From the New York Times
October 20, 2009
Fed Chief Cites Role of Trade Imbalances in Crisis
By EDMUND L. ANDREWS
SANTA BARBARA, Calif. — Ben S. Bernanke, the chairman of the Federal Reserve, said on Monday that global trade imbalances played a central role in the global economic crisis and warned that both the United States and fast-growing Asian nations needed to do more to prevent them from recurring.
“We were smug,” Mr. Bernanke said of the United States in a question and answer session following his speech.
In answer to another question, he said the American financial regulatory system was “inadequate” at managing the immense inflows of cheap money from China and other countries that had huge trade surpluses.
In his prepared remarks, Mr. Bernanke acknowledged that trade imbalances had declined sharply as a result of the crisis, mainly because trade itself plunged, but he warned that American foreign indebtedness would aggravate the imbalances once again unless the United States reduced its soaring federal budget deficit.
“The United States must increase its national saving rate,” he said. “The most effective way to accomplish this goal is by establishing a sustainable fiscal trajectory, anchored by a clear commitment to substantially reduce federal deficits over time.”
The federal deficit for the 2009 fiscal year soared to $1.4 trillion, almost triple the deficit in 2008, and budget analysts predict that budget deficits will average almost $1 trillion a year over the next decade.
By the same token, he said, Asian countries needed to rely less on exports and more on their consumption at home for their economic growth. One way to increase Asian household consumption, he said, would be for countries like China to increase social insurance programs and reduce the uncertainty that currently hangs over many consumers.
Speaking at a conference of the Federal Reserve Bank of San Francisco, Mr. Bernanke said Asian countries had bounced back from the global recession faster than the rest of the world and had become the engine of the global economic recovery.
“By and large, countries in Asia came into the crisis with fairly strong macroeconomic fundamentals,” Mr. Bernanke said, and noted that countries like China, Japan and Korea had fought the downturn with aggressive stimulus programs.
With the Asian economy expanding at an annualized rate of 9 percent in the second quarter of this year, and China’s economy expanding at rates of more than 10 percent, Mr. Bernanke said, “Asia appears to be leading the global recovery.”
But the Fed chairman warned that the United States-led crisis was fueled in large part by huge inflows of cheap money to the United States from countries like China that were trying to recycle dollars from their huge trade surpluses.
The Fed chairman noted that global trade and financial imbalances had narrowed considerably since the crisis began, largely because the volume of international trade contracted by 20 percent from its peak before the crisis.
But he cautioned that the imbalances could widen out again as economic growth revives. While the United States has to tighten its belt by saving more and consuming less, China and other Asian countries need to increase their consumer spending to promote faster domestic economic growth.
Mr. Bernanke avoided what was in many ways the elephant in the room: the value of the United States dollar. The dollar has dropped sharply in recent weeks against the euro and the Japanese yen, which has helped increase American exports by making them cheaper in some foreign markets. But the dollar has not budged in more than a year against China’s renminbi, which the Chinese continue to tightly manage and which many economists say remains greatly undervalued.