June 19, 2014,
Did you know the Federal Reserve’s move to withdraw stimulus from the U.S. economy helped caused the political upheaval in Ukraine? Or that it could cause more global crises in the next few years?
That’s the argument of Benn Steil, a prominent economist who recently wrote a well-received book on the 1944 Bretton Woods conference that led to the creation of the IMF and World Bank. He’s now director of international economics at the Council on Foreign Relations.
Steil points out that investors dumped Ukrainian bonds in the summer of 2013 after the Fed initially began to signal publicly that it would soon begin to taper – or cut purchases of Treasury and mortgage-backed securities. The panic among investors sent interest rates soaring on Ukrainian bonds and made it harder for the government to finance its operations.
The result: then-Ukrainian leader Viktor Yanukovych spurned economic ties with Europe, in Steil’s telling, and turned to Russia for help to ease a growing financial crisis. The stunning reversal led to massive civil demonstrations that forced Yanukovych to flee and induced Russia to invade and annex the Crimean region of Ukraine.
In an article in Foreign Affairs, Steil says the Fed is legally bound by U.S. law to take the necessary steps to heal the economy with little regard for the global consequences. Yet he points out that countries around the world might take defensive action to protect themselves – perhaps by manipulating the value of their currencies – and Steil says U.S. political leaders should cut them some slack.
“If Washington can’t lead,” Steil says, “it should at least get out of the way.”
– Jeffry Bartash