The Martian Central Bank
A Science Fiction Story
The chain of events which precipitated the solar-wide meltdown in lending markets originated, as one might expect, in a small office on the zeroth floor of the Hugh Building, the headquarters of the Martian Central Bank in the city of Mons. Martian buildings were sometimes built down from the surface, with the floors counting down to zero at the lowest level. The Hugh Building, sitting as it did at the base of Olympus Mons, was no exception to this rule. Thus, the zeroth floor lay beneath dozens of feet of solid rock, and had no windows.
The small office in question was the office of Dean Howe, a minor functionary in the central bank, but one who found himself at the epicenter of what would spiral into a raging crisis. His role in the crisis was difficult to determine, but some said he was the one who suggested the central bank goose the lending market to make up for general sluggishness in economic development. Other theories tended towards the more conspiratorial, with some holding Howe to be a wizard behind the curtain, polite and unassuming in person, but secretly manipulating events behind the scenes.
The Martian Central Bank was unique among planetary banks in that it didn’t change policy based on political considerations. The bank operated on a set of simple rules. Rates were raised and lowered with an eye towards targeting two percent annual inflation. Young employees with new ideas about the power of central banking were viewed with suspicion. The old hands who ran the Martian Central Bank believed that if the rules they had been following had been good enough for their great-grandfathers, they were good enough for them. They didn’t need any young folks from fashionable schools of economics coming in and messing with what had been operating well for over a century.
But Howe put forward a suggestion based on what was perceived to be general sluggishness, and when his boss wasn’t paying attention, he fed this suggestion into their central computing system, which had some machine learning capabilities but which wasn’t sentient. Another minor functionary in another part of the building happened to go on lunchbreak at that very moment, and somehow she missed the alert. The central computer system, which was supposed to require a human approval for every move, happened to have a glitch. And so, the one move which got through, without any human approval, had an enormous effect on the lending market.
Markets moved fast on Mars, and business cycles were often measured in days or even hours. With sentient machines doing most of the trading, there were no start and end times to the trading day. Trades could be conducted in milliseconds. Stocks could be purchased and then sold again milliseconds later based on second-to-second changes in earnings projections. All of which is to say that a surprise change from the Martian Central Bank, which had prided itself on predictability for one hundred and fifty years, threw off the expectations generated by all the statistical models the machines were running. Immediately, wild and rampant speculation threw the market into chaos. Wild swings in interest rates offered by banks, loans approved and rejecting, stock prices for banks soaring and plummeting,1 stock prices in the rest of the economy exhibiting more volatility than had been seen in a generation. Within an hour, several fortunes had been gained and several had been lost.
This spooked both institutional investors and bank customers, who organized runs on the banks to get their savings out. With the stock for every major bank in free fall, it looked ominous. If the equity price for every bank went too low, nobody would be able to cover their loans. The money the banks were supposed to protect would be gone. The banks would start calling in loans and most businesses and individuals wouldn’t have the cash to pay them.
This is, in fact, precisely what happened. Before the trading market could be shut down, five banks defaulted. The rest would follow within a day. There was panic in the streets. Investors were jumping off of buildings and riot police had to shoot people to keep them from looting the grocery stores or breaking into the bank vaults. Within a week, the most sedate and conventional city in the solar system had collapsed into radicalism and anarchy.
Meanwhile, at the Martian Central Bank, the higher-ups were struggling to figure out just what on mars had happened. Nobody knew who had ordered the change. There were no scheduled interest rate cuts, or hikes. The plan was to hold steady for the rest of the year, just like last year. Bill St. Bernard, the general manager of the Martian Central Bank, believed that the policy of a central bank should be to avoid change. Stability was his watchword. He believed that the primary job description of a general manager of a central bank was to resist all attempts to change policy. You picked a course and then stuck with it, and it took several assistant managers employed full time to resist all the efforts of all the people with bright ideas about change.
So, he was surprised to find that the current crisis was traceable back to a move made at his central bank. After all, there shouldn’t have been any moves at all. The ideal backdrop for an environment of incessant, hyper-fast, machine-driven trading was perfect calm and utter stasis. No manager had approved this. Even the technicians who tinkered with the central computing system and spent ninety percent of their day trying to shut down hackers had no idea where this had come from.
Finally, auditors traced it to Dean Howe. Howe was called into the main office before the board. A panel of three investigators interrogated him.
“Mr. Howe,” said one. “What exactly is it that you do here?”
“I am a deputy sub-administrator to the assistant deputy secretary of interest rates.”
The interrogators consulted their notes. “Mr. Howe, I’ll ask the same question again.”
“I proposed that we change our rates in order to take advantage of the current…”
St. Bernard leaned over the oval table. “Mr. Howe,” he said. “You do realize that any rate changes must be authorized from the top. I myself must approve them.”
“Yes, well, I supposed I believed it was better to ask forgiveness than permission. So, I plugged my projections in the central computing system and…”
“And you do realize,” continued Sr. Bernard, “that this institution has not raised or lowered its rates in forty-seven years? Stability. Predictability. Those are our watchwords here.”
“What are we doing then?” asked Howe with a touch of exasperation. “I mean, right, exactly, we haven’t changed our rates in almost half a century. Why? What’s the point? Why do we even all go to work each day? What is there to do?”
“My dear young man,” said St. Bernard. “We generally find it takes all of our time trying to prevent things from being done, let alone trying to do things.”
“But there’s so much that we could do. Just take the housing market for instance…”
St. Bernard cut him off again. “Young man,” he said with a smile, “you appear to be mistaken. You think that what we do here at the Martian Central Bank matters.”
“Well, of course it does! Look, one change and half the planet is rioting and we’re about to enter a solar-wide depression. And, look, I’m sorry, maybe it’s my fault. But clearly what we do matters.”
“It is a common mistake,” said St. Bernard. “One that the public at large appears to suffer from.”
“If it doesn’t matter what we set the rates at, why is there a panic when I changed them?”
“My dear fellow, it is the expectation that we create which matters. That is what caused the panic. You blindsided the trading market. They saw an unexpected move at the Martian Central Bank and were no longer sure which way was up and which was down. Everyone panicked and that made everyone else panic.”
“So, I suppose you’re going to tell me, sir, that the way to restore confidence is just to go out and fix that expectation of stability? That they need to have confidence that somewhere, something is stable.”
“Precisely,” said St. Bernard with a wink. “I think you’ve learned a valuable lesson. If you agree never again to make a change to interest rates during the time that you work at this institution, you can keep your job.”
“Gentlemen,” he added, looking at the investigators, “I think our work here is done.”
The next day, Bill St. Bernard went out and gave a press conference heralded around the solar system as the most important press conference in the history of the Martian Central Bank. He reassured investors that the problem had been discovered and rectified and urged calm.
“Tomorrow,” he said, “we will immediately set our rates back to where they were prior to the unfortunate error. Just to be safe, we will hold that position for the next ninety-four years. At that point, we will reconsider the question of whether to lower or raise our rates. From here on out, you can expect nothing but stability from us. It was an unfortunate error, but the appropriate person has been dealt with. You have my assurance that it will never happen again.”
That day, creditors dropped their claims against the banks. The intersolar stock market rallied, and after the biggest day in trading history, hit a new high. The rioters in the streets of Mons City put down their weapons and returned to their homes. Gradually, the police restored order. By Thursday of the following week, it was as if nothing had happened. Business went back to usual. Parliament passed a bill requiring all sentient machine trading algorithms to be registered with the government. There was talk of banning them. Meanwhile, at the Martian Central Bank, Dean Howe was quietly transferred into a clerical job where he could do no harm.
After the crash of ’42, it was generally regarded as good practice on the part of governments to allow banks to trade their stock on the public market. Banks were expected to put up more of their own capital as collateral against the bets they made, with the result that risk was borne more heavily on the part of the bankers than on the part of customers.