Bank of Canada Governor Mark CarneySHAUN BEST
As the world teetered on the brink of economic ruin 80 years ago, the most powerful central bankers and financial policy makers of the day compounded key blunders by essentially sitting on their hands or finding ways to make things worse.
U.S. authorities actually tightened monetary conditions as banks collapsed around their ears. And the Bank of England and British Treasury "did nothing in particular, and did it very well," historian Peter Clarke writes in Keynes , a fresh assessment of the famed economist and arch-opponent of laissez-faire policies in the midst of serious slumps.
When Montagu Norman, governor of the British central bank for a remarkable 24 years, was called as the first witness of a government committee investigating the growing crisis, he took to his bed and sent a deputy in his place.
It's hard to imagine Federal Reserve chairman Ben Bernanke, current Bank of England governor Mervyn King or the Bank of Canada's Mark Carney ever ducking a spotlight. And it's even harder to picture them doing nothing while the sky falls.
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Indeed, rapid and unprecedented intervention by the major central banks in the past year played a crucial role in rescuing the storm-battered global financial system. And many economy watchers credit their rare co-ordinated response with saving the world from the second coming of the Great Depression, one that some feared would make the original pale by comparison.
But although the grim forecasts of gloom purveyors as recently as last spring have failed to materialize, the central bankers themselves acknowledge that we are not out of the woods yet.
A flood of international loans tied to troubled assets sit like ticking time bombs in the financial system. Massive public stimulus spending has helped lift key economies out of technical recession. But the recovery has been slow and spotty and has not yet shown it can be sustained once government shuts off the taps.
Businesses and consumers have reined in spending. Unemployment remains stubbornly high, wages are stagnating, credit conditions are still tight, industrial output is nowhere near recovery level and global imbalances are worsening.
What's more, most governments have pretty much used up their ammunition. Interest rates cannot go any lower and heavy deficit spending has put a serious dent in their balance sheets. And the all-out effort to fix the short-term crisis is bound to have longer-term repercussions, from new asset bubbles fuelled by cheap money (already appearing in emerging markets) to soaring deficits, rising borrowing costs and growing inflation risks.
But that's tomorrow's story. Today, leading central bankers are basking in praise for thawing the global credit freeze, keeping money markets afloat, big banks solvent and currencies relatively stable. Once little known outside finance and policy circles, they have quite unexpectedly become celebrities.
Mr. Bernanke has gone from being a dry Princeton economist to Time magazine's person of the year. Mr. Carney has vaulted from the ranks of faceless financial technocrats into a leading public voice of financial prudence and moderation.
They may well be following the advice of global risk expert and former investment banker Satyajit Das, based in Sydney, Australia. "People grossly overestimate the ability of policy-makers to influence events," he says. "The wisest thing you can do is take credit for things which go right, whether you had any influence on them or not. And when things go wrong, make sure you've retired."
The developed world's worst central banker, Iceland's David Oddson, stayed too long. By the time the first poet or former government leader to run a modern central bank - Mr. Oddson holds both distinctions - was ousted earlier this year, he was reviled as a leading architect of the country's financial and economic ruin. Toward the end of his tenure, he required a 24-hour police guard.
Somewhere far above Mr. Oddson sit the rest of the world's more qualified central bank chiefs and financial policy makers.
Here's how some of them fared in 2009.
The Federal Reserve - Ben Bernanke
Lauded for aggressive rate-slashing, quantitative easing and creative use of the Fed's balance sheet. But sharply criticized for doing nothing early in his tenure about the budding mortgage mess and for his part in permitting the disastrous failure of Wall Street heavyweight Lehman Brothers in September, 2008, which triggered the global crisis.
Nevertheless, he held the key to unlock the frozen market. And much of his best work had nothing to do with the Fed's more publicized efforts to flood U.S. financial markets with money or the bailout for big banks.
"We have to understand that this is effectively a world central bank," says investment banker Ken Courtis, founding partner of Themes Investment Management in Hong Kong. This is not because the U.S. was the epicentre of the crisis or because of the size and clout of its economy, but because of its crucial U.S. dollar swap lines with other key central banks. "That, in effect, means that the Fed is the lender of last resort to the … world economy," Mr. Courtis says.
Mr. Bernanke, an expert on the causes and policy mistakes of the Great Depression, quietly bolstered the swap lines with his European and Japanese counterparts. At the time, their own banks could not get needed U.S. dollars, because the interbank market had seized up. The only way to obtain them was from their own central banks, via the swap lines, which meant Washington was effectively keeping large foreign banks functioning.
"It was quite an interesting solution to what could have been a terrible problem," says long-time Fed watcher Robert Brusca, chief economist with FAO Economics in New York.
Mr. Bernanke provided innovative responses in the midst of crisis. But critics worry about the long-term consequences of his policies and the potential damage he has done to the Fed's vaunted independence, as Congress threatens to reduce the regulatory authority Mr. Bernanke failed to exercise properly. "Now his authority is going to be curtailed [by the legislature]and the independence of the Fed may be compromised, to the great long-term detriment of the American economy," says Peter Morici, a business professor at the University of Maryland and a harsh critic of Fed policy. He sees a weaker central bank emerging from the financial mess "and Ben Bernanke is the man responsible."
Grade: B
Bank of Canada - Mark Carney
Unlike his counterparts, Mr. Carney inherited a relatively sound financial system and didn't have to resort to aggressive quantitative easing (central banker jargon for cranking up the printing presses). But while the government was reacting too slowly to the unfolding crisis, he was driving down interest rates to record lows; and his public pledge to keep them there did much to shore up confidence and bring down longer-term rates.
He is "positioned to be an important player in global banking reforms by being in the enviable position of having had oversight over a system that managed to avoid the wreckage seen in the U.S. and Europe," says Avery Shenfeld, chief economist at CIBC World Markets.
Grade: A
European Central Bank - Jean-Claude Trichet
Under the conservative Mr. Trichet, the ECB gets mixed grades. The bank warned U.S. officials early on about the dangers of the ballooning real estate bubble and the unregulated shadow banking system.
But unlike the Fed, the ECB is hamstrung by limitations on its operations and flexibility and the fact each member country runs its own fiscal affairs. For instance, because of strict inflation targeting, the ECB can't cut interest rates unless other central banks have agreed to do it at the same time. And it has no authority to print money, issue large amounts of liquidity without approval or buy up debt from member states.
"A lot of what the Fed did reflexively, the ECB is treaty-barred from doing, which leads to problems like Greece," says Peter Zeihan, vice-president of strategic analysis with global intelligence firm Stratfor. "The ECB couldn't put a floor beneath things."
Grade: B
Bank of England - Mervyn King
The British economy is still mired in recession and Prime Minister Gordon Brown is leaving the spigot wide open as he heads toward an election in 2010 that he is expected to lose badly. But that's not Mr. King's fault. His quick, aggressive response to the crisis may well have saved the banking system from complete collapse.
"The ATM machines in the United Kingdom were on the point of being virtually shut off, because nobody had any money," Mr. Das says.
But if Britain can't reverse the financial decline, the world's oldest central bank may well be presiding over the last few years of independent monetary policy. "I don't think they're going to turn into Iceland, but it's now feasible to consider that in a few years, London will have no choice but to apply for euro zone membership," Mr. Zeihan says.
Grade: B
Bank of Japan - Masaaki Shirakawa
The Japanese government and its central bank don't have to worry about running out of ammunition. They haven't had any for years. So when Mr. Shirakawa declared recently that the bank won't stand for a flat or falling consumer price index, bemused analysts were left to wonder exactly how he proposes to reverse a deflationary trend that has been eroding wages, dampening spending and boosting debt costs for much of the decade.
Needless to say, the current crisis hasn't made things any easier for the latest government or its less than bold central banker. "Their solution is to go back to the policies of the 1990s that they know didn't work and do them again," Mr. Zeihan says. That means sticking to a zero interest-rate policy and cranking up deficit spending.
The crisis has complicated "the already problematic cocktail of deflation and ballooning debt," says Mr. Courtis. Mix in a procession of weak governments, high unemployment and a shrinking economy, and the central bank "has had probably the most difficult of policy, economic and financial environments in which to operate," he adds.
"In their circumstances, what can you do?" Mr. Brusca asks. "They're right back in the soup and they've tried everything but the kitchen sink."
Grade: C