Geithner, Obama and China

Thoughts from the Frontline (01/27/2009)
Following Treasury Secretary designee Tim Geithner's public confirmation hearing, an extensive Q & A occurred in writing. The following quote has already created international consternation. Geithner twice answered questions about currency and China. In so doing he has placed the Obama administration squarely in the middle of the tension between the United States and the largest international buyer and holder of U.S. debt: China.

Geithner (on page 81 and again on page 95) answered: "President Obama—backed by the conclusions of a broad range of economists—believes that China is manipulating its currency. President Obama has pledged as President to use aggressively all the diplomatic avenues open to him to seek change in China's currency practices."

"Manipulation?" "Aggressively?" This is strong language. Geithner did not do this on his own authority. These are prepared answers. He is citing the new President—not once but twice.

China's response was fast and direct. China's commerce ministry said in Beijing that China "has never used so-called currency manipulation to gain benefits in its international trade. Directing unsubstantiated criticism at China on the exchange-rate issue will only help U.S. protectionism and will not help towards a real solution to the issue."

Are we seeing the world's largest and third largest economies calling each other names in the middle of a global economic and financial meltdown? Why are we picking a fight with China? The implied question is why are we alluding to one with Japan, whose currency is currently the strongest of the G4 majors? In a world where global finance is mostly in U.S. dollars, British pounds, euros, and yen, this is engaging in a dangerous sport.

So what do we do within 72 hours of launching the Obama administration that says it is seeking "change?" We fire the first public salvo in what could easily become a trade war or a threat to global financial integration.

What makes us so credible? Is it our proven record of regulatory oversight of our financial markets, as demonstrated by the Madoff scandal and the SEC? Or is it the way the actions of Treasury and the Federal Reserve allowed a primary dealer (Lehman) to fail, thus triggering a global contagion?

Where is the plan to restore confidence and credibility and transparency and consistent policy for the United States? And how does the Obama administration believe that launching a fight with China is beneficial?

Not one mention of trade openness appears in our reading of the 100 pages of answers to the Senate. Maybe someone else can find an affirmation of free and open trade. I cannot.

We are now in the realm of fiscal policy and national policy. This is not in the realm of the central bank; the Federal Reserve is not the player here. The Fed is doing all it can to unfreeze the financial system and restore it to functionality. If permitted to complete its task, that policy will work. If stymied or corrupted by conflicting policy in trade or federal finance, the recession will worsen and the pain will become more severe.

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