Treasure

Tuesday, Mar 24, 2009

Now, the imbalances that caused this crisis built up over a long period of time, and they will take a long time to work through.  The absence of a serious recession over the past two decades bred a degree of confidence in the future and a stable future that was just fundamentally unjustified.   Relatively accommodative monetary policy and high foreign demand for U.S financial assets pushed down rates, encouraged borrowing, pushed up asset prices, not just in housing and not just in the United States.  Financial innovation produced products whose complexity escaped, went well beyond the capacity of the checks and balances in the system.  Compensation practices overwhelmed the basic disciplines of risk management, leaving our financial system too fragile and too unstable.

Timothy Geithner, Secretary of the Treasury of the U.S., March 25, 2009, Council on Foreign Relations: A Conversation.

So who ensured an "absence of a serious recession" after the .COM crash of 2001 (as well as all others)?

The Federal Reserve. He even says as much: "relatively accommodative monetary policy."

Potpourri:

QUESTIONER:  Well, thank you.  Wonder if you could comment on two related things.  One, the Chinese government proposal about a global currency...

GEITHNER:  On the first question, I haven't read the governor's proposal.  He's a remarkably -- a very thoughtful, very  careful, distinguished central banker.  Generally find him sensible on every issue.  But as I understand his proposal, it's a proposal designed to increase the use of the IMF's special drawing rights.  And we're actually quite open to that suggestion.  But you should think of it as rather evolutionary, building on the current architectures, than -- rather than -- rather than moving us to global monetary union.

...

ALTMAN:  Let me just follow that up for one second.  A number -- I haven't read the governor's essay, either, but a slew of news reports interpreted his comments to suggest that the world needs a super reserve currency, and that the dollar, on some gradual basis, ought to be replaced in favor of that.  And I wasn't entirely clear what your response was.

GEITHNER:  Well, as I said, I haven't read his proposal, but I thought the initial reaction was sort of ahead of the details of the proposal I saw.  The only thing concrete I saw was a reference to expanding the use of the SDR, but I look forward to reading his figures.  As I said, I have tremendous respect for him.  He's a really thoughtful, pragmatic guy, and he has a great record of credibility in China as a whole, so anything he's -- he's thinking about deserves some consideration.

It is very important just to underscore that the future evolution of the dollar's role in the system depends really primarily on how effective we are in the United States in getting not just recovery back on track, our financial system repaired, but we get our fiscal position back to the point where people will judge it as sustainable over time.  And the president's budget, although it has some very important long-term investments in improving health care -- our health care system, improving education outcomes, energy efficiency, quality of infrastructure, it does that within a framework which proposes to bring down our deficits to a level that is -- achieves sustainability at the five-year horizon; sustainability being a deficit small enough so that our overall debt burden, relative to the GDP, is stable, at reasonable levels.

...

And you know, you're not going to see a financial system that, you know, built up a entire machinery of credit creation and provision, on an assumption of continuous liquidity, build up huge amounts of leverage, particularly outside the banking system... You're not going to see that process of adjustment and repair end quickly.

...

ALTMAN:  ... Do you see any change over the foreseeable future in the basic role of the dollar as the world's key reserve currency, or the reserve currency?

GEITHNER:  I do not.  I think the dollar remains the world's dominant reserve currency.  I think that's likely to continue for a long period of time.  And as a country, we will do what's necessary to make sure we're sustaining confidence in our financial markets, and in the productive capacity of this economy and in our long-term fundamentals.

Timothy Geithner, Secretary of the Treasury of the U.S., March 25, 2009, Council on Foreign Relations: A Conversation.

BACHMANN: We've seen both China, Russia, and Kazakhstan make calls for an international monetary conversion to an international monetary standard as soon as the G-20, and I'm wondering, would you categorically renounce the United States moving away from the dollar and going to a global currency as suggested this morning by China and also by Russia?

GEITHNER: I would, yes.

BERNANKE: I would also.

House Financial Services Committee to Hear from Secretary Geithner and Chairman Bernanke on AIG, 01:30:00, March 25, 2009, http://financialserv.edgeboss.net/wmedia/financialserv/hearing032409.wvx.

A top European Union politician on Wednesday slammed U.S. plans to spend its way out of recession as "a way to hell."

Czech Prime Minister Mirek Topolanek, whose country currently holds the EU presidency, told the European Parliament that President Barack Obama's massive stimulus package and banking bailout "will undermine the stability of the global financial market."

...

"We need to read the history books and the lessons of history and the biggest success of the (EU) is the refusal to go this way," he said.

The Associated Press, EU Presidency: US Spending Is 'the Way to Hell', March 25, 2009, http://www.cnbc.com/id/29874192.

The Kremlin published its priorities Monday for an upcoming meeting of the G20, calling for the creation of a supranational reserve currency to be issued by international institutions as part of a reform of the global financial system.

The International Monetary Fund should investigate the possible creation of a new reserve currency, widening the list of reserve currencies or using its already existing Special Drawing Rights, or SDRs, as a "superreserve currency accepted by the whole of the international community," the Kremlin said in a statement issued on its web site.

The SDR is an international reserve asset, created by the IMF in 1969 to supplement the existing official reserves of member countries.

...

Analysts said the new Kremlin proposal would elicit little excitement among the G20 members.

...

Nazarbayev's proposal did, however, garner support from at least one prominent source -- Columbia University professor Robert Mundell, who was awarded the Nobel Prize in 1999 for his role in creating the euro.

...

The Group of 20 industrialized and developing countries will meet in London on April 2.

Ira Iosebashvili, At G20, Kremlin to Pitch New Currency, The Moscow Times, March 17, 2009.

China's central bank on Monday proposed replacing the US dollar as the international reserve currency with a new global system controlled by the International Monetary Fund.

In an essay posted on the People's Bank of China's website, Zhou Xiaochuan, the central bank's governor, said the goal would be to create a reserve currency "that is disconnected from individual nations and is able to remain stable in the long run, thus removing the inherent deficiencies caused by using credit-based national currencies."

Analysts said the proposal was an indication of Beijing's fears that actions being taken to save the domestic US economy would have a negative impact on China.

"This is a clear sign that China, as the largest holder of US dollar financial assets, is concerned about the potential inflationary risk of the US Federal Reserve printing money," said Qu Hongbin, chief China economist for HSBC.

Jamil Anderlini, China calls for new reserve currency, The Financial Times, March 23, 2009, http://www.ft.com/cms/s/0/7851925a-17a2-11de-8c9d-0000779fd2ac.html?nclick_check=1.