Philip LOwe

Influence … the RBA deputy governor, Philip Lowe, was at MIT under career-makers Stanley Fischer and Rudi Dornbusch. Photo: Bloomberg

As the markets wait to see if the Reserve Bank finally believes it has enough room to give interest rate relief to the eastern states, which are not plugged directly into the resources boom, it is worth noting the central bank's executive ranks are now heavily drawn from a school that is a powerful influence in central banking in the wake of the global crisis.

That school is the Massachusetts Institute of Technology's economics department and, in the words of Robert Solow, a Nobel prize-winning economist who has been connected to MIT throughout his career, its specialty has been not to just develop theories but to ''have a grasp of what was actually happening''.

Solow also reportedly quipped that ''everything reminds [Chicago School doyen] Milton Friedman of the money supply. Everything reminds me of sex, but I try to keep it out of my papers'', and the hands-on approach to economic management he helped develop at MIT has elevated its economics faculty to a position of influence in the world's central banking family not seen since the 1980s, when Friedman's free market, monetarist Chicago School was dominant.

The Bank of Israel governor and former International Monetary Fund chief economist and vice-president, Stanley Fischer, is one of the key MIT career-makers. He is still an emeritus professor at MIT and one of his PhD students was the Federal Reserve chairman, Ben Bernanke. Another PhD apprentice was Greg Mankiw, a top adviser to the Bush administration and former chairman of America's Council of Economic Advisers who is now a key adviser to the Republican presidential candidate Mitt Romney.

The Bank of England governor, Mervyn King, taught at MIT in the early 1980s alongside Bernanke and is now helping co-ordinate the central bank response to Europe's sovereign debt crisis. King's deputy, Charlie Bean, is an MIT graduate, and the former Italian central bank chief and current European Central Bank president, Mario Draghi, studied for his PhD in the 1970s at MIT, where he was taught by Fischer and Bernanke. Draghi is now on the front line of Europe's crisis and has produced a series of ''whatever it takes'' moves to prevent a sovereign debt meltdown.

Lucas Papademos, who steered Greece through the first phase of its debt bailout and resigned late last year after failing to drag a fragile political coalition across the line on a new round of budget cuts, is an MIT old-boy, as is the IMF's chief economist, Olivier Jean Blanchard. MIT alumni also run the Central Bank of Cyprus and the Reserve Bank of India.

In Australia, four key positions are held down by executives with an MIT PhD on their wall.

Stanley Fischer and another MIT professor, the late Rudi Dornbusch, were the key influences on the MIT alumni inside our central bank: Philip Lowe, who replaced Ric Battellino as deputy governor in February; Guy Debelle, who took on Australia's key market co-ordination job on the cusp of the global crisis in 2007 when he became assistant governor (financial markets); Christopher Kent, a former head of economic research who took Lowe's role of assistant governor (economic) when Lowe was elevated to deputy governor and heir apparent to Glenn Stevens; and Jonathan Kearns, the central bank's head of economic research. Fischer was a curator of the MIT's hands-on economic management culture when they studied there in the 1990s. Dornbusch was the PhD adviser for Lowe, Debelle and Kent.

The London School of Economics is the Reserve's other key talent incubator. The assistant governor (financial system) Malcolm Edey, assistant governor (currency) Michele Bullock and assistant governor (banking and payments) Keith Hall are all LSE graduates.

The key economic and market management positions beneath University of Sydney and University of Western Ontario-trained governor, Glenn Stevens, are however in the MIT diaspora, and that should be telling the markets something about the the way the central bank approaches the task of rate setting.

MIT's rise is a reflection of a sea change inside central banks in the wake of the biggest financial crisis since the Depression. Blind faith in the markets and their supposed automatic stabilisers has been overtaken by a hard-won understanding that markets do need to be assisted when they fail and a willingness to look for ways to do so in a time-frame that works.

Economics was primarily a way to ''do something useful'', Fischer told Bloomberg this year, and MIT alumni like Draghi have been been applying that principle. Rules prevent the ECB directly intervening in the capital markets, but he has nevertheless fashioned of a series of moves to ward off a European meltdown, including the two-stage provision of cheap funding to Europe's banks.

Questions are being raised about whether Spanish banks have used the cheap ECB money to buy bonds that are on paper losses after a renewed bond-market slide, but Draghi probably headed off a cascade of private sector bank defaults with the move.

In Australia, the MIT influence is a reason to be confident the Reserve is not ideologically wedded to a high interest rate policy as it shepherds the economy through the resources boom. With inflation contained, it can move to support the struggling non-resources economy, and it will.

mmaiden@theage.com.au