The Myth of the Omnipotent Central Banker

Monetary Policy and Its Limits

A man crosses the street in Australia, 2012.
(Daniel Munoz / Courtesy Reuters)

The Alchemists: Three Central Bankers and a World on Fire. BY NEIL IRWIN. Penguin Press, 2013, 400 pp. $29.95.

Central bankers have always carried a mystique far beyond justification. Even as their policies and procedures have become markedly more transparent, the air of secrecy and power about them persists. And the ongoing financial crisis has brought their activities to the center stage of both economic policymaking and political attention, even as the crisis has revealed many inherent limitations of monetary policy and economic forecasting more broadly.

Indeed, central bankers should be far humbler today than they were in recent decades, when some claimed credit for the so-called great moderation, the period of reduced economic volatility that lasted from the late 1980s to the early years of this century. It is now clear that the prosperity and stability much of the world enjoyed during those years were largely the result of good luck. Nevertheless, monetary policy is a powerful tool, even if it is less powerful than many think.

The journalist Neil Irwin’s book The Alchemists: Three Central Bankers and a World on Fire thus has an unfortunate title. Central bankers are hardly inconsequential, but their policies cannot transform economic fortunes as an alchemist turns dross into gold. This limitation notwithstanding, Irwin’s book is an excellent account of how central bankers have responded to the financial crisis, scrupulously reported and full of clear explanations of events and economic concepts. On the whole, it is an incredibly valuable book for all economically concerned non-economists. As someone who knows well the three central bankers that the book features -- Ben Bernanke, the chair of the U.S. Federal Reserve; Mervyn King, the former governor of the Bank of England; and Jean-Claude Trichet, the former president of the European Central Bank (ECB) -- I can attest that the narrative has more than just a ring of truth. It gets the individuals, the circumstances surrounding their decisions, and their motivations right and also presents them fairly. Irwin’s volume will have lasting value for a wide range of audiences, including students and elected officials, but it will make its greatest contribution as a corrective to the many unfounded or simply crazy ideas about monetary policymakers’ intentions and impact.

THE HUMAN ELEMENT

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