Bernanke's Fed Chasing Down the Global Infection: William Pesek

Commentary by William Pesek

Nov. 3 (Bloomberg) -- The first interest-rate cut in seven years had to be traumatic for Bank of Japan staffers.

Not only did it undo years of struggling to lift borrowing costs from zero, but few investors seemed to care. The indifference is partly attributable to the tardiness of the 0.2 percentage point move, which lowered the BOJ's benchmark rate to 0.3 percent.

The bigger reason was the U.S. Federal Reserve. The Fed's half-point rate cut to 1 percent last week came two days before the BOJ's move, and it surprised no one. What shocked many was a decision to provide $30 billion each to the central banks of Brazil, Mexico, Singapore and South Korea.

The internationalization of the Fed has been unfolding for years. From Seoul to Santiago, investors often care more about what happens in Washington than they do about actions taken by local monetary authorities. The central bank has 12 districts across the U.S., yet the last 15 years have seen the creation of de facto spheres of Fed influence around the globe.

Consider Oct. 29 as the day the Fed formalized the arrangement by creating areas 13, 14, 15 and 16. The Fed's decision to expand efforts to unfreeze markets in emerging nations raised eyebrows in Asia, eclipsing its rate reduction and that of the BOJ.

The International Monetary Fund also announced an emergency loan program that almost doubles borrowing limits for emerging economies and waives demands for austerity measures. That, too, surprised many observers.

Good Housekeeping

The IMF signaled that it will move faster with aid than in the past. It also showed the urgent need for an overhaul of the global financial order well before a Nov. 15 meeting of 20 industrialized and developing nations in Washington.

Five years from now, Fed Chairman Ben Bernanke will be regarded either as brilliant or reckless for so directly reaching around the globe. At the moment, it looks like an innovative and bold step. Already, it's done more to stop the bleeding in markets than have officials in, say, Seoul.

It's one thing to accept euros, yen, pounds or Swiss francs in these kinds of ``liquidity swap facilities.'' It's quite another to accept emerging-market currencies. The Fed is bestowing its ``Good Housekeeping'' seal on economies that are following responsible policies yet are feeling the brunt of the credit crisis.

This activity raises a number of questions about what U.S. authorities are up to. Here are three relevant to Asia.

U.S.'s Friends

One, is the Fed playing geopolitics? Since the U.S. created the problems oozing around the globe, it should help others deal with them. That's especially true if the U.S. wants to have any friends a year from now.

The Fed had already created similar swap lines with the European Central Bank and monetary authorities in Australia and New Zealand. It is now extending the courtesy to ``four large systemically important economies'' in the developing world.

``There is another signal being sent: Being a friend of the U.S. still matters,'' Marc Chandler, global head of currency at Brown Brothers Harriman & Co. in New York, wrote in an Oct. 30 report. ``Venezuela, Argentina and Russia, for example, are unlikely to be thought of as likely candidates for a similar swap program with the Fed. Over time, who is regarded as a friend of the U.S. may impact valuations.''

Two, is the Fed helping the IMF or undermining it? It's more the former than the latter.

In recent weeks, Iceland approached Russia for loans before going to the IMF, while Pakistan sought help from China. With $1.9 trillion of reserves, China might easily supplant the role of the IMF and U.S. Treasury in Asia.

IMF is Back

Those overtures, even if unsuccessful, didn't go unnoticed by U.S. officials. Many observers wonder if they were among the catalysts behind the Fed's and IMF's actions last week.

``It has been fashionable to argue that the crisis would increase China's financial influence, as China sits on a ton of foreign exchange and potentially offered an alternative source of foreign-currency liquidity,'' Council on Foreign Relations economist Brad Setser in New York wrote on his blog last week.

And yet that hasn't happened. The U.S. and Europe moved quickly, at least by the standards of governments, to help a broad range of countries. ``China's rise, in effect, contributed to a change in the political climate that helped to lift some of the political constraints that in the past limited the IMF's scope,'' Setser argued.

International Monster?

Third, how does the Fed turn off this new spigot? An international precedent clearly has been set, one that may create even greater expectations next time there's a crisis.

For all its troubles, the dollar is still the world's reserve currency, and central banks in Beijing, Tokyo, New Delhi, Taipei and Seoul hold mountains of U.S. notes. If the dollar plunges because the Fed cuts rates further, those holding U.S. currency also may expect Fed bailouts.

Only time will tell if Bernanke created an international monster here. For the time being, Asia's emerging markets are all too happy to accept the Fed's seal of approval.

(William Pesek is a Bloomberg News columnist. The opinions expressed are his own.)

To contact the writer of this column: William Pesek in Tokyo at wpesek@bloomberg.net