Feb 25 - Mar 02, 2008

Who is more powerful - the elected president of the United States or the un-elected head of America's politically independent central bank? Steven Solomon, the author of "The Confidence Game" tries to answer this question in the scenario of 1987 stock market crash, "the dilemma was that neither Washington's elected politicians nor Wall Street's top financiers possessed the tools for decisive, emergency leadership to forestall the crisis. Only one institution, and one man did, - the US central bank and its chairman, Alan Greenspan."

In the words of the then Treasury Undersecretary of Finance George Gould, "a president can say something, but he can't do anything. But the Fed has a well-established statutory position and the ability to do something."

Steven Solomon continues, "The godlike moment of the anonymity-seeking central banker came when the smooth functioning of market mechanism broke down, top financiers were stampeding with the frightened herd to be first to the exit, cool heads were befuddled with panic, and the financial system was heading for a total smash-up. It was then that he - and only he- had the capacity to call for a time-out, restore confidence, and then let play resume according to usual market mechanism."

The two previous most powerful Fed chairmen Alan Greenspan, and Paul Volcker commanded unconditional respect of the world central bankers. This respect ensued, not from bowing to the government wishes or surrendering to the World Bank and IMF pressures, but from the subtle use of moral suasion when it came to obtaining of a collective consensus and from standing upright in crisis situations asking for tough decisions. Alan Greenspan took over from the legendry Paul Volcker on August 11, 1987. Steven Solomon writes about Volcker,

"By national opinion poll Volcker had ranked as the United State's second most powerful man after the president. In Washington he was feared and revered as the only man capable of standing up to Ronald Regan's redoubtable political popularity. In US and world financial capitals, he stood beside George Washington as the symbol of the US dollar's integrity and unofficial leader of the world economy."


We are a captive economy slaving on the farmhouses of IMF, World Bank, ADB and Paris Club banks. We continue to liver under the illusion that we are an independent economy which by itself is more dangerous than the actual captivity. We keep experimenting under the overseas directives without taking time-out to mull over what we have been doing and what we ought to. Our economy has huge growth potential which has been proved through its occasional show of brilliance in the past. In the face of recent geo political crises, our economy performed well to the disbelief of many. We had had a tremendous opportunity but could not put our acts together and dissembled into a woeful political and economic fragmentation. .

We were and are still in a "state of war" situation albeit without engaging in active large scale combats. We had time and reasons to go for revolutionary economic policies besides engaging the world attention to our role of a frontline US ally. We had money, necessary work force and natural resources to undertake new projects broadening industrial base on one hand and boosting agricultural output on the other. We should have taken to revolutionary land reforms to break away from the feudal stranglehold. This could have afforded us an opportunity to introduce tax on agriculture. We could have spent far more on education and training of labor to make us competitive in the emerging global scenario. Instead, we took the easier course and designed policies to give out of proportion impetus to service sector by putting productive money in the unproductive markets. Consequently, we ended up as a reinforced consumer economy. The disgruntled young workforce became the raw material of jehadi outfits while we experimented with the shifting of focus from agriculture to industry and then back to agriculture.

We lost many opportunities to create our own Volckers who could have taken us to the peaks of economic and financial stability.


Steven Solomon writes, Central bankers' fingerprints are everywhere behind the daily financial headlines: the rise and fall of interest rates, the ups and downs of the dollar, the emergency rescue of a crashing stock market or a nation in crisis. But they themselves are rarely seen or understood except by an elite minority. Only a few such as the US Federal Reserve Board's Paul Volcker and Alan Greenspan and the German Bundesbank's Karl Otto Pohl, are well-known names; most citizens have never heard of the Bank of Japan's Yasushi Mieno, the Bundesbank's Hans Tietmeyer, or the Bank of England's Eddie George."

Established in 1930, the Bank for International Settlement (BIS) is the oldest international financial organization where the world central bankers frequently meet to informally discuss the global financial matters. The central bankers' collective second home BIS, in the words of Steven Solomon, was one of the world's unique and most mysterious institutions. The BIS was becoming an increasingly important governing epicenter of world democratic capitalist society."

At BIS's head office in Basel, Switzerland, the world central bankers meet twice a month to informally take stock of the world finance and to make collective decisions whenever required. Volcker once said, "It amazed me, the determination of the European central bankers to go to Basel each month. Sure it's only a one-hour plane ride. Beyond all that there is a sense in which they like to be together-they feel strong."

The BIS and the press are not very cordial to each other. Most of the times, the journalists are denied an easy access restricting them to the lobbies of nearby hotels or to the adjoining streets, waiting for an opportune meeting with any of the central bankers for a brief comment or a meaningful nod. The working style of the assembling central bankers has a mysterious air of informality about it. In the words of Steven Solomon, "However much money was involved, no agreements were ever signed nor memoranda of understanding ever initialed. The word of each official was sufficient, and there were never any disappointments."

With the increasing role of the global capital, the world financial markets find themselves in a perennial state of uncertainty putting a big question mark on the growth prospects of developing economies. The world central bankers draw their strength from the growing size and mounting power of the global capital. Steven Solomon, in his concluding remarks says, "the great unmet political challenge of the new post-Cold War era is to "civilize" stateless money with world rules and reforms before the productiveness of the free market economy and the stability of democratic society are damaged. Until then, the world's well-being will be uncomfortably dependent upon the judgment of a tiny cadre of un-elected and secretive world central bankers."