In Box

After Bernanke

Yes, he saved the global economy. But will he leave behind a ticking time bomb?

Ben Bernanke, the chairman of the U.S. Federal Reserve, has said he probably won't serve another term when his current one expires this coming January. His decision to skip the Fed's annual conference in Jackson Hole, Wyoming, this summer has only reinforced the view that he won't be coming back. But history has yet to issue its verdict on the world's most powerful central banker.

Undoubtedly, Bernanke will be remembered as a bold policy leader who helped avoid a global depression by courageously taking the Fed into uncharted waters using highly experimental -- and highly risky -- policies. At the same time, he leaves his successor with a set of unprecedented and unresolved problems to contend with, from weaning the economy off life support to navigating the consequences of an unusually large balance sheet. And with so much uncertainty about the success of the Bernanke way, econ textbooks and quarterly unemployment figures just don't hold enough answers to how his stewardship of the U.S. economy will play itself out in the years ahead.

Bernanke might well end up regarded as one of the bravest, most innovative Fed chiefs yet. But history made him as much as he made history: The global financial system started to show signs of unusual stress soon after he assumed the chairmanship in early 2006. By September 2008, when Lehman Brothers' collapse set off a global panic, Bernanke, having brilliantly analyzed the historical causes and consequences of the Great Depression as an academic -- and having already taken some exceptional measures as Fed chairman -- understood the importance of quickly going all in to counter a potential tragedy of enormous proportions. After galvanizing the Fed into the role of audacious financial first responder, he went to Capitol Hill with Treasury Secretary Hank Paulson and, in what has been recalled by many as an extraordinary meeting, persuaded (or, more accurately, terrified) reluctant politicians to take unprecedented steps, including a massive emergency fiscal injection to save the financial system. Things really were that dire -- so much so that, worried that the banks might not open the next morning, I told my wife to withdraw as much cash from the ATM as possible.

Bernanke took a lot of heat for these bold moves, but he also did the best he could to leverage what Congress had authorized, working closely with the Treasury Department and other central bankers around the world. The result was an impressive set of coordinated policy responses that unclogged the pipes of the global financial system, got the money flowing again, and avoided an economic collapse with terrible human costs. He also departed from previous Fed practice by communicating these extraordinary measures to the public, including giving the first TV interview for a sitting Fed chairman in more than two decades, on 60 Minutes.

There's no question that Bernanke played a critical role in steering the global economy back from the brink in 2008 and 2009. Yet his unusual brand of policy activism did not end there -- and here's where his legacy is more complicated. In five years we might look back and say that he bought just enough time for the United States to heal its economy -- or that he's to blame for a new bout of disastrous financial turmoil.

Bernanke saw that, having overdosed on debt and credit entitlement, Western economies faced a multiyear "new normal" characterized by unusually sluggish economic growth, alarmingly high unemployment, worsening income distribution, and concern about overextended fiscal balance sheets. Meanwhile, pronounced dysfunction in Washington, including an extremely polarized Congress, frustrated all attempts at comprehensive reform. Once again, Bernanke bravely went on the offensive. He pivoted from normalizing broken financial markets to using the Fed to deliver higher growth and more robust job creation -- a significant challenge given the relatively limited tools at his disposal, the nature of his mandate, and the extent of bipartisan rancor in Washington.

The Fed had already been forced into a series of new, untested maneuvers, including buying securities on the open market. Bernanke's hope was that these exceptional moves would buy enough time for politicians and other government agencies to get their act together. It didn't happen. So he courageously signaled in August 2010 at the Jackson Hole conference that the Fed would do even more.

Confronting a sluggish economy and unemployment hovering around 10 percent, Bernanke decided that opening up all sorts of emergency funding windows for banks at the Fed was not enough. He combined three policy initiatives that had once been deemed irresponsible, if not entirely unthinkable: He floored policy interest rates at zero for an exceptionally long period, committed to keeping them there even longer through what is called "forward policy guidance," and used the Fed's balance sheet aggressively to buy treasury bonds and mortgages as a way of manipulating prices and investor behavior.

Early in his crisis-management mode, and with the honesty and openness that have characterized the entirety of his remarkable tenure at the Fed, Bernanke warned that the potential benefits of such an unconventional policy stance came with "costs and risks." The longer the Fed persisted, the trickier it would get to strike a balance, and the harder the potential return to normalcy, he acknowledged.

Now, three years after pivoting from saving the imploding financial markets to explicitly targeting employment and economic growth, the Fed is no closer to winding down its experiments. The U.S. economy has yet to attain escape velocity and return to predictable, stable growth. Joblessness remains too high, at 7.5 percent as of this writing, a problem aggravated by millions of young and long-term unemployed, threatening to create a new lost generation.

All these problems have major international consequences too, given that the Fed issues the dollar, the world's reserve currency, and thus its actions resonate around the globe. In effect, Bernanke's policies have pushed other central banks to pursue more expansionary and experimental policy approaches -- in some cases, even regardless of the intrinsic needs of their domestic economies.

Few doubt, for instance, that Bernanke's unusual activism contributed to Japan's remarkable policy U-turn, which, with its massive injections of yen into the system, constitutes the country's biggest postwar economic policy experiment. He has also influenced monetary policy from Brazil to South Korea, Mexico to Chile. And it has made the United States a few enemies: The Fed has been accused in some quarters of fueling the fires of a potential "currency war" around the world. Unsurprisingly, this mix of hyperactive leadership yet disappointing economic and job growth has resulted in a robust debate.

I firmly believe that Bernanke saved the global economy from a depression in 2008 and 2009, yet I still have many questions about how we'll come out the other side. Are the as-yet-elusive benefits of Bernanke's unconventional policies worth the costs and risks? Is the Fed just blowing financial bubbles that will burst down the road? Has Bernanke unduly threatened the institution's public standing and the political autonomy that it needs to support high, noninflationary growth? When will the Fed allow markets to function normally again? How close are we to international currency wars and beggar-thy-neighbor threats? And what if this huge monetary experiment ends up failing -- could the Fed after Bernanke end up a significantly weaker institution?

Of course, much of how this plays out lies well outside the control of Bernanke -- or his successor -- and will depend on the actions of others, from bickering politicians on Capitol Hill to central bankers in other countries. No doubt, Bernanke deserves much praise for his brave risk-taking. And he will go down in history as the Federal Reserve chairman who successfully steered the global economy away from the edge of disaster. But let's hope that he is also remembered for having built the foundation that enabled his successor, working with a more functional political system, to guide the United States back to the path of high economic growth, robust job creation, low inflation, and greater wealth equality. That would be a new normal we could all get behind.

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In Box

In Defense of Leading from Behind

So what if it's a terrible slogan? It's still the right strategy.

"Leading from behind," a quote from an unnamed Obama administration official highlighted by New Yorker writer Ryan Lizza, has been vehemently and repeatedly trashed in the Washington scramble to redefine U.S. power in the 21st century, becoming fodder for Mitt Romney's 2012 presidential campaign and a rallying cry for neoconservatives. But the concept behind the phrase deserves another look. President Barack Obama seems to have come to the same conclusion and already is leading in a new way -- not from behind, but as a partner.

When it was coined in April 2011, the phrase rested on indisputable, if uncomfortable, emerging realities: Americans had soured on playing Lone Ranger to a hopelessly messy world. The price tag had grown outrageous, the results dubious. America's allies were demanding a bigger say in the policy menu, though they still expected Washington to pick up the check. Forget not that they pushed the White House into dethroning Col. Muammar al-Qaddafi in Libya and now scheme the same for President Bashar al-Assad in Syria. And remember the 2009 Copenhagen climate change conference, where erstwhile friends ditched the United States to join China's disgraceful bid to undermine global climate change efforts -- though they didn't fail to slip the bill (and the blame) under the U.S. door.

Due regard for these potent realities, however, was doomed by the word "behind." The idea was ill-named and ill-explained, and the foreign-policy gods descended with lethal fury. They likened the phrase to a military officer commanding his troops to charge while he sipped tea at headquarters. "Behind," they intoned, reeked of weakness and indecision, of fear to wield American power in a world still quietly craving U.S. leadership. Unsurprisingly, the slogan's originator remains anonymous, surely trembling that Bob Woodward might soon unmask him or her.

Here are the useful insights hidden within "leading from behind," and here's how they can be put together to fashion a new strategy for using international power in the 21st century. First, the "behind" must be banished. If foreign-policy hands the world over agree on anything, it is that only Washington can lead on major international issues for some time to come. Americans shouldn't shrink from this; it's still the best way to protect U.S. interests. If Washington is to lead effectively, however, it must do so in a new way -- through genuine partnerships. Unless others are treated as actual partners, they won't follow, and any resulting coalition will lack the power to prevail. From time to time, Obama has suggested that this is indeed his approach to foreign policy, but as in so many matters he has never proved the point.

These future partnerships must be grounded in the idea of mutual indispensability, wherein the United States is the indispensable leader and other countries are the indispensable partners. This is not the Lone Ranger and Tonto, nor many Tontos without the Lone Ranger. Rather, as Washington takes the lead on important matters, other countries will buy in because their interests are served. It works because all parties understand that a coalition provides the best opportunity to achieve common goals -- that mutual indispensability is a power multiplier. It doesn't take a Bismarck to see that most international problems can't be solved without such power partnerships.

States will not greet this process with oaths of obedience or lust to be yoked into partnerships. Their natural tendency is to let the forest burn in hopes that someone else will extinguish the flames. Such inertial heft is not easily overcome. Nor are the vagaries of domestic politics when short-term political costs loom large. Rarely will the logic of mutual indispensability alone galvanize a coalition. Arm-twisting by Washington might help, as might giving or withholding special favors. But those sorts of measures are usually more effective at closing deals than forging them in the first place.

The instrument best suited for forging coalitions is a fine and compelling strategy. The strategy must demonstrate that only partnership can fix the problem, that only common action will prevent worsening at the expense of would-be partners, that U.S. leadership is fair and necessary, and that, ultimately, partnering amounts to good politics at acceptable costs. Good strategy is the essential ingredient of durable coalitions. Good strategy is power.

THE BEST CASE for a strategy of U.S.-led partnerships, ironically, was made when it wasn't done this way -- the overthrow of Qaddafi. Here, Washington actually led from behind. France and Britain, in particular, beat their drums daily against the tyrant, whose ouster represented a humanitarian duty. Predictably, the Obama administration succumbed to the pressure, though with conditions: European allies and Arab aircraft would attack Qaddafi's forces and supply the arms to the noble rebels, while the United States would provide logistical support, command and control for air attacks, and intelligence -- but not engage in actual combat on the ground.

This coalition began firing away without carefully examining the credentials of the supposed good guys or probing whether they could retain power and serve Western interests better than the colonel. Little apparent thought was devoted to a post-Qaddafi Libya -- perhaps the allies believed that the country's vast oil wealth would solve all problems. Their "strategy" also failed to address the repercussions for the rest of the region. How did they imagine their "freedom fighters" would dispose of Qaddafi's vast store of advanced armaments? Well, you can't think of everything. Absent Washington's coherent lead on these strategic questions, the inevitable result was chaos, attacks, and new threats from al Qaeda cohorts. Believe it or not, the perpetrators of this "strategy" still congratulate themselves for this fiasco -- even after the debacles in Benghazi and Mali.

But the wrong strategy on Libya points to the right one for Syria. The key is identifying the most serious potential threats to the interests of America and its allies amid the welter of possible outcomes. Just as the most serious threat in Libya was not Qaddafi's continued reign but what would come next, Assad -- bad as he is -- isn't the worst nightmare in Syria. He was always worrisome to his neighbors, but not a major danger. To be sure, America's strategy must include his departure, but at this point, that event alone won't stop the fighting. His fellow Alawites will not lay down their arms as long as they fear the Sunni rebels' revenge. Moreover, though Assad's flight will diminish Iran's influence in the region, his departure won't begin to eliminate it.

Just as the biggest threat in Libya was a radical jihadi takeover, so it is in Syria. As matters now stand, there is a high risk that a rebel victory would mean a jihadi victory. So far at least, the mujahideen have been both the fiercest fighters and the most effective administrators of conquered territory. Extremists aren't the only ones who know how to bake bread and pave roads, but they're the ones who have been doing it best.

Thus, the imperative is a strategic partnership to stop the jihadists -- the one common interest among Alawites and moderate Sunnis. A jihadi triumph is what both fear most, the moderate Sunnis because the jihadists would overpower and enslave them, and the Alawites, a Shiite offshoot, because they see their slaughter in jihadi eyes. The outlines of a deal take form: The moderate Sunni rebels pledge a government role and means of protection for the Alawites, and the Alawites dump Assad and cede necessary powers to the moderates, all based on mutual containment of jihadists. This approach also would lock in the crucial partnership of the Russians, who won't abandon the Alawites. Britain, France, Iraq, Jordan, Lebanon, Turkey, and the Persian Gulf states -- even possibly Iran -- should also find it appealing. That's a compelling power partnership, and the only chance to end this civil war without a lot more war.

A workable strategy for Afghanistan, too, sits on America's doorstep and must focus on which countries would suffer most from a failed state there. The name of the game for Washington is to disentangle itself as fast as possible without abandoning Afghans and further besmirching American credibility. The strategic key is finding partners with potent reasons to assume responsibilities in Afghanistan as America draws down.

The answer stares Washington in the face and always has: Afghanistan's neighbors. The prospect of a collapsing Afghanistan -- spilling over with refugees, drugs, and religious extremists -- should give nightmares to Russia, Tajikistan, Kyrgyzstan, Uzbekistan, Turkmenistan, China, India, Pakistan, and even Iran (which helped early in the war for these reasons). But as long as the United States protects their interests, they have no incentive to partner. Now Washington must alert them that they can either take responsibility or suffer the consequences (though, of course, the United States will and should play a continuing role in organizing the process and helping to pay the bill).

Going forward, the United States has no choice but to embrace the sound underpinnings of "leading from behind." The blunt truth is that Americans won't finance Lone Rangerism, and it wouldn't work anyway. Other countries won't just follow along with Washington. Sure, making this new approach viable will be burdensome and cumbersome. But if key countries don't want to see problems fester and explode, they will recognize that mutual indispensability -- with America as the leading power partner and themselves as actual partners -- is the only promising path to successful use of international power. That's the ultimate message of "leading from behind," and the foreign-policy gods trash it at their own peril.

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