Who's Going to Miss Larry? Not Asia.by
As much as Lawrence Summers did Barack Obama a favor by taking himself out of the running for Federal Reserve chairman, the economist did Asia a solid, too.
Asian markets have been gyrating like it's 1997 all over again, roiled by fears of a clumsy exit from the Fed's quantitative easing experiment. When investors in the West talk about "tapering," their peers in Asia tend to hear "market collapse." That fear is a legacy of the Fed's harsh, and messy, tightening cycle in 1994 -- a shock that helped precipitate Asia's meltdown three years later. The dollar's post-1994 rally made Asia's currency pegs impossible to maintain.
The idea of a Summers-led Fed worried many in Asia -- and not just because he was part of a Clinton administration team that botched the global response to Asia's crash. Officials here followed with growing distress the long paper trail of Summers comments questioning the efficacy of ultra-loose monetary policy. They feared Summers would scrap QE much faster than Janet Yellen, in ways that would push nations like India, Indonesia and Thailand with widening current-account deficits into free fall.
The high levels of Asian anxiety should be a lesson for whomever President Obama picks to replace Ben Bernanke, whose term ends in January. More than ever before, the U.S. central bank must meticulously consider the damage its actions in Washington could do around the globe.
The Fed has a dozen districts across the U.S. and conducts its policies based on supply-and-demand strains around the nation. But the last 20 years have seen the creation of de facto spheres of Fed influence around the globe. It's hardly a reach to think of Latin America as the 13th district, Southeast Asia the 14th, Eastern Europe as 15th, China the 16th, and so on. From Buenos Aires to Jakarta, investors care more about what happens in Washington than they do about actions taken by local monetary powers. For better or worse, this internationalization of Fed policy must be central among the variables considered in Washington.
What good is Obama's much-ballyhooed pivot toward Asia if the Fed is exporting turmoil to the region? In this interconnected world of ours, fresh contagion in Asia will quickly boomerang back on the U.S.
"The Fed insists that it's blameless -- the same absurd position that it took in the aftermath of the great crisis of 2008-2009, when it maintained that its excessive monetary accommodation had nothing to do with the property and credit bubbles that nearly pushed the world into the abyss," says former Morgan Stanley chief economist Stephen Roach, who's currently a senior fellow at Yale University. "It remains steeped in denial: Were it not for the interest-rate suppression that QE has imposed on developed countries since 2009, the search for yield would not have flooded emerging economies with short-term hot money."
There's plenty of blame to go around, of course. Asia's developing economies are guilty of not working harder to rebalance their sources of growth away from exports alone. Yet as the Fed gears up for a potentially market-shaking policy reversal, Asia is relieved Yellen is likely to the one engineering it. Today's stock rally is Asia's way of thanking Summers for stepping aside.
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