Tower of Basel: The Shadowy History of the Secret Bank That Runs the World (39 page)

The governors’ sense of common interest and their mutual trust has proved especially important during the crisis. King said, “We have adopted different
forms of communication with the markets, and learned from the experience of others about what worked and what didn’t work. The BIS meetings have helped us to formulate views about what we should do, and about the financial instruments we use. All the governors feel they benefit from sharing experiences, which is different from just getting documents.”

Nonetheless, the governors’ meetings are still dominated by a tight-knit, inner-core of the governors of the Federal Reserve, the ECB, and the Bank of England, who share decades-old connections. Ben Bernanke, Mario Draghi, and Sir Mervyn King all spent time at the Massachusetts Institute of Technology economics department. Bernanke and Draghi earned their PhDs there, while King taught there for a short time in the 1980s and shared an office with Bernanke.
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The emphasis on status and hierarchy adds to the mystique of the BIS, said Pennant-Rea. “When you strip down the membership, only a relatively small number really matter. The United States above all, Germany and Britain to a minor extent. There is a very strong sense of pecking order.”

But like all self-referential groups that rely on each other for mutual advice and reinforcement, the central bankers, cocooned in luxury and discretion at the BIS, can easily forget that they are public servants, said Andrew Hilton, the director of the Centre for the Study of Financial Innovation, a think-tank based in London. “It’s a tricky one because you don’t want them to be affected by day-to-day populist pressures. On the other hand, you do want them to know how much a pint of milk costs. The fine line you have to draw is between not being pressured by what’s happening on the street, but also being aware of it. It’s all too easy as a central banker to float over the political economy and throw bread to the masses. Central bankers should probably never be allowed to go anywhere in a limousine. They should take the Basel tram.”
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Those central bankers who implement austerity programs do not personally suffer the consequences. Jean-Claude Trichet served as president of the ECB from 2003 to 2011. Europe’s economies have slid into recession in part because of the ECB’s relentless demands to keep inflation below 2 percent. Despite his role in the unfolding Eurozone crisis, Trichet is now a much sought-after
speaker on the international conference circuit.

In May 2012 Trichet spoke at the Peterson Institute for International Economics in Washington, DC, offering his thoughts on the “Lessons from the Crisis.” To an outsider the scene seemed an extraordinary spectacle: as Spain’s economy began to collapse, neo-Nazis patrolled the streets of Athens, beating immigrants, and an entire generation of young Europeans faced years of unemployment and poverty. Trichet, however, was garlanded with praise and lauded for his insight. The French banker, said Peter G. Peterson, “played a decisive role in the Europe crisis as president of the European Central Bank until he stepped down last fall,” which was indeed true, although not in the sense that Peterson intended.

The solution to the Eurozone crisis, argued Trichet, was not less supranationalism and technocratic rule, but much more. Trichet called for what he described as “a quantum leap” of economic governance, to accelerate the next stage of European integration. If a Eurozone member refused to obey instructions “coming from the center”—meaning European authorities—there should be the “activation of a federal government by exception.” This policy, which even Trichet admitted would be at the “very, very, limit” of what would be acceptable, would mean that if “Your parliament is not behaving properly, we fine the country.”
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Apparently oblivious to Europe’s growing backlash against rule by technocrats, Trichet will have plenty of time to further hone his ideas for the end of national sovereignty in his new position as chairman of Bruegel, one of the foremost think tanks on European economic integration. The first president of the ECB retired having wreaked “the sort of destruction on the European economy that hostile powers could only dream about,” said Dean Baker, of the Centre for Economic and Policy Research, a liberal think tank. Trichet embodies the type of central banker who sees the economic crisis as something quite distinct from their responsibilities, said Baker. “Their job is to get inflation down, to 2 percent. The economic crisis is something bad that happened. It would have been nice if it did not happen, but it was not their responsibility, you cannot hold them accountable for it, and they don’t have the tools to deal with it.”
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Central bankers strongly reject this argument. Inflation, they say, is not a
tap to be turned on and off when governments like to stimulate growth. “This is not something that you toy with,” said one former central banker. “It is very easy for politicians to basically rob people of their savings by creating inflation. It is immoral, and anyway capital is much more mobile than it was ten or thirty years ago. The money will say you are creating inflation, goodbye, we are going to China or wherever, in a few seconds. It is much cleaner if we deal with the problem head on and do the painful things.”
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Or as Stephen Cecchetti, the head of the BIS Monetary and Economic department, said, high debt levels are a “drag on growth.” There can be no growth without structural repair and a gradual but credible reduction in debt levels. “As we have learned from years of experience with crises in both emerging market and advanced economies, the choice between austerity and growth is a false one. The true choice is between austerity and collapse. And that really is no choice at all.”
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But the BIS’s view is outdated. There is a choice, as even the IMF now argues.

          
“And they said, ‘Come, let us build a city, and a tower with its top in the heavens, and let us make a name for ourselves, lest we be dispersed across the whole earth.’”
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— Genesis 11.3, The Tower of Babel

T
he story of the Tower of Babel is often read as a parable of the price of arrogance. Its builders started to construct the tallest building in the world, one that would reach to the very heavens as a physical manifestation of their greatness and ambition. Things ended badly.

The BIS tower, at Centralbahnplatz 2, in Basel does not reach to the heavens, but many of those working inside believe themselves possessed of a near-celestial mandate. Now seventy-three years old, the bank has evolved into one of the world’s richest and most influential anachronisms. Montagu Norman’s “cozy club” has sixty members. They circle the globe, from Colombia to the Philippines, Iceland to the United Arab Emirates, although the developing world remains underrepresented. The BIS employs around six hundred staff from more than fifty countries. Thousands of central bankers and their officials flock every year to the bank’s numerous committees, meetings, and conferences.

Since 2007 the ongoing financial crisis has neither reduced the value of the BIS’s assets nor dented its profits and prestige. The bank makes much of its money from the fees and commissions that it charges central banks for its services, such as short-term liquidity and credit, gold swaps, and by providing a range of investment opportunities and instruments. The BIS is a much sought after commercial partner. Its record is solid and conservative, its credit rating superb.
In Basel at least, the crisis has, overall, been good for business. For the financial year ending in March 2009 the bank made net, tax-free, profits of 446.1 million Special Drawing Rights, the equivalent of around $650 million.
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Its total equity was valued at the equivalent of almost $20 billion.
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By the end of March 2012, profits had nearly doubled, to the equivalent of around $1.17 billion—almost $100 million a month—and the bank’s total equity had increased by 40 percent to around $28 billion.
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These are extraordinary sums for a single financial institution with just 140 clients and two local offices, in Mexico City and Hong Kong.

Even at a time when the IMF, not usually an advocate of generous public spending, has warned publicly and repeatedly against excessive austerity, at the BIS the legacy of Hjalmar Schacht, Montagu Norman, and Per Jacobssen endures.
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The bank’s managers regularly warn against the dangers of excessive lending and inflation. Austerity is seen as a necessary medicine, no matter how unpleasant its consequences. Such warnings are listened to.

The bank’s influence is profound: the BIS is one of the world’s most effective instruments of soft power. The bimonthly governors’ meeting gathers central bankers from countries that control more than four-fifths of the world’s GDP. The discussions at the Basel weekends have shaped the debate about the global financial crisis and the world’s response to it. The committees hosted at the BIS are rebuilding the world’s financial architecture and coordinating regulatory and supervisory policies. The Basel Committee on Banking Supervision oversees the capital requirement of commercial banks. Its work, wrote Ezra Klein, a columnist for the
Washington Post
, “will shape the future of global finance, and, by extension, the economy.” Klein awarded the committee the title of the “Most Obscure-Yet-Important Regulatory Agency of the Year,” noting, “its actions may only rarely make the front pages, but the work done in Basel is crucial to creating a more stable world economy.”
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“Obscure yet important” surely brought knowing looks and quiet smiles at the BIS headquarters.

The bank’s annual reports are regarded as essential reading in the world’s treasuries and governments. The head of the bank’s Monetary and Economic Department, who writes and oversees the annual reports, is one of the world’s
best read and most influential financial and economic analysts and commentators. The BIS hosts one of the world’s largest restricted databases of banking information. Its mainframe computers sweep up data about the flow of transnational finance, including money flows in and out of offshore domiciles. Such information is of great interest to governments. Three months after 9/11 the Basel Committee on Banking Supervision hosted a meeting to coordinate central banks’ and regulatory authorities’ strategies on the prevention of terrorist financing and the sharing of records to prevent terrorist financing.
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The Financial Stability Board, hosted at the BIS, is likely to become the fourth pillar of the global financial system, after the BIS itself, the IMF, and the World Bank. The FSB coordinates national financial authorities and regulators. Its members include the Federal Reserve, the ECB, the Bank of England, and the national banks of China, Saudi Arabia, Switzerland, Russia, Japan, and Korea. The IMF, the World Bank, the European Commission, and the BIS itself are also members of the FSB, as are three of the most powerful committees hosted at the BIS: the Basel Committee on Banking Supervision, the Committee on the Global Financial System, and the committee dealing with payment and settlement systems. The writer Matt Taibbi once memorably described Goldman Sachs, the giant investment bank, as a “vampire squid.”
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The BIS is now the vampire squid of the regulatory world, hosting a myriad of committees that in turn spawn a raft of subcommittees, many of which are composed of the same central bankers and officials, each producing reams of reports that are passed back and forth from Basel to national central banks and governments in an endless merry-go-round of resolutions and recommendations.

Others argue that the answer to the banking crisis is not more insider committees and regulatory bodies hosted at the BIS, or anywhere else, but much less, or none at all. “Banking should become a normal industry, like manufacturing bicycles,” said Andrew Hilton, of the Centre for the Study of Financial Innovation. “Banking should be regulated to protect against fraud, to protect consumers, and to protect the banks’ integrity, but nothing else. That sounds crazy because everyone says that banking is special. Banking is only special because the sums of money
flowing through these institutions are so large they can bring society down. If the banks were smaller, if they did simpler things and they were not a systemic threat, either individually or within a cluster, you would not have to regulate them. The banks would take out insurance and the system would be protected.”
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Such views are regarded with horror in Basel. Yet, the heart of the matter is that BIS is an opaque, elitist, and anti-democratic institution, out of step with the twenty-first century. The BIS should have been closed down in the early 1930s, after the collapse of the German reparations program. Instead it funded the Holocaust and the Nazi war machine. Its staff members, such as Thomas McKittrick and Per Jacobssen, passed vital economic intelligence to the Nazis—often with the knowledge of the Allied authorities. The bank embodied the most cynical kind of capitalism. While millions died, it kept financial channels open across the frontlines.

After 1945 the BIS and its allied committees shaped much of the postwar financial world. Behind the scenes the BIS provided the necessary financial mechanisms, support, and technical expertise for the financial aspects of the Euro-integrationist project. Without the BIS the euro would not exist. The BIS gave birth to the European Central Bank, a bank that is accountable neither to the European Parliament nor to any government, even though it controls the monetary policy of seventeen countries. The BIS has survived through the decades just as it was born—by opacity, secrecy, and by hiding behind a carapace of legal immunities. These protections perpetuate the technocrats’ belief that a tiny, self-selecting elite, unaccountable to everyday citizens, should manage global finance. The BIS’s privileges are a hangover from a thankfully vanished age of deference to authority, at least in the developed world.