Chapter 1: An uneasy relationship
The relationship between markets and central banks . . . is similar to that between tigers and their tamer. The latter can bend the former to his will if he uses superior skill, great care, and intelligence. If, instead, the tamer excites and irritates the tigers, they will win. The spectacular growth in the size of markets of the last ten years has widened the gap between the strength of the tigers and that of the tamers, and having more than one tamer in the cage does not help. Tommaso Padoa-Schioppa (1994, p. 19) The relationship between monetary authorities and ﬁnancial markets has, for most of the twentieth century, been diﬃcult, confrontational and at times openly conﬂictual. This has reﬂected the diﬀerent objectives pursued: monetary and ﬁnancial stability by monetary authorities; and the optimum combination of risk and return on investments by market intermediaries. The relationship has often been described by the press, but also in economic literature, as a never-ending contest between allegedly sovereign authorities and forces that behave unpredictably, even crazily or irrationally, and are endowed with magic or supernatural powers. These descriptions recall characters such as the ‘gnomes of Zurich’ or ﬁnancial ‘wizards’ à la George Soros. But there are also references to the ‘casino capitalism’ and ‘mad money’ denounced by Strange (1986 and 1998), the ‘manias and panics’ dispassionately psychoanalysed by Kindleberger (1978) or the ‘irrational exuberance’ evoked by the then Federal Reserve Chairman Alan Greenspan (1996). More recently, in 2005, Franz Müntefering, Chairman of...
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