Lords of Chaos

There is often a good story behind the circumstances of how an individual author comes to write a particular book at a particular moment. If you are ever at a social event with an author and want a conversation starter, they are generally more than happy to share their individual story with you. As for books on the financial crisis, one ‘story behind the book’ that I remember was told by Andrew Ross Sorkin, who wrote Too Big to Fail. As he tells it, he came home from work one night at 2:30am as the mega-insurance company AIG was about to collapse, he woke up his wife and described his day to her and he says to her, “It’s like a movie” and in response his wife says “No it’s like a book, Andrew.”

I believe that Neil Irwin, author of The Alchemists: Three Central Bankers and a World on Fire, is in clear denial about his ‘story behind the book.’ As he tells it, his work at the Washington Post in covering the Federal Reserve intertwined with the crisis and he wanted to capture the crisis through the key central bankers of the day. I think the reality is that Irwin at some point read Liaquat Ahamed’s Pulitzer prize-winning book, Lords of Finance, about the key central bankers during the Depression and he decided to update that book for the current crisis. It should be noted that Ahamed wrote a nice endorsement for the jacket cover of Irwin’s book, so even if he is of the same mind as me regarding the genesis of Irwin’s idea he does not seem too annoyed.

The name of the book itself describes someone with a magical power to turn a substance of little worth into something of great value. This is apparently a reference to the capacity of modern day central bankers to turn simple paper money, or even more predominantly today electronic key strokes, into something of worth, essentially a modern day version of Rumpelstiltskin.

Irwin’s book starts out as a history of central banking as he chronicles a litany of central bank failures, which can be summarized as ‘stories about how central bankers completely tanked their nation’s economy.’ He in sequence recounts the story of the first central bank in Sweden, Stockholms Banco, the predecessor to today’s Sveriges Riksbank. It was led by one Johan Palmstruch, who Irwin refers to as “history’s first central banker” whose “actions as a man with the power to print money at will had decimated Swedes’ personal savings, wrecked their national economy, and forced the government to intervene to prevent complete catastrophe.” This is followed by the story of the German Reichsbank, its creation in 1876 and ultimately the hyperinflation it created in the early 1920s that “wiped out the savings of an entire generation.” You would think that Irwin’s recitation of this history would make him skeptical of the idea that we can get a room full of very smart people and plunk them down in Washington, DC, or London or Frankfurt and with minimal effort achieve through alchemy the basis of a stable financial system. Unfortunately, that skepticism does not come through in the later stages of the book, as his comments mostly effuse gushing praise for modern central bankers.

As the story proceeds up to the modern day, the pages committed to each of the key events in this tome of approximately 400 pages seem strangely disproportionate to their importance in the financial crisis. For example the bailout of Bear Stearns, which some have derisively called the “original sin” of the bailouts because it started the authorities down the road of reliance on such interventions, gets all of two pages. What little the book contains on Bear is the same, tired media narrative that if Bear was not saved it would “bring an entire economy down,” and it needed to be bailed out because of how “deeply intertwined” it was with the rest of the financial system. Irwin then notes that “[t]here was not time to do any careful number crunching” which would seem to accurately describe the Fed’s seat of the pants approach to analyzing Bear’s plight. But then a few pages later Irwin reveals an evident blind allegiance to the capabilities of the Fed to reach the proper balance of intervention, as he approvingly quotes a European central banker’s description of the Bear Stearns rescue as “masterful.”

The Lehman failure gets a bit more ink than Bear Stearns, all of about six pages. After tracing through the details of Lehman’s troubled end, almost completely out of left field, Irwin concludes: “In any case, the result was plain: By allowing a financial institution of such great international economic reach to go bankrupt, the Fed failed the global community of central bankers.” He gives no basis to ignore all the reasons he listed against intervening in Lehman: the lack of a buyer for the institution, including the collapse of a consortium that looked into supporting it; Lehman’s deep insolvency; and the lack of sufficient collateral to support any type of standard lender of last resort borrowing. This is one rare moment where he comes down hard on the US central bank and his quoted comment above seems to imply that anyone else in the community of central bankers would have known what to do.

Then Irwin segues immediately into the details of the AIG bailout. After noting that the Fed again performed “some very quick, very scary guesstimation” (more seat-of-the-pants analysis) and then quoting Bernanke hyperbole that “[t]he failure of AIG, in our estimation, would have basically been the end,” Irwin reveals his not-so-surprising conclusion on the efficacy of bailing out AIG. In contrast to the lack of action from Washington on Lehman Brothers, he dramatically and approvingly coos “[t]his time, Washington wouldn’t let down the world.”

Irwin’s analysis of these ‘big three’ intervention decisions by the Fed and Treasury can only be described as weak. He does not drive into the detail of the underlying decisions. He does not engage in good old fashioned ‘shoe leather’ journalism and uncover any new revelations about the decision-making process like so many other books on the financial crisis have done. He merely reveals a bias heavily weighted towards intervention and a ‘Washington to the rescue’ mindset that is not supported in the least by the facts presented.

From this point on in the book (about the last 250 pages), Irwin meanders through a host of topics in his journey through the ensuing four years and into late 2012. An interesting section of the book is rather unique in that it is ground that I have not seen covered in any other book on the crisis. In a chapter called ‘Battle for the Fed’ Irwin traces the Ron Paul-Alan Grayson-Bernie Sanders effort to ‘Audit the Fed.’ He nicely summarizes the ideas of this classic right-left coalition that came together in the aftermath of the bailouts: “In the spring of 2009, people of opposing parties and differing political ideologies could all agree on one thing: The government agency that most clearly deserved to have its wings clipped in response to the economic crisis was the mighty Federal Reserve.”

Irwin gets his ultimate analysis wrong on this topic:

Paul’s name for his legislation was particularly inspired: ‘Audit the Fed.’ After all, every corporation gets audited; any institution of the Fed’s size should be held to such routine accountability. In fact, on financial matters the Fed was already audited, with an independent inspector general in house, oversight by Congress’s investigative arm, and reserve bank audits carried out by the same major accounting companies that audit every major corporation in America.

Unfortunately, he blurs the concept of a financial statement audit and a policy audit on monetary policy as undertaken by a body like the Government Accountability Office and places a great deal of stock in an inspector general that Alan Grayson embarrassed in a classic viral video from 2009. However, in this same chapter, Irwin does a good job of detailing the opposition to Bernanke in his reappointment to the chairmanship in 2010.

The latter chapters of the book are heavily dedicated to the European Union and its troubles during 2011 and 2012. Irwin’s decent summary, as is the case with his earlier reporting of the troubles in the US, provides no great revelations. In a detour of a chapter called “Governor Zhou’s Chinese Medicine” Irwin focuses on China. The most revealing tidbit from this chapter is the following statist comment in describing the Chinese government response to the crisis as compared to the US response:

It all worked. The Chinese economy bottomed out in the fourth quarter of 2008, six months earlier than the U.S. economy did, and it returned to its pre-crisis growth path of nearly 10 percent almost immediately. Democracy and free speech are among the greatest achievements of Western Civilization, but in moments of financial panic, authoritarianism has its advantages . . . . The crisis certainly exposed the weaknesses of free-market capitalism.

With the exception of the unique analysis of the “Battle for the Fed” chapter, in my mind there is little to recommend in Irwin’s book. The lack of depth in Irwin’s analysis of the events of recent history is only outdone by the thinness of the analysis undertaken by the Fed and Treasury in justifying their interventions during 2008 and 2009.