A Conversation with Axel Weber
The twin phenomena of the deregulation of the American financial sector and the development of a global marketplace have resulted in our present “life boat” predicament. I say “life boat” because the recent financial crisis has demonstrated how fragile our individual fates — as students, homeowners, consultants, miners, painters, citizens — are against a volatile backdrop of economic sociality. Yet, for neoclassical and many professional economists, markets are the defining architecture of our worldly experience. Even our most banal decisions and attitudes can be traced to an ultimately commercial root. This fact is transparent only to the behavioral freakonomic, who breathlessly tries to demonstrate just how far the field’s colonial program has gone: anything that isn’t already exchanged in a market could be, and perhaps ought to be. If the ontological candidates for human essence have, at various times, been divided between the divine, the political, and the “trucking-and-bartering” man of the Scottish Enlightenment, today’s worldview nudges us, silently, towards the last.
How are individual lives grasped by the invisible hand? My conversation with Dr. Axel Weber represents one attempt to untangle recent history and interpret the current state of affairs. From 2004 to 2011, Weber was the Chairman of Germany’s Bundesbank, holding the equivalent office to his American counterpart, Federal Reserve chairman Benjamin Bernanke. During Weber’s tenure, Germany emerged from the crisis as the most robust economy in the Western hemisphere. In 2011, with a vacancy atop the International Monetary Fund and Chancellor Angela Merkel’s public desire for a German president of the European Central Bank, Weber pulled off an encore: he departed the continent and arrived at the Booth School of Business for a two year visiting professorship. But his arrival at Chicago was both a new venture and a return to his home, the academy. I spoke with Dr. Weber about the crisis, the status of the field, and his life in economics.
Let’s start with your personal background. Did you always plan on entering into government or becoming a central banker?
I was from the very beginning on a path to academia. My father was the head of a primary school as well as the mayor, so education was stressed in my family — my brother is a professor of Geology and my sister is a practicing psychologist — and I always had an interest in politics.
University life seemed attractive to me, since it is self-determined in what you do. It’s a nice environment for a career. I never planned on being a central banker; I studied the social sciences — sociology, politics, and economics with some legal studies, but I focused on economics in the final year and a half of my undergraduate education.
What drew you to economics as a discipline?
I was drawn to the mathematical aspect of economics: statistics, econometrics, and so on.
This was in the ’70s, correct?
Yes, I finished my high school in 1976, at the University of Konstanz.
It’s a very interesting time right now to be studying economics and the social sciences, as I’m sure it was during the ’70s as well. What was the environment like?
I originally liked the business cycle and monetary economics. Konstanz had two faculty members — Karl Brunner & Meltzer — who were monetary economists, and once a year had a big conference with all the big people in macroeconomic policy. I asked if I could sit in on the conference and that really got me into monetary economics more seriously. Studying really depends on the place and what it is known for.
So let’s move further into this. What exactly do you see as the distinction between monetary policy and fiscal policy?
Fiscal policy is about balancing the two sides of the budget. It’s about taxes. And because of this, it is deeply political. Fiscal policy and taxation affects everyone, and it needs to be legitimized through democratic and legislative procedures.
Monetary policy has some key differences. At the beginning, central banks were sub-departments of the Treasury. What we know from the history of monetary policy is that the central banks became independent with the singular mission to guarantee low inflation. Low inflation, 2% or 3%, is crucial to avoiding a loss in purchasing power and future income
[The central bank’s mission] is not to monetize debt. If it deliberately steps over the line, then the bank is no longer independent and unbiased. Central Banks must be independent in order to focus on their primary mandate — inflation — not be drawn to other policies.
But certainly monetary policy isn’t immune from the reality of political pressure and social groups.
Of course not. The European consensus is that monetary policy must provide a framework, a set of rules, that is made transparently. That is ultimately what the electorate wants to see. People take economic policies into account — in order to plan ahead, I have to have an idea of taxation, purchasing power of my income, and what kinds of returns I can expect on financial investments. But there must be a socially agreed-upon framework to ensure the long term.
That is not easy, but mere discretionary decisions make it much harder to plan ahead. And what all the research tells us is that expectations are the key drivers—expectations of income, consumption — and discretionary policy can’t do that.
You have mentioned in other contexts that Germany took steps well ahead of the financial crisis of 2008 that made it well positioned when things hit the fan. I was wondering if you could expand on those.
Yes, under Chancellor Schroeder, Germany passed some very important reforms, known as the “Agenda 2010”, which were aimed at reducing and realigning social security, pension payments, and unemployment to fit the demography of Germany, which as you may know is aging and shrinking. The reforms also had the effect of making the labor market more flexible-- earlier, union wage bargaining was done as an industry-wide level, which meant that people in different firms were getting more or less the same benefits. But of course when a recession hits, some firms do better than others. The reforms changed the industry-wide bargaining to a firm-specific level, which gave employers a high degree of flexibility. This really helped when the crisis hit. So before the crisis, unemployment was at 8%, then went to 9% and now it is actually at 7%, which is lower than before the crisis. It was really the flexibility for firms that was the positive aspect that let the German economy rebound.
I think there is a deep skepticism, in leftist and libertarian thought — one thinks of the Vienna economists, for instance — about the possibility for government to make these proactive decisions. Perhaps that has been born out in the US.
Well I don’t want to comment on the American system, I have experience with the European model. I would agree with the skeptics about the government of omnipotence—I prefer to think about it in terms of the framework I mentioned earlier. If you have a bargaining process that is not flexible, for instance, that is something that the government must settle. The government is not a better bank, investor, or entrepreneur; I think day to day decisions must be left to firms and individuals. What it can do is provide the framework, and it is powerful in this regard.
There seems to be a worry that after government has dipped its fingers into the private realm, there is no going back; the mantra became, ‘The US federal government owns Lehman’. Do you foresee things going back to normal in terms of the relationship between state and market?
The cataclysmic event was Lehman Brothers’ collapse. We in Europe could not really influence that, although we participated in the conversation. I think Lehman can be seen as an exogenous event.
How, as director of the Bundesbank, did you prepare or approach such a circumstance?
From day one, it was crisis management. We made a few decisions that I think helped stabilize things in Germany. The first was the rescue fund for banks, which had 500 billion. Only a small percentage of that was used, but it was for any potential problems. This immediately convinced the market that the fall out would be limited, that we would use our economic resources to recover what we could.
In a very concrete way, what was the experience like?
Meetings all weekend, with all the CEOs and bankers in a room, all of whom had individual interests. Of course, everyone would pursue their own solution, and not a cooperative one. You as central banker must assume role of everyone’s joint interest, and not let individual interests get in the way. This meant the job was twisting the arms of the banks into accepting rescue packages to support competitors.
The banking crises of the last 20 years has shown us that markets come back, assets come back. But here all the losses came at a single time. What we tried to do was ride out the losses, not to avoid them completely but to minimize them beyond what they would otherwise have been. We moved the bad assets outside the banks, but it was important to realize that there will be losses and to deal with them. So we saved IKB bank in July 2007, along with Saxon LB bank and Ast LB Bank, and stopped the problem in our own constituency.
Lehman was worldwide in its impact. The lesson is that large financial institutions need more global supervision. There must be sharing of information of those in charge with the rest of the world; we are more globalized and harmonized, and there are repercussions. The industry has led regulation, but regulation must be aligned, in the G20 for instance.
Do you envision the G20 — not, say, the United Nations, or the World Bank — as the location for that process?
Yes, you must have 80% of GDP in coordinating fashion. Input is important, but too many participants means decision making is slowed down and susceptible to single country interests. The G20 is the right group.
People today are still very worried about the Euro, and every day in the media there is a seesaw; today the Eurozone is optimistic, the next day, pessimistic. Where do you see this process ending?
There is a misconception at play here, that it is a problem of the Euro. This is a debt problem, not a euro problem, and it requires some tough medicine. It can be a tedious process, but I am 100% certain that the political will is there. It is not an easy prescription for the rich countries either, but ultimately the historical project of the Euro will not be derailed by Germany, which has benefitted a lot from it.
I must ask about your decision to step away from politics.
Policy became politics. Politics is about making the right decision, and I must remain true to myself and my convictions. My opinion on the bonds is public and well-known and I won’t go into that here. I never intended to be a lifetime central banker, so I don’t see this as stepping away from politics as much as returning to academia. I have been a professor at three universities for over 10 years, and my time at the central bank was an interesting way of going from advising policy (which I had always been involved with) to making policy. I am open to something else. I’m not now actively looking to return to politics.
What advice would you have for students today, who are academically inclined but still want to make a social impact? Perhaps this is an impossible question!
No it is actually a very easy question. I wanted to become a professor and so had to study hard, publish, and so on, but I wanted to apply the academic side to policy world. I had broader interests and couldn’t envision 40 years of just giving annual or semi-annual lectures. The Bank was an interesting challenge and I wouldn’t rule out further experiences. I know the academic side and the government side and so perhaps the market side remains to be seen.
I would advise students to do the following: don’t tie yourself down to a single path of life when you are still young. You must be flexible when considering your career — if you feel there are other interesting challenges to take. Changing from one job to another is not a failure! In general, I think peoples’ mindsets are too much focused on a single track or career. I typically do not like to take the obvious next step — sometimes I take a side step that is less obvious but more interesting at the end of the day.