Ben Bernanke's eight-year term as chairperson of the United States Federal Reserve Board came to an end last week, with successor Janet Yellen taking over from February 1. When he succeeded Alan Greenspan in 2006, it was seen by many as something of an anti-climactic development; a somewhat retiring personality, in stark contrast to the cult figure that his predecessor had become. In his 18-year term, Mr Greenspan presided over a prolonged period of macroeconomic stability, during which the financial system grew ever more complicated and globally integrated. This ultimately proved to be too good to last and Mr Greenspan, universally feted on his exit, found his legacy increasingly questioned - even criticised - as the financial crisis of 2008 played itself out. However, one man's bequest proved to be another's opportunity and Mr Bernanke, among whose many academic accomplishments were deep insights into the Great Depression, initiated a series of policy measures that may have helped the US economy and perhaps even the global one from going down the same path eight decades later.
Mr Bernanke will be remembered for his use of aggressive liquidity measures, now collectively referred to as unconventional monetary policy, or UMP. In late 2008, then in 2010 and finally in 2012, the US Fed pumped enormous amounts of liquidity into the country's financial system by buying up securities, both government and mortgage-backed. In between, it also attempted to "twist" the yield curve - flatten it by buying up long-term securities while selling short-term ones. During the almost five-year period that this unconventional framework has been in place, the US economy, after dithering in the early years, is now clearly back on the path to recovery. The Fed's persistence and patience undoubtedly deserve some credit for this. Thus, from the domestic perspective, Mr Bernanke's handling of the crisis and the benefits of his approach will be viewed very positively.
However, the fact is that the US Fed's actions are no longer limited in their impact to the US economy alone. It is on this dimension that Mr Bernanke's legacy might be seen in a somewhat less favourable light. In 2010, the second round of liquidity infusion was criticised by leaders from the emerging market economies for precipitating a "currency war". Massive inflows of the freshly infused dollars were driving up their currencies and hurting competitiveness in a still-fragile growth environment. While that episode passed, in 2013, Mr Bernanke's hint that the US economy was approaching the point at which UMP would have to be rolled back led to massive financial turbulence around the globe. Now that the process is afoot, there are indications that another bout of global instability might be under way. These collateral consequences of UMP are the dark side of Mr Bernanke's legacy. The recent statement by Reserve Bank of India Governor Raghuram Rajan, that there has been a breakdown in global co-ordination on money and finance, reflects this perspective. As Janet Yellen begins her term, with some reassurance about the health of the US economy, she would do well to accept the fact that all her decisions will have repercussions all around the world.
