LONDON, August 28, 2025 — Patrick Honohan, governor of the Central Bank of Ireland from 2009 to 2015 – the seminal period of euro area sovereign debt upsets – is a central banker who almost literally grew up with economic and financial crises.
Honohan understands, all too well, the psychology of politics and markets. As a European Central Bank governing council veteran, and a long-standing professor of economics at Trinity College Dublin, he can unravel the intricacies with wit, subtlety and linguistic flair. His deftly written manual The Central Bank as Crisis Manager is required reading not just for officials whose nightly rest may be disturbed by incipient financial breakdown, but also for all those caught up in the aftermath.
For two decades, central banks have been in the limelight both for failures [perceived or real] in spotting [or contributing to] the build-up of economic crises – and for the actions they take (or don’t take] in reacting to ensuing upheavals. Now, more than ever, central bankers are in the eye of the storm. As Britain’s foremost monetary economist [and former Bank of England Monetary Policy Committee member] Charles Goodhart has long pointed out, central banking independence is likely to be one of the first casualties in sparring over holding down interest rates.
President Donald Trump’s political assault on the Federal Reserve is rooted in the US administration’s desire to lower the cost of servicing US public debt bloated by economic setbacks and unwise tax cuts. Trump’s aggression has now extended beyond regular diatribes against Jerome ‘Jay’ Powell, the Fed chair, culminating in a legally questionable announcement on 25 August that he was firing Lisa Cook, a Fed governor, over alleged mortgage application irregularities in 2021, before she was appointed to the board.
Debate over Trump’s erratic economic and trade policies
The Cook imbroglio has the potential to go significantly beyond a dispute over interest rates. It will inflame the debate over whether Trump’s erratic economic and trade policies – coupled with his manifest desire to win control over US money creation – will weaken further the supreme role of the dollar, with a systemic impact on the world monetary system.
As a policy-maker in Ireland, at the centre of the unfolding euro sovereign debt unrest, Honohan was himself a pivotal player in turbulence which, as he writes in his book, could have led to the break-up of the world’s number two reserve currency.
Honohan’s principles for reaction may be of only limited practical significance for helping Powell and Cook face current challenges. Yet they merit thoughtful reflection. One of his most important points is that, once in crisis-fighting mode, central banks must adopt a set of policies and approaches outside their normal remit. In a professionally benevolent way, central bankers need to develop split personalities.
‘Normally thought of as staid, slow-moving, taciturn and organisationally aloof central banks have to behave quite differently when faced with an unfolding crisis. They must accelerate decision-making, change the style of communication, and prepare to work with other arms of the state.’
Achieving success in such cases, as Honohan recognises, is a matter of fine balance. To overcome the odds, central banks need to draw on reserves of skills and experience – and will unquestionably require a portion of luck. But a ‘quantum change’ in behaviour is crucial in ‘preventing a financial crisis from metastasising into a confidence-driven economic recession’. As Honohan notes, using a central bank’s balance sheet to provide liquidity and closely co-operate with the government, has clear implications for central bank’s vaunted [and somewhat well worn] independence.
Long list of supervisory and regulatory shortcomings
Honohan’s impressively well organised book chronicles a long list of supervisory and regulatory shortcomings. He surveys how central banks were not prepared to deal with the 2023 failures of Silicon Valley Bank in the US and Credit Suisse in Switzerland. ‘These cases reveal that the coverage rules in existing formal deposit insurance schemes are not politically viable.’
Honohan deals with cases of financial market dysfunction with causes lying outside the banking system – such as the ‘dash for cash’ disruption of the US Treasury market at the outbreak of the Covid-19 pandemic in March 2020, and the pension fund upset in the UK in September 2022.
He examines the People’s Bank of China’s quelling of financial market turbulence in 2015 as well as the ECB’s actions in the sovereign debt crisis include former ECB President Mario Draghi’s ‘whatever it takes’ intervention in 2012. He extends his range to macrofinancial crises in Argentina, Iceland, Ireland, Lebanon and Indonesia. And he investigates ‘technical and ethical challenges’ faced by central bankers over Russia ‘s invasion of Ukraine.
Honohan warns that preparedness must be practical, requiring more than a ‘fire drill exercise… Even if in most years there is no need to put it into operation, crisis management is core business for a central bank. It should not be relying solely on virtuosic improvisation by a gifted amateur’.
Honohan decrees that central bankers should learn about the history of financial crises both in their own country and abroad, ‘so that they are alert to the ways in which vulnerabilities that have infected the system can tip into a crisis’.
But what happens when, as in the case of Trump and the Federal Reserve, the ailment comes from inside their own public sector systems? There are many precedents, not only in developing countries ranging from Argentina to Zimbabwe, but also in the case of President Richard Nixon and Fed Chairman William McChesney Martin in the 1960s and 1970s.
The Trump broadside against the Fed takes such struggles to a new dimension. Defensive tools are required extending well beyond the central bankers’ current armoury. In the next edition of his book, Honohan may need to add a new chapter on how central banks should react to a still more virulent category of infection. It could be entitled: ‘The enemy within’.
The writer, David Marsh, is Chairman of OMFIF.
https://thecooperator.news/central-banks-can-fight-inflation-without-massive-handouts-to-banks/
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