Central banking dermatologists.

• Author: Posen, Adam S.
• Position: The Monetary Realist

Until the recent financial disturbance, much of the drama associated with central banking had turned to boredom. For the last fifteen years, forward-looking monetary policy oriented toward price stability had delivered low and stable inflation--and interest rates and growth responded well to this environment. Academics held an ever larger share of high positions at central banks, and policies globally were increasingly coming right out of the same few textbooks, not out of swashbuckling personas. Monetary policymakers might not yet have become as boring and useful as dentists, as Keynes famously hoped they would, but they sure seemed closer in recent years to dermatologists, monitoring at appointed intervals for the occasionally needed quick outpatient procedure, than ER surgeons, awash in testosterone, blood, and critical cases.

With the hubbub of the current financial panic, however, everyone's attention has returned to central banks and to the specific individuals leading them. The market buzz is that the European Central Bank's Jean-Claude Trichet is gaining fans through his decisive action, while the Federal Reserve's Ben Bernanke is eschewing activism--contrary to stereotypes and to the two institutions' own self-proclaimed orientations. Alan Greenspan's return to the headlines with his ridiculously serendipitous book release served to underscore the apparent importance of individual central bankers' qualities. A lot of Monday-morning quarterbacking has ensued, with the usual thick-necked traders blaming their more recent speculative losses on the academic predilections of the same sort of pencil-necked geeks who mined the curve for them in Econ 101.

Yet, even in the current situation, there still is less difference between individual central bankers than meets the eye. Any seeming distinction between Trichet's and Bernanke's--and even Mervyn King's and Toshihiko Fukui's--responses to recent events arose largely from the local financial structures and economic forecasts each of them faced, not from differences in personal style or ideology:

* All of them have separated measures providing financial liquidity to the core banking system from interest rate decisions for the broader economy in both their actions and their communications.

* All of them are in the end ready to inject liquidity aggressively and discount a wider range of assets in order to bring down spreads in the overnight and commercial paper markets.

* All of them have...