THIS week, a meltdown in the global financial markets was averted through the intervention of six of the world’s leading central banks in a move led by the chairman of the US Federal Reserve, Ben Bernanke.
The aim of the concerted move was to prevent a seizing up in the banking system in Europe, brought about by the unravelling sovereign debt crisis.
The swoop by the banks impressed investors, many of whom have been casting around desperately for leadership amid growing concerns that we were headed for a repeat of a Lehmans catastrophe.
What the groups of central banks did is as follows: They reduced the premiums banks had to pay to borrow dollars overnight from central banks by one half to 50 basis points (0.5%). The central banks also agreed to create temporary bilateral swap programmes so funding could be provided in any of their currencies “should market conditions so warrant”.
Europe’s banks have stopped trusting each other, and they are no longer prepared to deposit funds with each other. The result is that the interbank market is seizing up.
Policymakers now do not bother to conceal their panic. The normally unflappable Finn, Olli Rehn, European Commissioner responsible for economic and monetary affairs, talked of there being “nine days to save the euro” while IMF director general, Christine Lagarde, said that “timing is of the essence... Europeans in particular, but also all central bankers appreciate the urgency of the moment.”
The bank governors do win praise for a move which has re-instilled a degree of confidence, but the general verdict is that it has addressed a major liquidity issue without addressing the underlying problem of sovereign insolvency. Over to you, Ms Merkel.
Who then, are the key players?
BEN BERNANKE: US Fed chairman
Bernanke was handed a poisoned chalice by his predecessor as America’s top central banker Alan Greenspan.
Having written extensively on the Great Depression, he strove mightily through 2008 and 2009 to prevent its recurrence, earning the nickname “helicopter Ben” for his willingness to spread vast amounts of liquidity around in an effort to prevent the system seizing up.
Many question the decision to let Lehman Brothers go under, but he was named by Time magazine as its Person of the Year in December 2009 after he increased the balance sheet of the US Fed threefold in an effort to prop up the US economy.
As Time puts it, “he did not just reshape US monetary policy, he led an effort to save the world economy.”
His critics call him “Bailout Ben, the patron saint of Wall Street”.
They view him as soft on inflation. All the GOP (Republican party) presidential candidates have promised to remove him from office if elected.
MERVYN KING: Bank of England Governor
King is now a veteran among central bank bosses. Critics accuse him of having been too close to Alan Greenspan and suggest that he allowed a housing bubble to take hold in Britain.
However, he also earned a reputation as a hawk on the governing council, willing to take a minority position if necessary.
He startled many, this week, when he warned British banks to start building up their reserves as a buffer against the “exceptionally threatening environment ” caused by the eurozone crisis. He also conceded that the authorities were drawing up contingency plans to meet the event of a breakup of the eurozone.
Mario Draghi: ECB president
The ECB boss finds himself at the epicentre of the eurozone sovereign debt crisis just weeks after succeeding the long-serving Jean Claude Trichet.
Draghi surprised the markets when he pushed through a quarter-point interest rate cut at the first meeting of the governing council following his appointment. This was seen as an implied rebuke to his predecessor.
However, Draghi is proving reluctant when it comes to demands over German opposition to agree to a programme of quantitative easing designed to flood the markets with credit in an effort to thwart the bond market vigilantes who now threaten the very future of the eurozone, raising the spectre of an economic meltdown across Europe and well beyond.
Draghi proved his mettle as Governor of the Bank of Italy in ensuring that bank lending was kept well under control.
The big question is: with hundreds of billions of debts due to be rolled over in Italy and Spain, and by European banks in the early months of 2012, can the fiscal union/austerity cart really be put ahead of the sovereign debt horse? Has the new President the skills to engage in macro prudential supervision? Can he engage as an equal with the ECB’s German paymasters who remain obsessed with counter inflationary strategies, and with the preservation of their creditor nation privileges? Could Draghi, instead, go down in history as the man who turned out the lights at the ECB, and across the Western world
Mark Carney: Central Bank of Canada governor
Brought up in the remote Northern Territories, the son of a school principal, he has won many plaudits for the way he has handled the downturn.
Canada endured a banking meltdown in the 1990s and cleaned up its act ahead of the Noughties bubble.
Carney has the good fortune to preside over a banking system and economy that is in good working order, boosted by a surge in the price of energy. Canada has huge reserves of gas and shale oil.
Masaaki Shirakawa: Bank of Japan governor
The BoJ’s contribution came despite Japan being the most indebted G20 nation with a debt to GNP ratio of over 200%. Shirakawa offered a bleak assessment of the economic outlook in the wake of the crisis, this week.
Shirakawa must contend with the surge in the value of the yen, which is now seen as a safe haven currency following the eurozone crisis.
This problem is shared with the Swiss National Bank, chaired by Philipp M Hildebrand.
The relative strength of the Swiss franc is lowering Switzerland’s competitiveness internationally.