Outside the Beltway

Bernanke’s Reply to China

The finger-pointing about the global economy continues.

Dave Schuler
6

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Although he didn’t mention China by name, I’m sure the Chinese authorities took Dr. Bernanke’s remarks as being addressed at them. In remarks made in Frankfurt, Federal Reserve Chairman Ben Bernanke issued a retort to Chinese complaints about his second assay at quantitative easing:

By keeping their currencies artificially weak, Mr. Bernanke argued in Frankfurt Friday, China and other emerging markets are allowing their economies to overheat, preventing trade imbalances from adjusting and worsening what he called a “two-speed” global recovery.

Their “strategy of currency undervaluation” is preventing more “balanced and sustainable” global growth, he warns, echoing a view expressed by Obama Administration officials.

He continued:

“Why have officials in many emerging markets leaned against appreciation of their currencies toward levels more consistent with market fundamentals?” Mr. Bernanke asks. Mainly, he says, because they are sticking to a long-term strategy of pushing for export-led growth with cheap exchange rates.

Rather than attempting to lay blame I think it would be more productive for Dr. Bernanke to recall that the United States is almost completely unable to influence Chinese behavior and policy. China comprises an enormous territory containing more than a billion people. The Chinese authorities have their own goals and objectives and U. S. wants and needs play little role in them.

If we have objections to the relationship between China and the United States we should look rather to changing our own behavior and policy. We were not forced to extend most favored nation trading status to China, expand trade with China, or sell U. S. Treasury notes to China. We were also not forced to allow commercial banks to get into the investment bank business, loosen lending standards, or make risky bets on perpetually rising housing prices.

Those were policies, conscious choices, we made them, we had good reasons for making them, but they were not the only possible choices.

They are not laws of nature and treating them as such while treating Chinese policies as malleable to suit our needs is mere petulance.

The behavior we change must be our own.

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6 responses to “Bernanke’s Reply to China”

  1. john personna Avatar
    john personna

    We were also not forced to allow commercial banks to get into the investment bank business, loosen lending standards, or make risky bets on perpetually rising housing prices.
    Those were policies, conscious choices, we made them, we had good reasons for making them, but they were not the only possible choices.

    Authors Joe Nocera and Bethany McLean, on Charlie Rose, undermine the “good reasons” idea.

    Bethany suggests that the reasons were more about implicit and explicit corruption.

    Good show.

  2. john personna Avatar
    john personna

    BTW, there was another piece to the Bernanke comments, as noted on Calculated Risk:

    [O]n its current economic trajectory the United States runs the risk of seeing millions of workers unemployed or underemployed for many years. As a society, we should find that outcome unacceptable. Monetary policy is working in support of both economic recovery and price stability, but there are limits to what can be achieved by the central bank alone. The Federal Reserve is nonpartisan and does not make recommendations regarding specific tax and spending programs. However, in general terms, a fiscal program that combines near-term measures to enhance growth with strong, confidence-inducing steps to reduce longer-term structural deficits would be an important complement to the policies of the Federal Reserve.

    I add that note because someone here was remembering Bernanke as an opponent of fiscal stimulus.

  3. john personna Avatar
    john personna

    (I should have started by acknowledging that yes, we should get our own house in order. We shouldn’t be surprised when the Chinese do what they think is best for them, and we should be less stupid about what is best for us.)

  4. Pete Avatar
    Pete

    Bernanke is another overrated academic:

    Today In Economic History
    From the Senate Banking Committee hearing to confirm Bernanke as Greenspan’s successor, November 15, 2005:

    SENATOR SARBANES: Warren Buffett has warned us that derivatives are time bombs, both for the parties that deal in them and the economic system. The Financial Times has said so far, there has been no explosion, but the risks of this fast growing market remain real. How do you respond to these concerns?

    BERNANKE: I am more sanguine about derivatives than the position you have just suggested. I think, generally speaking, they are very valuable. They provide methods by which risks can be shared, sliced, and diced, and given to those most willing to bear them. They add, I believe, to the flexibility of the financial system in many different ways. With respect to their safety, derivatives, for the most part, are traded among very sophisticated financial institutions and individuals who have considerable incentive to understand them and to use them properly. The Federal Reserve’s responsibility is to make sure that the institutions it regulates have good systems and good procedures for ensuring that their derivatives portfolios are well managed and do not create excessive risk in their institutions.

    …

    SENATOR SARBANES. Do you think these issues contain a sufficient danger in them that it would warrant the Fed undertaking a special examination of these questions if you were to become the Chairman? Because if this went bad on your watch, I mean, there could be tremendous consequences, obviously.

    BERNANKE: I think it is useful to have informal contacts to try to understand what is going on in the market, and the Federal Reserve has various mechanisms for learning about this market; in particular, working through the various counterparties that deal with hedge funds.

    SENATOR SARBANES: Well, I commend this area to you as one that should have some focus of your attention. Otherwise, it may well come back to haunt you.

    posted by The Cunning Realist at Monday, November 15, 2010 4 comments

  5. ponce Avatar
    ponce

    According to the C.I.A., China exported $1.2 trillion worth of stuff last year. Its economy grew at a rather modest (for them) rate of 9.1%.

    These good were bought with currencies artificially overvalued due to Chinese currency shenanigans?

    China is overvaluing every other country’s currency by undervaluing theirs?

    And this also makes foreign goods artificially more expensive to Chinese consumers?

    Sounds like their plan for getting through the worldwide recession was much more effective (and maybe cheaper) than ours.

  6. WhiskeyJim Avatar
    WhiskeyJim

    Just one simple fun academic exercise from a plebeian; under what circumstances would Keynesian economics be considered a failure?

    Let’s say we cut government spending and GDP and employment almost immediately increased. Would that do it? I doubt it.

    So if there are no facts that repudiate it, what would you call it?

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