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Arvind Subramanian: Ben Bernanke’s Global Legacy

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 US 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 provideddollar 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, which, in the aftermath of the Asian financial crisis in the 1990’s, 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 eurozone’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 US, 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.

Arvind Subramanian is Senior Fellow at the Peterson Institute for International Economics and the Center for Global Development.

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Posted: January 14, 2014 Tuesday 01:39 PM