They're technocrats, schooled in subjects that bore most people. They are appointed—not elected—to top government jobs, and what they do is not well understood. But they are enormously powerful, and in 2009 they may determine whether the global economy avoids calamity. "They" are central bankers: Ben Bernanke of the U.S. Federal Reserve; Jean-Claude Trichet of the European Central Bank (ECB); Masaaki Shirakawa of the Bank of Japan; and, to a lesser extent, counterparts in China, India, Brazil, Mexico and elsewhere.
Not since the early 1980s, when high inflation plagued many advanced economies, or perhaps the 1930s, has their role been so crucial. Global economic growth is slowing to a standstill. Economists at Deutsche Bank forecast that the world economy will expand a meager 0.2 percent in 2009—the worst year since at least 1950. In 2007, growth was almost 5 percent. Without stronger growth, the slump might feed on itself and fuel economic nationalism.
Superficially, central bankers seemed poised to deliver that revival. As if on cue, major central banks cut interest rates in November and December to spur growth and prop up their financial systems. The ECB reduced its key rate to 2.5 percent; the Bank of England went down to 2 percent, equaling the lowest rate since its founding in 1694; and many other central banks have also cut rates—China, India, Canada. As for the Fed, its key short-term rate has dropped from 5.25 percent to as low as zero; the Fed will now try to lower long-term rates.
Until recently, there was little unanimity of purpose. In July, the ECB raised its key rate to 4.25 percent to prevent soaring oil prices from increasing overall inflation. "Europe was in denial [about the crisis] until Lehman's bankruptcy" on Sept. 15, says Fred Bergsten of the Peterson Institute for International Economics.
In a crisis, history counsels cooperation. Its absence in the 1930s was disastrous. Consider the bankruptcy in May 1931 of Creditanstalt, then Austria's largest bank. That failure might have been prevented if Germany and France had agreed on a rescue package. They couldn't. Bank panics "spread to Hungary, Poland, Germany and Britain—and the rest of the world," says Harvard political scientist and historian Jeffry Frieden.
One sign of cooperation today is massive "swap" lines between the Fed and 14 other government central banks. These swaps provide dollars to other central banks, enabling them to lend the dollars to local banks. Companies, investors and banks in Europe, Asia and Latin America have borrowed huge amounts in dollars. As U.S. credit markets seized up, renewing dollar loans became harder. The Fed's swaps—as much as $500 billion—substitute for private credit, minimizing defaults.
It seems encouraging that central-bank cooperation reflects a broader consensus. After meeting in November, the G20 nations (the United States, the European Union, Japan, China, India and some other major nations) issued a communiqué forsaking protectionism and pledging "economic stimulus" programs. So far, then, so good? Globalism, not nationalism.
Well, maybe. But as Frieden points out, much of today's "cooperation" is through press releases. Countries agree on broad principles but go their separate ways. Countries renounce protectionism, but there are signs that China—with a massive trade surplus—might relax, or even reverse, its policy of currency appreciation. By making the renminbi cheaper, China would give its exports an added price advantage.
All this compounds the pressures on central banks to restore economic growth. There is not so much cooperation as a shared fear grounded in scholarly conclusions about the Great Depression: don't let panic destroy the financial system; public lenders must advance when private ones retreat. But these plausible responses raise a troubling question: what if this downturn is following a different script?