This interview will appear in the 2Q Y2013 (July 2013) issue of the Sovereign Wealth Quarterly.
This is a Q&A with Neil Irwin, Author of The Alchemists.
1. What major theme would you like readers to draw from your latest book, The Alchemists: Three Central Bankers and a World on Fire?
To understand our modern world, you have to understand the work of the central banks, and their leaders, which have shaped the planet’s economic destiny in ways that many people fail to understand. And moreover, it was the response of the global central bankers to the crisis that began in 2007, which I chronicle in detail, that stood between the world economy and the abyss, with consequences that will shape the 21st century economy for all of us.
2. In your opinion, did Ben Bernanke and the other central bankers in Europe and Japan properly coordinate central bank actions during the global financial crisis?
There were failures, of course. But there can be no doubt that the leading central bankers acted with a decisiveness and common purpose that saved the world from a much worse series of economic outcomes. This easily could have gone the way the Great Depression of the 1930s, when failure of the central bankers to act in a unified way and on a scale commensurate to the crisis they faced allowed global depression and ultimately a world war. The actions of Ben Bernanke, Mervyn King, Jean-Claude Trichet, and the rest prevented the same from happening here, and that is to their great credit.
One example that I like to use is liquidity swap lines created among all the major industrialized nations’ central banks. It was essentially a tool for ensuring European and other global banks could gain access to dollar liquidity. Few in the American public knew about them, but it amounted to, at the peak, $580 billion in U.S. taxpayer resources lent to international banks (it was all repaid, with interest). It was the bonds of trust among the leading central bankers, cemented at countless gatherings in Basel and in Jackson Hole and elsewhere, that gave them the confidence to respond with tools that contained the great panic of our age.
3. Why call central bankers the alchemists?
Hundreds of years ago, alchemists were these men who envisioned turning basic materials into gold and silver, to create money from thin air using potions and so on. Some were hucksters, some were skilled technicians, and some were among the great scientists of their day; it has been said that Sir Issac Newton was not the first modern scientist, but the last of the alchemists.
But here’s the thing: As it turned out, you didn’t need potions or magic to create money from thin air. All you need is a central bank, imbued with power from the state, and a printing press. In the modern age you don’t even need the printing press. And you need a central banker to run it. These are the men and women whom society has entrusted with that great power, and that is what makes them our modern alchemists.
4. Foreign institutional investors – including sovereign wealth funds – have invested heavily in government bonds. Are savers losing out when central banks maintain QE policy in the long run?
I think that largely gets it backward. Of course low interest rate policies and quantitative easing mean low returns for savers, but the low interest rate on sovereign bonds is a reflection of there being more demand for safe assets right now than there is supply. The only way that will change in time is when the global economy improves enough that there is more global investment and that demand for safe assets diminishes. In that sense, the thing that bond investors want and the thing that the central bankers want are aligned, and the question is if or when we’ll get to that point. But to blame central bankers for the current low interest rate environment is a bit like blaming the weather man for the rain.
5. It seems today with the expansion of central banks’ balance sheets we are operating on borrowed time. Is there a proper system in place to transition away from QE policy without negatively affecting economic growth?
I’m more optimistic than a lot of people that they can pull it off without major disruptions in financial markets, but I absolutely concede we are in uncharted territory and a spirit of modesty is warranted given all we’ve seen the last few years. But if there’s one thing central banks no how to do, it’s raise interest rates. We’ve now had more than four years of quantitative easing by the Fed and Bank of England, longer than that from the Bank of Japan, and a huge balance sheet expansion by the ECB with no perceptible inflation problem and asset prices that, while up a lot, seem to be up in ways justified by fundamentals. I don’t pretend that the exit from these strategies will be easy, but I see no reason that they can’t withdraw that monetary support gradually enough, and in the context of a growing economy, that keeps us from having any huge disruptions in markets. I hope I’m right!
6. What is your take on the current transparency of the Federal Reserve System?
They’ve come a long way. This is a central bank that not that long ago didn’t even announce its policy changes. Now each policy change comes with several paragraphs of description of the rationale; minutes come out three weeks later; the Fed releases its leaders’ forecasts for the economy and inflation; the chairman does four press conferences a year. It will be interesting to see whether Bernanke’s successor pushes toward even greater transparency or if things will now remain how they are for a while. I’m a reporter, of course, so I’d prefer that their policy meetings be broadcast on television. But I acknowledge that may be a step too far for central bankers.
7. Do you perceive currency wars in Asia as the next major issue for bankers to tackle?
I think the currency war issue gets overstated. I understand why the South Koreans and other Asian exporters would be unhappy about the BOJ’s aggressive easing, and that it may deepen some geopolitical stresses. But as long as every country keeps the eye on the ball—domestic inflation—and doesn’t let it get out of control, which they have so far, I see no reason this has to spiral into something tremendously dangerous.
8. What is your take on the current transparency of the Federal Reserve System?
It’s been a remarkable period we’ve been living through, and the consequences of this wrenching crisis will be with us for a generation to come. What I’ve tried to do with the book is tell that story in its full global arc—not just the U.S. subprime crisis or the post-Lehman Brothers collapse, but a story that began with that crisis, then bent, warped, pivoted, and crossed the Atlantic to become a sovereign debt crisis and really something that threatened the entire postwar European project. It’s an ambitious story, and others can judge whether I’ve done it justice, but that’s the story The Alchemists sets out to tell.
About Neil Irwin
Neil Irwin is the author of The Alchemists, an account of the rise of central bankers as key shapers of the world economy, and how the modern central bankers used that power in the 2007-2012 crisis and its aftermath. He is a columnist at The Washington Post and economics editor of Wonkblog, the Post’s site for policy news and analysis. He was previously the Post’s beat reporter covering the Fed and other central banks. Irwin was a Knight-Bagehot Fellow in Economic and Business Journalism at Columbia University, and has an MBA from Columbia Business School. He often appears on television analyzing economic topics, including on the PBS Newshour, CNBC, and MSNBC.
Atlas Merchant Capital LLC and Singapore’s GIC Private Limited acquired just under a 25% equity stake in Dresher, Pennsylvania-based Ascensus, the largest independent recordkeeping services provider, third-party administrator, and government savings facilitator in the United States. San Francisco Genstar Capital LLC and New York-based Aquiline Capital Partners LLC were the sellers of the shares in Ascensus and will maintain control over the company.
Atlas Merchant Capital LLC was founded by Bob Diamond and David Schamis. Diamond is the former group chief executive of Barclays plc.
GIC is an investor in Alight Solutions, a provider of human capital solutions.
Barclays acted as the lead financial advisor and J.P. Morgan acted as financial advisor to Ascensus in connection with this transaction. Willkie Farr & Gallagher LLP acted as legal counsel to Ascensus.
Debevoise & Plimpton LLP acted as legal counsel to Atlas Merchant Capital and Sidley Austin LLP acted as legal counsel to GIC.
In 2015, JC Flowers sold Ascensus to Genstar Capital and Aquiline Capital Partners.
The Value of Research: Skill, Capacity, and Opportunity
This article is sponsored by S&P Dow Jones Indices.
How much should a portfolio manager be willing to pay for research? The question is of importance to any manager, but has become particularly pertinent since newly imposed European rules require that the costs of investment research—previously offered by many investment banks as an in-kind consideration in return for brokerage business—be unbundled from trading.
Unfortunately, attempts to determine a fair value for research in the most general circumstances are doomed to fail. Even if we only consider direct recommendations to buy or sell certain securities, the value of such recommendations to a portfolio manager will vary according to the absolute size of positions taken in response. Instead, we provide a framework for estimating relative research values across markets and constituents, under certain stylized (but reasonable) assumptions.
REPORT: The Value of Research: Skill, Capacity, and Opportunity
Malaysia’s Khazanah Nasional Berhad is prepping to declare more than 1 billion MYR in a dividend payout to the Malaysian government for 2019. Khazanah Nasional is undergoing a significant strategy shift to focus more on domestic assets, while selling off venture tech investments, overseas real estate, fund investments, and other non-strategic assets. The wealth fund also plans to scale back its overseas presence in markets such as San Francisco and London.[ Content protected for Sovereign Wealth Fund Institute Standard subscribers only. Please subscribe to view content. ]
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