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.