Thursday, November 27, 2014

Ben Bernanke’s Global Legacy

WASHINGTON, DC – 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.

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    1. CommentedJose araujo

      "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."

      Sorry, whhhatttt?

      Someone who makes such claim is complety ignorant regarding the dynamics of exchange rate and world economics.

      How does wage increases appreciate currency rates.... More demand for imports should push currency down not up, selling reais and buying dollars..

      Also higher wages, lower returns, less direct investment less demand for reais...

      Mr Arvinds economics are all twisted and shows the level of knowledge people inleading positions have, euther he considers PS readers to be dumb, and ignorant that Brasil currency surge was the combination of increased demand for resources, leading for an increased demand of reais, and the QE pushing dollar down via he increased supplly of dollars and lower interest rates.

    2. CommentedPaul Mathew Mathew

      Ben's legacy is that he delayed the collapse of the world as a result of the end of cheap oil thereby delaying the massive famine and die off that is imminent.

      High energy prices = less consumption because everything including the fuel in your tank costs more = layoffs = less tax revenue = government cutbacks, layoffs and debt increases = less consumption = more layoffs = less taxes ===== economic death spiral.

      Compounding the problem is the fact that a weak labour market means real wages drop - as they are across the world right now - that means everything is more expensive and your buying power is dropping at the same time.

      Governments recognize this and are trying to offset with debt, easy lending (they are purposely inflating bubbles), lower interest rates and money printing.

      Of course they will fail - because the disease is expensive oil. And there is no substitute

      The economic death spiral will accelerate when the QE and ZIRP no longer have any effect and the confidence game collapses.

      This moment will be known as the end of the industrial revolution by the few who survive.

      This is not a Hollywood movie where the hero saves the day. This is the reality we are facing.

      US Army colonel: world is sleepwalking to a global energy crisis

      The dialogue opened with a presentation by Mark C. Lewis, former head of energy research at Deutsche Bank's commodities unit, who highlighted three interlinked problems facing the global energy system: "very high decline rates" in global production; "soaring" investment requirements "to find new oil"; and since 2005, "falling exports of crude oil globally."

      Lewis told participants that the International Energy Agency's (IEA) own "comprehensive" analysis in its World Energy Outlook of the 1,600 fields providing 70% of today's global oil supply, show "an observed decline rate of 6.2%" - double the IEA's stated estimate of future decline rate out to 2035 of about 3%.

      Enjoy the remaining time that Ben has bought you - while you can

        CommentedJose araujo

        Your arguments imply that the zero lower bound was caused by the QE, hence the easy money, when it isn't.

        Near zero interest rates are caused by strong risk aversion and liquidity preference.

        There is no easy money because investors are nor investing and debt levels are regressing not increasing.

        I guess, You should rethink your model..

    3. CommentedJason Gower

      Of course it is way too early to assess Bernanke's legacy. Here we are almost a decade removed from the Greenspan-era and his legacy is still debated. AND Greenspan's policies were far less controversial (debatable rate decisions but far less controversial or unconventional).

      Further, given the dollar's role in the global financial system and the increasingly complex web of interlinkages within and across economies, there will never be a point in time when one can say definitively that Bernanke's unconventional policies were a success or failure in the long-run; that chapter has yet to be written given the unprecedented monetary expansion. The only definitive thing we will probably ever be able to say is that his Fed's immediate response to the crisis likely staved off a larger immediate economic catastrophe. Even then, the debate can be had thirty years from now if it would have been better to let the market immediately clear in 2008 (even with the far reaching pain and suffering it would have caused) than to potentially delay the "day of reckoning" through a slow process of stagnant growth and deterioration that could be caused by the distortive effects of this unconventional policy. In the long-run this runs the risk of structurally altering the global economy for the worst. The point is none of these questions can be answered yet.

      Perhaps the more relevant question now is what Bernanke's Fed has done to redefine the Fed's (and ultimately global central banks given the knock-on effects or "copycat" policies that we have seen) mandate. As an unelected official, and given the larger public's general ignorance and/or disinterest in monetary policy, what are the implications of this massive role that Bernanke took on as Fed chairman? Was this a stealth watering down of democracy or did Bernanke within his mandate fill a much needed void as "global ambassador"? Whatever one's opinion on this, the fact is Bernanke's Fed has dramatically altered the role of and redefined the limits of the Fed on a global level, for better or worse.