Fascinating Look Inside Global Central Banks, and the Impact of MIT « Market Montage

As we await QE4, QEInfinity+, or whatever you want to call it to be announced later today, the WSJ has quite a piece this morning on the relationship among the world's central bankers.  If you have not heard, Goldman alum Mark Carney has been tapped to take over for Bank of England's Mervyn King.  But it is not all about "the vampire squid" association in this part of the world; it actually all has origins at MIT.  Did you know Mervyn King and Ben Bernanke shared an office decades ago?  And that Mario Draghi (ECB President), Stanley Fisher (Bank of Israel Governor), Mervyn King, and Ben Bernanke were all at MIT in the mid 70s to mid 80s?  And these folks have meetings with no minutes taken 6x a year?  Just fascinating stuff.   You can also see how important it is for the big money on Wall Street to be tapped into these conversations – not that anything like that EVER happens.

Federal Reserve Chairman Ben Bernanke and European Central Bank President Mario Draghi received their economics Ph.D.s from MIT in the late 1970s. Mr. Fischer was their adviser. Charles Bean, deputy governor of the Bank of England followed shortly after. Mr. Bernanke and Bank of England Governor Mervyn King shared an office as MIT professors in the early 1980s.

Via WSJ:

  • Every two months, more than a dozen bankers meet here on Sunday evenings to talk and dine on the 18th floor of a cylindrical building looking out on the Rhine.  The dinner discussions on money and economics are more than academic. At the table are the chiefs of the world's biggest central banks, representing countries that annually produce more than $51 trillion of gross domestic product, three-quarters of the world's economic output.
  • Of late, these secret talks have focused on global economic troubles and the aggressive measures by central banks to manage their national economies. Since 2007, central banks have flooded the world financial system with more than $11 trillion. Faced with weak recoveries and Europe's churning economic problems, the effort has accelerated. The biggest central banks plan to pump billions more into government bonds, mortgages and business loans.
  • Their monetary strategy isn't found in standard textbooks. The central bankers are, in effect, conducting a high-stakes experiment, drawing in part on academic work by some of the men who studied and taught at the Massachusetts Institute of Technology in the 1970s and 1980s.
  • Three of the world's most powerful central bankers launched their careers in a building known as "E52," home to the MIT economics department. Fed Chairman Ben Bernanke and ECB President Mario Draghi earned their Ph.D.s there in the late 1970s. Bank of England Governor Mervyn King taught briefly there in the 1980s, sharing an office with Mr. Bernanke.
  • Many economists emerged from MIT with a belief that government could help to smooth out economic downturns. Central banks play a particularly important role in this view, not only by setting interest rates but also by influencing public expectations through carefully worded statements.
  • Over Sunday dinners in Basel, which often stretch to three hours, they now talk of pressing, real-world problems with authority. The meals are part of two-day meetings held six times a year at the BIS. Dinner guests include leaders of the Fed, ECB, Bank of England and Bank of Japan, as well as central bankers from India, China, Mexico, Brazil and a few other countries.
  • The Bank of England's Mr. King leads the dinner discussions in a room decorated by the Swiss architectural firm Herzog & de Meuron, which designed the "Bird's Nest" stadium for the Beijing Olympics. The men have designated seats at a round table in a dining area scented by white orchids and framed by white walls, a black ceiling and panoramic views.
  • Serious matters follow appetizers, wine and small talk, according to people familiar with the dinners. Mr. King typically asks his colleagues to talk about the outlook in their respective countries. Others ask follow-up questions. The gatherings yield no transcripts or minutes. No staff is allowed.
  • On Mondays after the dinner, the bankers join a larger group of central bankers at a large round table on a lower floor of the BIS building, which is shaped like a rook chess piece. Staff members sit nearby at desks decorated in white leather.  "These meetings are a very important forum to understand the global situation," said Duvvuri Subbarao, governor of the Reserve Bank of India and a Sunday dinner participant. "People speak freely."
  • The central bankers typically stop short of formally coordinating their moves.  But as central bankers grapple with doubts and disagreements over reviving the global economy, they form a tightknit fraternity, tied by efforts to manage growth and gird against financial instability. Their relationships play out during conversations by phone and in person. "A big secret of central bank cooperation," Mr. King said, "is that you can just pick up a phone and have an agreement on something very quickly" in a crisis.
  • This summer, the central banking clique kept in close touch as they readied for a new round of monetary activism. On June 8, Mr. Bernanke and Mr. King spoke by phone for a half-hour before policy meetings at their central banks, according to Mr. Bernanke's phone records, obtained in a public records request. A few days later, Mr. Bernanke spoke by phone with Mark Carney, head of the Bank of Canada—and last month named as Mr. King's successor. Shortly after, Mr. Bernanke called Stanley Fischer, head of the Bank of Israel, and a former MIT professor who was Mr. Bernanke's dissertation adviser.
  • A few days later, the ECB announced an agreement to buy bonds of struggling European governments in exchange for a country's adherence to fiscal austerity.  Then the Fed announced plans to buy bonds every month until U.S. job market improves "substantially." The BOJ, despite Mr. Shirakawa's hesitance, soon followed with news it also was expanding its bond-buying program.

 

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