“Two years ago,” the president of International Society for Econometrics said, “the Federal Reserve was in disarray, having been managed by a succession of chairmen who spent their days testing the political winds, instead of interrogating the hard economic data.”
Harold Lasker scanned the upturned faces of the twelve hundred conference attendees in the ballroom of the Grand Hyatt in midtown Manhattan. To Milton Abrams, sitting to his left on the raised dais, they looked like refugees huddled in the safety of a school gymnasium after fleeing a war zone.
Antiglobalization demonstrators had gathered for a second time that day, blocking the hotel entrance, forcing the attendees to sneak in by way of Grand Central Station, their underground route fortified by police and private security guards against the surging protestors.
“What changed?”
Lasker shifted his gaze to Abrams, who felt himself recoil as twenty-four hundred eyes fell on him. He felt less like an honored keynote speaker and more like a burglar caught in a patrol officer’s high beams. The sudden attention caused him to cease his fidgeting that had accelerated during Lasker’s introduction. He withdrew his hand from the sweating water glass and the tracks its erratic movements traced on the starched white tablecloth, then dried his fingers on his napkin and dropped his hands to his lap.
“I’ll tell you what changed,” Lasker said. “We finally have a chairman who has refused to play politics with the economy by pursuing policies that brought a series of booms and busts because of the central bank’s unwillingness to control the expansion of credit.”
Lasker held up a copy of the society’s latest journal. Everyone in the room knew the single topic to which it was devoted: the coming collapse.
“The question is whether it’s too late.” Lasker paused, and then said, “I believe that it isn’t. If… if… we’re tough-minded enough.”
Easy for him to say, Abrams thought—for all of them to say. He knew that to the tenured academics in the room, “tough-minded” meant nothing more than standing firm in their demand for a new photocopier for the economics department or for an extra teaching assistant to whom they could shift more of their work. And to the corporate executives, it meant nothing more than holding their ground with the homeowners’ association design review board or two-putting a par three, or fighting with the company’s compensation committee over an additional million dollars in salary or an additional ten million in stock options.
None of them, Abrams knew, possessed the kind of toughness required to bring the financial life of the country to a standstill in order to break the cycles of inflation and deflation that were eroding the foundation of the economy.
And Abrams wondered whether he himself possessed it. Even the fact of his presidential appointment to be Fed chairman hadn’t done much to dampen his self-doubt.
“And the first place to draw the line is with China.”
Abrams’s jaw tightened. He felt like grabbing Lasker’s jacket collar and tossing him backward off the dais.
Lasker had promised not to raise the issue of China’s currency policies—and the whole world was watching. Even worse, Lasker had just criticized the previous chairmen’s testing of the political winds, only to throw Abrams into the storm.
Abrams knew that as far as the international financial community was concerned, a nonresponse to Lasker’s claim by the chairman of the Federal Reserve would be viewed as a response and would move the markets. Abrams therefore put on what he called the Bernanke Face, the dull-eyed expression of a goat oblivious to the slaughterhouse into which it was being led.
Staring ahead, Abrams noticed motion at the back of the ballroom. A CNBC producer he recognized was walking out to the foyer, and he grasped what she was doing: alerting the studio that a story was about to break.
Abrams glanced at his watch. The markets would close in forty minutes. He decided that he would find a way to stretch his speech and wait until question time to respond to the China issue, and let the mass of overnight news dissipate the impact of his reaction.
“China’s currency policies,” Lasker continued, “have destabilized the capital flows throughout the world.”
Idiot. Abrams thought. Id-i-ot. The esteemed president of the society was one of those who’d demanded for decades that the Chinese let their currency float instead of keeping it fixed unreasonably low against the dollar. Finally they did, and as predicted by its advocates, the price of their products on the international market increased, costing them some of their competitive advantage.
But as Lasker and others hadn’t predicted, it also sucked into China a trillion dollars a year of foreign investment. Investors, who’d once received only seven hundred thousand Chinese yuan for a million dollars, now received one point four million yuan.
If it had made economic sense ten years earlier to invest a billion dollars in China, it was insanity not to invest two billion today, for the dollars now bought fifty percent more of the country.
“The PRC’s dual exchange rate policy,” Lasker said, “one for domestic transactions and one for foreign investment, creates exactly the kind of unfair subsidy prohibited by the WTO.”
Id-i-ot. What pisses you off is that they outsmarted you. Did you really think they’d follow your advice like it was a doctor’s prescription: Drink liquids, get lots of rest, take one of these tablets twice a day?
Lasker and his followers had learned the lesson too late: Chinese economics was like Chinese medicine: counterintuitive and impossible to swallow.
Lasker paused, and then sniffed the air. Seconds later, members of the audience were coughing and wiping their eyes. Those at the back of the room ran toward the exits, the ones in front bunched up behind them.
Abrams clasped his hands together under the table.
Thank God for tear gas.