staff members sit
nearby at desks decorated in white leather.
"These meetings are a very important forum to understand the global
situation," said Duvvuri Subbarao, governor of the Reserve Bank of India
and a Sunday dinner participant. "People speak freely."
The central bankers often act with the common goal of bringing the
world closer to full employment. Other times, though, they are starkly
at odds.
In November 2010, for example, the Fed launched a $600 billion
bond-buying program known as quantitative easing. A few days later, New
York Fed President William Dudley and Fed vice chairwoman Janet Yellen
attended a weekend meeting here and were surprised by the furor the
Fed's stimulus program had stirred among developing countries, according
to people familiar with the talks. Mr. Dudley and Ms. Yellen spent much
of the meeting explaining the Fed's actions, as other central bankers
raised worries the program would cause inflation or spark an unwanted
flood of capital into their markets.
"Every time there is quantitative easing by the Fed, that gets
discussed," said Mr. Subbarao. "We all have to reckon with the spillover
impact of our policies on other countries." Basel, he said, is the
place to air such concerns.
The role of the Bank for International Settlements has broadened
since it was formed in 1930 to handle reparation payments imposed on
Germany after World War I. In the 1970s, it became the center of
discussions on bank capital rules. In the 1990s, it became the meeting
place for central bankers to talk about the global economy.
The central bankers typically stop short of formally coordinating their moves. Mr. Bernanke, Mr. Draghi and Bank of Japan head Masaaki Shirakawa
are more focused on domestic challenges. Mr. Shirakawa has often warned
others in Basel about the effectiveness of easy money policies,
according to people familiar with his statements. That hesitance has
made the BOJ an issue in Sunday's Japan elections. Shinzo Abe, the
front-runner to become prime minister, has promised to rein in the BOJ's
independence and demand more aggressive efforts to end consumer price
deflation.
But as central bankers grapple with doubts and disagreements over
reviving the global economy, they form a tightknit fraternity, tied by
efforts to manage growth and gird against financial instability. Their
relationships play out during conversations by phone and in person.
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