by Arvind Subramanian, Peterson Institute for International Economics
Op-ed at Project Syndicate
January 14, 2014
© Project Syndicate
The world is still struggling to digest Alan Greenspan's mixed legacy as chairman of the US Federal Reserve Board from 1987 to 2006. So it is too soon to assess whether his departing successor, Ben Bernanke, is headed for history's chopping block or its pedestal. But the crucial international role that Bernanke and the Fed played during his tenure—a time when domestic economic weakness translated into relatively ineffective American global leadership—should not be overlooked.
In these last five crisis-ridden years, the Fed has affected the world economy in two ways: through its hyperactive policy of purchasing long-term assets—so-called quantitative easing (QE) —and through its largely overlooked role in providing international liquidity. Let us consider each.
Whatever the impact of QE on the US economy, its impact on the rest of the world has been, on balance, generally benign. The first round of QE was unambiguously beneficial, because it minimized, or even eliminated, the tail risk of a global depression after the collapse of Lehman Brothers in September 2008.
To be sure, subsequent action by the Fed received a mixed reception in the rest of the world. In 2010 and 2011, when QE pushed capital to emerging markets, there were complaints that the United States was practicing a form of currency manipulation. Since May 2013, when Bernanke signaled the possibility of unwinding QE, emerging economies have faced the opposite type of pressure: capital outflows and sharp currency adjustments.
But in both cases, the problems for which blame was heaped on the Fed largely reflected macroeconomic mismanagement in the affected countries. For example, Brazil complained most vocally about capital inflows, because its currency had over-appreciated in a short period of time; but the main culprits were domestic wage increases and overheating, not the Fed's policies.
Likewise, India was severely affected by Bernanke's suggestion that the Fed would "taper" QE, but only because its economy was characterized by high inflation and large budget and external deficits. It was as if the emerging markets had forgotten that exposure to Fed policies was part of the bargain they willingly made when they signed on to financial globalization.
Meanwhile, the Fed has been mindful of its international responsibilities, playing a constructive role by increasing dollar liquidity in times of extreme financial stress. It provided dollar liquidity (via swap lines) to the central banks of Brazil, Mexico, Singapore, and South Korea in the aftermath of the Lehman failure. And it has provided nearly unlimited amounts of similar liquidity to central banks in Europe and the Bank of Japan. These actions contributed to easing extremely tight financial conditions and corresponding market volatility.
The Fed's support to emerging-market central banks was remarkable, because most of these countries chose not to borrow from the International Monetary Fund (IMF), which, in the aftermath of the Asian financial crisis in the 1990s, had come to be considered an instrument of US hegemony. They preferred to deal directly with the United States via the Fed, to which the IMF stigma evidently did not extend. In fact, the speed, timeliness, and effectiveness of Fed support have now led to efforts to institute similar mechanisms at the IMF.
The Fed's support for Europe was similarly remarkable, because the rest of the US government was an ineffective bystander at the time—able to offer cheap counsel but little hard cash to the euro area's distressed economies. Even efforts to augment the IMF's resources floundered on the reef of American political dysfunction. All other major economies, including key US allies, have enacted the legislation needed to strengthen the IMF; in the United States, however, there has been no comparable action since 2010, owing to Congressional resistance.
The explanation for the Fed's exceptional role in the context of otherwise anemic American international leadership is simple: Though the US economy is weak, and American politics is polarized to the point of paralysis, the dollar is still in demand. In these circumstances, Bernanke effectively leveraged his role as controller of the mighty dollar-printing machine known as the US Federal Reserve.
Dollar supremacy will not last forever, and it is increasingly being challenged by the Chinese renminbi, as I describe in my book Eclipse: Living in the Shadow of China's Economic Dominance. But that vestigial source of American supremacy made Bernanke a constructive and effective international leader. As he departs from office, the assessment of his performance as "Helicopter Ben," who dropped piles of cash on the US economy, will begin in earnest. But history should not neglect "Ambassador Ben's" crucial global role.
Testimony: International Impacts of the Federal Reserve's Quantitative Easing Program January 9, 2014
Op-ed: Emerging Markets' Victimhood Narrative January 31, 2014
Policy Brief 13-21: Lehman Died, Bagehot Lives: Why Did the Fed and Treasury Let a Major Wall Street Bank Fail? September 2013
Op-ed: Misconceptions About Fed's Bond Buying September 2, 2013
Op-ed: After Bernanke, Make Unconventional Policy the Norm July 15, 2013
Testimony: The Fed at 100: Can Monetary Policy Close the Growth Gap and Promote a Sound Dollar? April 18, 2013
Op-ed: How the IMF Can Help Cut US Joblessness February 4, 2013
Policy Brief 12-25: Currency Manipulation, the US Economy, and the Global Economic Order December 2012
Policy Brief 12-15: Restoring Fiscal Equilibrium in the United States June 2012
Book: The Long-Term International Economic Position of the United States April 2009
Article: The Dollar and the Deficits: How Washington Can Prevent the Next Crisis November 2009
Speech: Rescuing and Rebuilding the US Economy: A Progress Report July 17, 2009
Book: US Pension Reform: Lessons from Other Countries February 2009
Testimony: The Dollar and the US Economy July 24, 2008
Testimony: Why Deficits Matter: The International Dimension January 23, 2007
Book: Accountability and Oversight of US Exchange Rate Policy June 2008
Op-ed: Bubbles Are Getting Blown Out of All Proportion September 8, 2004
Book: The United States as a Debtor Nation September 2005