NY TIMES ARTICLE ABOUT FED RESERVE/US PROBLEMS IN CONVINCING CHINA TO "REVALUE" ITS CURRENCY

May 24, 2010

Clinton and Geithner Face Hurdles in China Talks

By MARK LANDLER

BEIJING — China and the United States opened three days of high-level meetings here on Monday meant to broaden and deepen the ties between the world’s largest developed and developing economies.

But the opening session instead laid bare a recurring theme between Beijing and Washington: the United States came with a long wish list for China on both economic and security issues, while China mostly wants to be left alone to pursue policies that are turning it into an economic superpower.

President Hu Jintao, welcoming the 200-strong American delegation in the Great Hall of the People, praised the “mutually beneficial and win-win cooperation” between the United States and China. Such coordination, he said, had helped speed the recovery from the 2008financial crisis.

On the crucial issue of China revaluing its currency — something the Obama administration had pushed for — Mr. Hu repeated China’s past promises to make its effectively fixed exchange rate respond more to the market, but the fact that the country’s top leader mentioned reform at all suggested it is on the leadership’s agenda.

Still, Mr. Hu also repeated that Beijing would move “under the principle of independent decision-making, controllability, and gradual progress.” Translation: China alone will determine the timing of any such move.

Economists said the deepening debt crisis in Greece, which came up immediately in the discussions on Monday, would make Beijing more reluctant to allow its currency to appreciate in value in the immediate future.

Treasury Secretary Timothy F. Geithner did not mention China’s currency in his opening remarks, and the United States did not broach it in the first working session. The administration has decided not to prod Beijing at this meeting, officials said, concluding that it would resist outside pressure.

The United States is hitting similar hurdles on security issues. Secretary of State Hillary Rodham Clinton pressed China to support measures against North Korea following the strong evidence that it torpedoed a South Korean warship in March. But China has been skeptical of North Korea’s role and is reluctant to punish the North, with which it has close ties.

And while China agreed to a watered-down United Nations resolution on Iran’s nuclear program, it has not signed off on amendments against specific Iranian citizens and companies. With big planned investments in Iran’s oil and gas industry, China may well be in business with some of them.

In her speech to the opening session, Mrs. Clinton cited Iran and North Korea as issues in which Beijing and Washington must find common cause. “Today, we face another serious challenge provoked by the sinking of the South Korean ship,” she said. “So we must work together, again, to address this challenge and advance our shared objectives of peace and stability.”

A spokesman for the Foreign Ministry, Ma Zhaoxu, was noncommittal, saying of the Korea crisis, “We hope all the relevant parties will exercise restraint and remain cool-headed.”

Some of this is cultural, to be sure. Chinese officials tend to speak far less directly than Americans. Mr. Hu did not mention Iran and North Korea, referring to regional “hot spots.” The fact that he frankly addressed the exchange rate of China’s currency, the renminbi, surprised some observers, and lent itself to varying interpretations.

For some experts, Mr. Hu’s pledge to “steadily advance the reform mechanism of the RMB exchange rate,” without repeating his previous references to the rate being “basically stable,” was a sign of conciliation. “It’s important, the fact they haven’t mentioned it,” said Ben Simpfendorfer, the China economist for the Royal Bank of Scotland.

But others interpreted it as a pre-emptive move to take the issue off the table. Eswar Prasad, an economist at Cornell University, noted that the crisis in Greece had rattled the Chinese on two levels. It was likely to curb their exports to Europe, and it had strengthened the renminbi relative to the swooning euro, which makes Chinese goods more costly in foreign markets.

“That double hit on China’s exports almost certainly means that they’re not going to move forward unless there is evidence of stabilization in the euro and stabilization in Europe’s recovery,” Mr. Prasad said.

A senior Chinese official said that Beijing would keep a “high alert and attention on the euro zone sovereign debt crisis.” He noted that it could affect not only Europe’s economic recovery but also Chinese exports. China exports more to the European Union than to the United States.

The United States needed a 48-vehicle motorcade to ferry its delegation to this second round of the so-called strategic and economic dialogue. Among the prominent names: the chairman of the Federal Reserve, Ben S. Bernanke, the commander of the military’s Pacific Command, Adm. Robert F. Willard, and the secretary of health and human services, Kathleen Sebelius.

Some of the topics under discussion veered far from economics and security. Mrs. Clinton singled out Melanne Verveer, the State Department’s ambassador at large for women’s issues, who is meeting with Chinese women’s groups to discuss their progress in women’s rights.

Mr. Geithner lobbied against Chinese government procurement rules giving preference to products with intellectual property developed in China. American businesses, particularly in technology, say this handicaps them and deprives China of state-of-the-art products. “Innovation flourishes best when markets are open, competition is fair, and strong protections exist for ideas and inventions,” he said.

The Chinese have their pet issues as well: Beijing is pushing Washington to loosen controls on exports of high-technology equipment with potential military applications. A raft of questions from reporters for state-run Chinese media organizations suggested a coordinated campaign.

If American officials seemed likely to leave China with many of their wishes unfulfilled, there was one notable difference in this year’s meeting compared to the one last year in Washington: the American economy is growing again, which gave Mr. Geithner a rare chance to crow a bit.

Rather than identify the United States with the troubled economies of Europe, Mr. Geithner said the United States was holding its own with emerging economies like Brazil, India, and China.

“Economic growth in the U.S. and China is broader and stronger than many had anticipated, even a few months ago,” he said.

Michael Wines contributed reporting from Beijing, and Keith Bradsher from Hong Kong.

BERNANKE’S HOW-TO ON RATE INCREASE LACKS A WHEN

New York Times February 11, 2010 By SEWELL CHAN

WASHINGTON — “At some point.” “At the appropriate time.” “When the time comes.”

On Wednesday, the Federal Reserve’s chairman, Ben S. Bernanke, outlined a strategy — but not a timetable — for scaling back the extraordinary measures it began taking in 2007 to prop up the economy as financial markets teetered on collapse.

The Federal Reserve has eased borrowing by lowering short-term interest rates to nearly zero and built up a $2.2 trillion balance sheet by scooping up assets like mortgage-backed securities and even vast sums of Treasury bonds and notes.

Eventually, to avoid inflation, both actions will have to be reined in. But Mr. Bernanke, in a 10-page statement, provided few hints as to how long that period will be.

“Although at present the U.S. economy continues to require the support of highly accommodative monetary policies, at some point the Federal Reserve will need to tighten financial conditions by raising short-term interest rates and reducing the quantity of bank reserves outstanding,” he wrote.

“We have spent considerable effort in developing the tools we will need to remove policy accommodation, and we are fully confident that at the appropriate time we will be able to do so effectively.” However, Mr. Bernanke did provide new details of a major concern: how, as the recovery proceeds, to gradually shrink the balance sheet, which along with a vast array of assets also includes $1.1 trillion that banks are holding with the Fed.

Mr. Bernanke suggested that a new policy tool — the interest rate on excess reserves, which the Fed began paying in October 2008 — would be a vital part of the Fed’s strategy.

Increasing that interest rate, he said, will have the effect of pushing up other short-term interest rates, including the benchmark fed funds rate — the rate at which banks lend to each other overnight.

It is even possible, Mr. Bernanke said, that the Fed “could for a time use the interest rate paid on reserves, in combination with targets for reserve quantities,” to communicate its policy stance to the markets. Since 1994, the fed funds rate has been the much-watched centerpiece of statements by the Federal Open Market Committee, the Fed’s crucial policy-making arm.

Representative Spencer Bachus of Alabama, the senior Republican on the House Financial Services Committee, which requested Mr. Bernanke’s statement, noted on Wednesday that many in Congress never approved of the Fed’s extraordinary actions in the first place.

“An intervention creates an artificial condition in which the system becomes increasingly dependent on government action,” he said in a statement. “As with any addiction, an altered state is created where the only choices are permanent addiction or a sometimes painful withdrawal.”

For days, economists have been trying to forecast what Mr. Bernanke would say about the sequence of steps and the combination of tools the Fed will use to tighten credit. On that subject, Mr. Bernanke offered only hints of his thinking.

“One possible sequence would involve the Federal Reserve continuing to test its tools for draining reserves on a limited basis, in order to further ensure preparedness and to give market participants a period of time to become familiar with their operation,” he wrote.

“As the time for the removal of policy accommodation draws near, those operations could be scaled up to drain more significant volumes of reserve balances to provide tighter control over short-term interest rates. The actual firming of policy would then be implemented through an increase in the interest rate paid on reserves.”

But Mr. Bernanke suggested that “if economic and financial developments were to require a more rapid exit from the current highly accommodative policy” — that is, if fears emerge about inflation — the Fed “could increase the interest rate paid on reserves at about the same time it commences significant draining operations.”

Along with raising the interest rate on reserves, Mr. Bernanke discussed three other options for draining reserves. The first involves reverse repurchase agreements, in which the Fed would sell securities from its portfolio with an agreement to repurchase them at a later date.

The second involves term deposits — similar to certificates of deposit — to banks. That would convert part of the banks’ reserves into deposits that could not be used for short-term liquidity needs and would not be counted as reserves.

A third tool involves redeeming or selling securities. That strategy could carry risk, as the Fed’s large portfolio of mortgage-backed securities is helping to prop up the housing market and keep mortgage-interest rates low.

As part of its special lending programs to inject liquidity into the market, the Fed modified its discount window — the traditional program for direct lending to banks — to make terms more generous and to make nonbanks eligible for borrowing. That effort is winding down, and Mr. Bernanke said that “before long, we expect to consider a modest increase in the spread” between the discount rate — the rate at which the Fed directly lends to banks — and the fed funds rate. He emphasized that the change “should not be interpreted as signaling any change in the outlook for monetary policy.”

Mr. Bernanke’s statement elicited mixed views from economists.

Laurence J. Kotlikoff, an economist at Boston University, said that despite Mr. Bernanke’s efforts to be reassuring, the prospect for serious inflation was real. “We could go from here to hyperinflation, basically overnight, because we’ve increased the basic supply of money by a factor of three,” he said.

Mr. Kotlikoff also was skeptical about Mr. Bernanke’s proposed solution. “The Fed printed more than $1 trillion in new money and then went out and handed it to the banks, and now they’re trying to bribe those banks not to actually release it into the public stream — that’s what these interest rates on reserves are,” he said, adding, that that interest also amounted to a free subsidy to banks.

Ricardo Reis, an economist at Columbia University, was more sympathetic, describing Mr. Bernanke’s actions as innovative and necessary.

“The Fed can now return to having a ‘boring’ balance sheet with mostly government securities as assets, and bank reserves and cash as liabilities,” he said. “The increase in reserves plus the payment of interest on reserves — two innovations of the past two years — are good things. They should remain.”

Mr. Bernanke did note that the balance sheet would shrink on its own, over time, as assets like mortgage-backed securities and debt guaranteed by Fannie Mae and Freddie Mac are prepaid or mature. “In the long run, the Federal Reserve anticipates that its balance sheet will shrink toward more historically normal levels and that most or all of its security holdings will be Treasury securities,” he wrote.

BERNANKE BACK AS HEAD OF FED RESERVE FOR ANOTHER 4 YEARS

January 29, 2010

Senate, Weakly, Backs New Term for Bernanke

By SEWELL CHAN

WASHINGTON — The Senate gave Ben S. Bernanke a second four-year term as the head of the Federal Reserve on Thursday after critics excoriated the central bank’s conduct in the years leading up to the financial crisis.

The 70-to-30 vote was the weakest endorsement ever extended to a chairman in the Fed’s 96-year history.

The confirmation was a victory for President Obama, who had called Mr. Bernanke an architect of the recovery, but also signaled the extent to which the Fed, once little known to the public, has become the object of outrage over high unemployment and bank bailouts.

In several hours of debate, senators said that the Fed had abetted, then ignored, the housing and credit bubbles and allowed banks to keep dangerously low capital reserves and to make reckless lending decisions that ruined consumers. Some even blamed Mr. Bernanke for the falling dollar and questioned his commitment to free enterprise.

In contrast, Mr. Bernanke’s supporters were muted. They reiterated that the Fed had made mistakes but said that Mr. Bernanke had helped save the economy from a far worse recession.

After a week in which top White House officials and Mr. Bernanke met with Democratic leaders in the Senate to secure support, the Senate first voted 77 to 23 to end debate, with more than the 60 votes needed to overcome the threat of a filibuster.

On a second vote, to confirm, the 30 dissents came from 18 Republicans, 11 Democrats and one independent, Bernard Sanders of Vermont.

On Thursday evening, Mr. Obama congratulated Mr. Bernanke in a statement. “As the nation continues to face the consequences of the worst recession in a generation, Ben Bernanke has provided wisdom and steady leadership in the midst of the financial and economic crisis,” he said.

While an arm-twisting campaign by the administration limited the opposition, the outcry against the Fed will most likely continue rippling through economic policy generally, and Mr. Bernanke’s leadership of the Fed in particular. The effects could be felt first in the debate over how to reform financial regulations. The Obama administration has proposed consolidating risk regulation under the Fed, while some in Congress want to strip away its oversight authority.

“The institutional prestige of the Fed, even apart from this vote, had taken a hit, and it started back around the disaster of September 2008,” said Stephen H. Axilrod, who worked at the Fed for 34 years and wrote a history of its monetary policies. “I don’t think it has recovered. This is a low point in the Fed’s recent history, that’s for sure.”

The vote also made clear Congress’s insistence on transparency from a historically secretive institution that has made extraordinary interventions in the market since 2008.

“The Fed is going to have to work hard, for a long period, to regain the public confidence of the sort it enjoyed during the halcyon days when everything was going so swimmingly,” said Barry Eichengreen, professor of economics and political science at the University of California, Berkeley.

Senators from opposite ends of the spectrum formed unlikely alliances. After Mr. Sanders, who calls himself a socialist, finished denouncing Mr. Bernanke, Jeff Sessions, a conservative Republican from Alabama, rose to do the same.

Another Alabaman, Richard C. Shelby, the top Republican on the banking committee, which approved the nomination last month by a 16-to-7 vote, laid out a bill of particulars, saying Mr. Bernanke’s handling of the financial crisis did not make up for his failings before that time.

“Considerable economic devastation occurred as a result of Chairman Bernanke’s loose monetary policy and weak regulatory oversight,” Mr. Shelby said. “If we don’t hold Chairman Bernanke accountable, what precedent are we setting for future regulators?”

To an extent, the rhetoric against Mr. Bernanke reflected a spilling-over of frustration at two of his collaborators: the former Treasury secretary, Henry M. Paulson Jr., and the current one, Timothy F. Geithner.

And looming over it all was the role of Mr. Bernanke’s predecessor, Alan Greenspan, whose once-sterling reputation has been diminished as his decisions to keep interest rates low after the 2001 recession have been brought into question.

Mr. Bernanke, 56, was a member of the Fed’s board for part of that period, from 2002 to 2005, when President George W. Bush named him to lead his Council of Economic Advisers. He rejoined the Fed, as chairman, in 2006, and Mr. Obama renominated him last year. Mr. Bernanke is a Republican economist and an authority on the Depression.

“I knew that he would continue the legacy of Alan Greenspan, and I was right,” said Senator Jim Bunning, Republican of Kentucky, who was the lone vote against Mr. Bernanke in 2005.

Mr. Bunning cited a half-dozen statements from 2007 to 2009 in which Mr. Bernanke expressed optimism about the housing market, bank capital ratios, the capitalization of Fannie Mae and Freddie Mac and the unemployment rate. Saying that Mr. Bernanke had been repeatedly wrong, he declared, “We shouldn’t be paying the Fed chairman to learn on the job.”

Senator Sheldon Whitehouse, Democrat of Rhode Island, echoed that, saying Mr. Bernanke had shown “a troubling pattern of false confidence.” Senator Jeff Merkley, Democrat of Oregon, went further, saying the Fed had “helped set the fire that destroyed our economy.”

While less passionate, supporters of Mr. Bernanke said he had acted deftly and decisively, at least since the collapse of Lehman Brothers in September 2008.

“He basically allowed the Fed to become the lender of the nation,” said Senator Judd Gregg, Republican of New Hampshire. “Nobody had ever done that. The way he did it was extraordinary in its creativity, and the results were that the country’s financial system did not collapse.”