Interview with Dr Benn Steil, Director of International Economics at the Council on Foreign Relations

Dr. Benn Steil is senior fellow and director of international economics at the Council on Foreign Relations in New York.  He is also the founding editor of International Finance, a top scholarly economics journal, and lead writer of the Council’s Geo-Graphics economics blog.  Prior to his joining the Council in 1999, he was director of the International Economics Programme at the Royal Institute of International Affairs in London.  He came to the Institute in 1992 from a Lloyd’s of London Tercentenary Research Fellowship at Nuffield College, Oxford, where he received his MPhil and DPhil (PhD) in economics.  He also holds a BSc in economics summa cum laude from the Wharton School of the University of Pennsylvania.


Dr. Steil has written and spoken widely on international finance, monetary policy, financial markets, and economic history.  He has testified before the U.S. House, Senate, and CFTC on financial market and monetary issues.  He is a regular op-ed contributor at the Wall Street Journal and the Financial Times.  His latest book, The Battle of Bretton Woods: John Maynard Keynes, Harry Dexter White, and the Making of a New World Order, won the 2013 Spear’s Book Award in Financial History, took third prize in CFR’s 2014 Arthur Ross Book Award competition, was shortlisted for the 2014 Lionel Gelber Prize (“the world’s most important prize for non-fiction,” according to The Economist), and was the top book-of-the-year choice in Bloomberg’s 2013 poll of global policymakers and CEOs.  The book has been called “a triumph of economic and diplomatic history” by the Financial Times, “a superb history” by the Wall Street Journal, “the gold standard on its subject” by the New York Times, and “the publishing event of the season” by Bloomberg’s Tom Keene.  His previous book, Money, Markets and Sovereignty, was awarded the 2010 Hayek Book Prize.  Financial Statecraft: The Role of Financial Markets in American Foreign Policy was named one of the “Best Business Books of 2006” by Library Journal and an “Outstanding Academic Title of 2006” by Choice.


How will December’s rate rise by the Fed affect the global economy?
Basically, the markets don’t believe the FOMC that there are going to be four quarter-point rate rises over the course of 2016. So, my personal view is that the December rate rise is pretty much a non-event and that the markets are confident that the Fed is going to backtrack over the course of 2016. There will be very few, if any, additional Fed rate rises this year.

And if they backtrack, if it continues to be a bit rocky, do you think they might go back to QE?
I think the Fed would be extremely reluctant to go down that route because they know it would be politically controversial. I think that is one of the reasons why the Fed has chosen to raise its policy rate rather than sell assets as its means of tightening: if the economy does get into difficulty, it would be politically, certainly, much easier for them to cut rates than to begin buying back the assets that it sold.

Also, you recently wrote about the dangers surrounding the ECB’s current stance. We published that at the Cobden Center last week, too. How could Mario Draghi take a better approach given the current situation in Europe?
The European outlook is pretty grim. I think there’s a strong case for the ECB to make its monetary stance more accommodative, and Draghi has indicated that that is the direction in which he is moving. The problem is that he has disappointed in the past. And if he does disappoint in March, we could see a rather violent reaction in the market. As I’ve written before – in the Forbes article, for example, that you read – the Fed, the ECB, and the Bank of Japan are, in many ways, playing the global role that the Fed did in the crisis with its QE asset purchases. The ECB and the Bank of Japan are set to inject at least another one and half trillion dollars of central bank liquidity into the global economy over the course of 2016. Now, since emerging markets have been taking advantage of the divergence in monetary policy between the United States and Europe by moving their borrowing into euros, they are effectively speculating on a further declining euro. And if Draghi disappoints in March, we could see an enormous spike in the euro that will increase borrowing costs in emerging markets significantly and help precipitate an even worse crisis there.

Do you think that current debt levels around the world could result in another disintegration of the international monetary system similar to August 1971, i.e. the Bretton Woods System?
I think it has the potential to be enormously destabilizing in many ways. I think the key question is going to be whether global growth is revived because the increase in debt levels is clearly only going to be sustainable if it contributes to a rise in global growth. It’s far from clear that that’s the direction in which we’re moving right now.

Since 2008 the role of central banks has largely transmogrified into that of central planning authorities for the global economy. Do you consider this to be an inevitable trend, and do you think that it’s reversible?
Politically, I think it’s very difficult to reverse it. The Fed and the ECB, during the crisis, made interventions that would have been logical for a fiscal authority to make, but which those authorities were politically incapable of making. For example, the Fed’s massive and unprecedented interventions in the US mortgage market. I’m concerned that the lesson that’s going to be drawn from the experience is that politicians can always hide behind central bankers – essentially tell them to do their dirty work. And if things turn out badly, they can bash them behind the scenes and perhaps seek to undermine other aspects of their power. We’re certainly seeing that debate in the United States now.

You wrote in Foreign Affairs, in 2007 “Modern technology makes a revival of gold money through private gold banks, possible even without government support”. In light of the technological developments since then, do you view cryptocurrencies and the surrounding areas like the blockchain potentially playing a larger role in the global monetary system in the coming years?
I have no doubt that blockchain technology is going to become enormously important for the infrastructure of global financial markets, irrespective of what happens to so-called cryptocurrencies. Where I’m skeptical is on the role of fiat cryptocurrencies like bitcoin. If there should be a crisis of confidence in existing government-produced currencies, I find it implausible that people would turn to private fiat currencies, which have the same problem of irredeemability. Additionally, there are security vulnerabilities in some elements of the infrastructure – as we saw in the collapse of the Mt. Gox exchange. So the area where I would expect there to be progress, if there were a crisis of confidence in existing state-based money, would be gold-backed digital currencies. That would address the lack of confidence that people have in a fiat system. Digital gold banks already exist, and it is easy to see how digital gold debit cards could facilitate their use worldwide.

If that type of thing really did take off, how do you think central banks would respond to it?
I think the first reaction would not be from the central banks but from the governments themselves. As you know, in the United States, some of these initiatives have been the target of federal prosecutors – charges, for example, that they are vehicles for money laundering. There are also significant tax disincentives to be using gold as a digital currency, and governments can always fall back on this. Unfavorable tax treatment of gold capital gains is a way to discourage use of such currencies.

At The Cobden Centre we’re primarily an Austrian school think tank and believe that interest rates should be set by the market rather than central banks. Do you think this could have prevented the bubbles that we’ve seen over the previous decades?
If you go back to the classical gold standard of the 19th century, it certainly played an important role in limiting international imbalances. But it didn’t stop national financial crises from happening. For example, as you know, we had a major bank panic in the United States in 1907. It strikes me that any feasible alternative to the current system, in which central banks are primarily targeting interest rates, would involve a switch to targeting other variables, which produce problems of their own. And there is no nirvana international monetary system in my view. With regard to gold, although it has many properties that make it a useful international currency its supply is determined by unpredictable new deposit discoveries, mining technology innovations, and other factors unrelated to demand for currency.

We at the Cobden Centre also generally believe that there’s quite a substantial global asset bubble as a consequence of all the cheap money – especially of the last few years, but in many respects in the last 20 years or so – and that this will probably get out of the control of central banks when it bursts. Are you more optimistic than we are about the potential for central banks to be able to manage this deleveraging, or do you think it’s likely to get out of control?
Well, I would characterize myself as less pessimistic because I believe that any incipient bubbles that we may have been seeing late last year are already in the process of bursting. We’ve seen significant disruptions in major global asset markets over the past several weeks.

Which of the main central bankers in the world today do you think is the most adept ?
My first choice would be Mario Draghi. I believe he has the biggest challenge among major central bank heads in that the political foundation of his institution is very weak. He has to be extraordinarily careful in terms of managing German political and public opinion because he cannot take it for granted that Germany will be able to maintain popular support for the European Central Bank in the future. If, for example, the European Central Bank were to lose significant sums on its holdings of national debt, in particular Greek debt, it is very possible that it would need a recapitalization. And one could imagine that if the ECB itself were to get into the bailout queue that German public opinion would turn violently against the continuation of the euro. I think to date Draghi has been extraordinarily adept in adapting monetary policy while not entirely alienating the German public. It’s an extremely difficult balancing act that he’s engaged in.