The Alchemists: Three Central Bankers and a World on Fire by Neil Irwin

conservative bunch. The awesome responsibility that society grants them comes with a demand for certain traits: seriousness, sobriety, caution. No head of state would entrust control over an entire economy to someone inclined toward frivolity and risk-taking. Most of the time, that’s just fine. We want central banks to be led by people who are boring. The idea of “first, do no harm” is a powerful one, and a central banker who was too quick to experiment could do a great deal of harm to his economy.
    But it is precisely when an economy needs the most help from a central bank that the job demands what seem like radical departures from orthodoxy. The very qualities that lead to a person’s being selected to help lead a central bank make him reluctant to engage in the bold experimentation that might help get an economy out of a deep rut.
    For all its excessive caution, the Bank of Japan did eventually cut rates to zero, pledge to keep them there, and purchase a variety of assets with newly created yen—and even those efforts weren’t enough to “fix” the economy. A generation of Japanese has seen diminished prospects; if economic output per person had risen at the same pace from 1991 to 2011 in Japan as it did in the United States, the average Japanese person would have an extra $9,500 a year in income.
    Monetary policy is indeed powerful—but it’s not all-powerful. As Princeton economist Alan Blinder put it in the closing session on that fall day in 1999 at the Woodstock Inn, “ Does an economy with a zero nominal interest rate follow more or less the same economic laws as it does in normal times—except that one variable is stuck at zero? Or is the situation more akin to physics at zero gravity, or near absolute zero temperature, where behavior is fundamentally different, even strange? I think the conclusion we seem to be reaching here at Woodstock is that it may indeed be a new world.”
    Ueda, representing the Bank of Japan, closed the event with a pledge—and a warning that would prove all too prescient once the Federal Reserve, the Bank of England, and the European Central Bank had joined their Asian counterpart in the strange new world of ZIRP.
    “I promise ,” he said, “to bring all the interesting ideas I have heard in this conference to the attention of my colleagues in Tokyo. Meanwhile, I must say that one of the most important messages of the conference has been: Do not put yourself into the position of zero rates. I tell you it will be a lot more painful than you can possibly imagine.”

EIGHT
    The Jackson Hole Consensus and the Great Moderation
    F or the world’s central bankers, the gathering at Wyoming’s Jackson Lake Lodge in August 2005 was a moment of triumph. After centuries in which their predecessors had frequently failed to guide the nations of the world through boom and bust, inflation and deflation, they had finally, it seemed, learned all the important lessons of how to manage an economy. The 110 central bankers and other economists convened in the Explorers Room seemed to have all the answers, and they had created a more stable and prosperous world than any known before.
    One scholar after another took to the lectern in that Friday morning, standing beneath elk-antler chandeliers to pay tribute to the great man. Alan Greenspan, slightly hunched and with big glasses, a hangdog face, and a smile as enigmatic as that of the
Mona Lisa,
was soon to step down as the chairman of the Federal Reserve, the central bank that decided the fate of the then $12.6 trillion U.S. economy, the largest in the world. Colleagues from nations large and small in every corner of the globe had come together to see Greenspan off into retirement properly and consider his legacy. The official name of the event was the Federal Reserve Bank of Kansas City Economic Policy Symposium. But it’s known across the world of finance simply as Jackson Hole, for the ancient glacial basin where the gathering takes place