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|Pt. 1||Magic Tricks||1|
|Ch. 1||The Magician on the World Stage||3|
|Ch. 2||The Magician at Home||28|
|Pt. 2||Central Banks||53|
|Ch. 3||What Is a Central Bank?||55|
|Ch. 4||The Question of Independence||80|
|Pt. 3||Avoiding Catastrophe||99|
|Ch. 5||The System and Its Risks||101|
|Ch. 6||The American Lender of Last Resort||120|
|Pt. 4||Making Money||141|
|Ch. 7||The Age of Invention||143|
|Ch. 8||Monetary Policy in the Maelstrom||164|
|Ch. 9||Disaster Time||181|
|Ch. 10||Greenspan and the Markets||205|
|Pt. 5||The Day Jobs||245|
|Ch. 12||The Payments Franchise||247|
|Ch. 14||The Fed and the Poor||285|
|Pt. 6||What's Next?||299|
|Ch. 15||The Fed in Our Future||301|
Since the last great universal crisis of 1867 many profound changes have taken place. The colossal extension of the means of transportation and communication -- seagoing steamers, railroads, electric telegraphs, the Suez Canal -- have made the real world market a fact...Infinitely greater and varied fields have been opened in all parts of the world for the investment of superfluous European capitals, so that it is far more distributed, and local overspeculation may be more easily overcome. By means of these things, the old breeding grounds of crises and opportunities for the growth of crises have been eliminated or strongly reduced.
-- Friedrich Engels (1894)
As the millennium turns, central banks are in apotheosis. Never has their prestige, their authority, or their independence -- indeed, their mystique -- been greater. But the appearances are deceptive. The volcano rumbles under Olympus and fissures are visible on the slopes. The unprecedented volatility in the markets -- stock markets, bond markets, foreign exchange markets -- demonstrates that instead of settling down, the postmodern financial system is acting up. Central banking in the twentieth century, especially as practiced by the Federal Reserve System in the United States, is one of the great stories in economic history, and no one can understand the present policy dilemma worldwide (the need, as former Treasury Secretary Robert Rubin put it, for a new financial architecture) without understanding that story. In a world where tiny changes in interest rates canproduce rapid and vast change in the prices of financial instruments and the viability of national economic policies, the decisions the central banks must make are exquisitely important. They had better know what they're doing. We had better know what they're doing.
The touchstone has to be October 1998. It very nearly all came apart in October 1998.
As they do in two of every three years, bankers and central bankers, financiers and finance ministers came to Washington by the thousands in the first week of October 1998 for the annual meetings of the International Monetary Fund and the World Bank. It turned out to be an experience they will never forget as long as they live, a weekend of pure terror, as though an asteroid were descending on Earth, much worse than the riotous and riotously publicized protests at the smaller Interim Committee meeting eighteen months later. David Komansky, CEO of Merrill Lynch, the prototype of the jolly fat man, said that he woke up on Saturday morning an optimist, and that night he wanted to crawl under the bed to hide.
This was far from a normal experience at the Bank/Fund meetings, which have usually been a kind of reward for their participants, divided by age. Seniors enjoy their importance in various caucuses formed for self-congratulation and finger-pointing at others outside the caucus. They eat and drink the very best, decorously, at parties in venues like the Corcoran Gallery and the Folger Library. Juniors, drafted during the day to provide an audience for the big shots at the plenary sessions in the enormous ballroom of the Sheraton Park Hotel near the National Zoo, party vigorously late into the night at the expense of various publications and suppliers to the finance community. All the 182 countries that belong to the Bank and the Fund are represented, usually by both finance minister and central bank chairman (all expenses paid by the Bank or the Fund), and all the world's two hundred largest banks are there (at their own expense), sometimes with delegations of thirty and forty people.
Not much work is required. Some of the pleasantries in the corridors will turn into deals, and everybody's Rolodex grows larger. But the closing communiqués are in large part ritual, and where in fact real decisions must be made, the terms if not the details are arranged before the first limousine takes the first delegate from Dulles Airport to his or her hotel. "The deputies" have already met, in Paris or Tokyo or Rome, and written the draft of the communiqué, which will be presented in Washington to selected representatives of the outliers of globalism, noblesse oblige, before the public meetings begin on Monday. If disagreements persist, they are resolved on Saturday, when the finance ministers of the seven big financial powers (the list includes Canada, but not China or Russia) meet as a group.
The official meetings are only part of the show. Perhaps the most important side event is a Monday morning conference sponsored by the Group of Thirty, a think tank established in the late 1970s with help from the Rockefeller Foundation. The anointed Thirty in 1998 included active executives of the Bank for International Settlements in Basle, the Banque de France, the European Central Bank, the Bank of England, and the Bank of Israel, plus former chief executives of the Federal Reserve, the Bank of Japan, Danmarks Nationalbank, the International Monetary Fund, and the Federal Reserve Bank of New York; half a dozen academics; and present or recently retired senior executives of Citibank, Dresdner Bank, Deutsche Bank, Goldman, Sachs, Industrial Bank of Japan, Merrill Lynch, J. P. Morgan, and Morgan Stanley. When the Bank/Fund meeting is in Washington, the Group of Thirty affair occurs at the Pan-American Union or in the top-floor meeting room of the Federal Reserve's Martin Building.
Beneath the practiced mallet of Paul Volcker, a former Fed chairman, the conference proceeds in an orderly fashion for three hours through presentations by a dozen speakers (it always, miraculously, ends on time). Private bankers, finance ministers, and central bankers -- since 1987, the list has always included Federal Reserve chairman Alan Greenspan, early in the proceedings -- present their views on the world's financial situation and respond to a few questions from the audience. In 1998, the usual list of the great and the good -- the finance minister of Italy, the chairman of the Bank of Japan, a senior executive from Deutsche Bank, and so on -- was supplemented by George Soros, who had just lost $2 billion in Russia.
But for once the context of the meeting had been set not by its own eminent speakers but at another meeting two days before, when Deutsche Bank, the largest by some margin of the German banks, presented the report of its Global Markets Group. Volcker also chaired this meeting, which was held in the downstairs ballroom of the Omni Hotel near the Sheraton. Each member of the audience was presented with an 83-page large-format coated-paper pamphlet on Global Emerging Markets, tastefully illustrated on the cover with a drawing of the Titanic sinking in an iceberg field and a bunch of lifeboats seeking to escape. Next to the illustration was the sentence: "The real problems lie below the waterline."
Lumping together the five nations devastated by the Asian financial crisis, the Deutsche Bank researchers concluded that "While it is difficult to argue that governments are insolvent...under most scenarios, the ability of the government to service its debt in the short run is questionable." Turning attention to Russia, the German bank's experts argue that "there is a very high risk that Russia will not be able or willing to repay its foreign debt" -- ever. Latin America might have a chance because most countries had large enough reserves to ride out a long storm, but "failing to stay on course might have very costly and lasting consequences." And the main speaker in the Latin American part of the program, Professor Guillermo Calvo of the University of Maryland, thought it would be wisest to abandon hope. Then David Folkerts-Landau, "Global Head" of Emerging Markets Research, formerly director of capit