Treasury Secretary Timothy Geithner in Gyeongju, South Korea

Bloomberg Television’s Chief Washington correspondent Peter Cook interviewed Treasury Secretary Timothy Geithner in Gyeongju, South Korea yesterday– the embargo on the interview was lifted this AM.

Source: Bloomberg News

During the interview, the Treasury Secretary said that China will “continue to move” on a stronger yuan. Geithner also spoke about the results of the G20 meeting in South Korea. Today, Geithner is meeting with Vice Premier Wang Qishan in China.


Link to Bloomberg News story here:


PETER COOK, BLOOMBERG NEWS: Mr. Secretary, thank you for the time.


COOK: Tell me why this communique, this document, the talks this weekend should end any discussion of a currency war.

GEITHNER: Because it’s a framework for cooperation that all countries signed onto. And it’s — what it’s designed to do is make sure that growth in the future is going to be more sustainable, that the financial system will be more stable. We’re going to make it easier to sustain support in all countries for more open trade by making sure that we address the risk of persistently large trade imbalances across the globe.

COOK: People will look at this, and they will say, “Words on paper, Mr. Secretary. Where is the stick? Where is the punishment, if you will, for any G-20 nation that doesn’t abide by this?” And they’re going to look at this list and say there’s some countries not doing some of these things right now.

GEITHNER: Peter, it’s a world of sovereign countries. So the only thing that works is try to convince countries that they’re better off individually if they work together to solve these kind of things. And I think it’s encouraging, what you’ve seen so far.

It’s not just if we look back over the last two years and you saw these countries come together and coordinate very closely a very powerful program of economic and financial support to break the back of the financial crisis, restart economic growth. But they’ve worked very closely together on very tough reforms over the financial system and new capitals to limit leverage and risk taking. And you’ve seen them make sure they’re making good on the commitment to keep markets open in the face of huge pressure, given the high levels of unemployment, the damage caused by the crisis.

And here you see them look a little bit more to the future and make sure that, as we recover, we’re not sowing the seeds of the next financial crisis. And you’re seeing the adjustments that have to happen in exchange rates; other domestic forms happen more gradually.

COOK: What’s the significance of the fact the G-20 even addressed exchange rates for the first time ever in this document?

GEITHNER: Well, it’s very important. Again, you know, we’ve had a long period where the major economies, principally Japan, Europe and the United States, were all the — bore all the burden of cooperation/exchange rate questions. They dominated all those discussions.

But the world’s changed dramatically. And it’s very important that we’re discussing things with China, with India, with Brazil, with the emerging market economies all around the world that are growing so rapidly and are going to be such a promising sort of future source of future growth. So it’s very important to have these countries come together and talk about these things in much more detail with much more candor for the first time.

COOK: This language in here commits G-20 nations to move towards more market-determined exchange rate systems that reflect underlying economic fundamentals and refrain from competitive devaluation of currencies. Does this obligate China to do something it’s not doing right now?

GEITHNER: China is doing two very important things, now, which of course, we want to see continue. One is they’re putting in place some very important reforms to shift from an export model of growth to a growth model driven more by domestic consumption, more by domestic demand. That’s enormously important. They’re doing that because they recognize that, in the future, it’s not — doesn’t make sense for them to depend so much on exports. And it’s very important to the United States and China as trading partners to see their domestic demand, their demand for imports start to expand more rapidly in the future.

They’re also letting their exchange rate move up. And they’re doing that because it’s in their interest. Makes no sense for China to have monetary policies set by the Federal Reserve. They’re an independent country, large economy. They need the flexibility to run their policies in a way that makes sense for China. And that requires that their exchange rate move up over time, as they’re now doing.

Now we want to see that continue. They’ve got a ways to go. But I think they’re committed to do that, because they recognize it’s in their interest.

COOK: Did you receive any assurances from the Chinese during the course of your talks this weekend that that recent progress in terms of the acceleration of the yuan appreciation, that that will continue at that pace?

GEITHNER: I think it will continue, because again, I think it’s very much in China’s interests. And, of course, they recognize it’s important to the world as a whole. I mean, countries around the world are affecting by what’s happening in China. China recognizes that. And I think we’re going to see them continue to move.

COOK: All right. Let me ask you about the new proposals you brought to the table. You seemed to shake up this meeting. Did you intend to do that? Did you come here trying to give the G-20 a kick in the pants, if you will?

GEITHNER: Well, I think you — what I thought was encouraging is how much we sort of — support we saw around the room, from the major economies, from emerging markets, from surplus country — types of countries, and recognizing they had to come together and work on ways to deal with these things together. And I think that’s very promising.

Of course, you know, ultimately the test is what countries actually do. But I think they recognize that we’re close, so closely connected today that we need to work on these things together.

COOK: Your one specific proposal that drew the most attention and some mixed reviews, of course, this idea that countries need to commit to reduce excessive current account imbalances, whether they be surpluses or deficits. Japanese, the Germans expressing some resistance to that. Those are big surplus countries. Walk me through what this means, because again, there’s nothing in here to obligate these countries, as I understand it, to actually do anything.

GEITHNER: Again, we’re in a world of sovereign states, independent countries. That’s the nature of the reality. We can’t change that. All we can do is try to convince countries that they’re better off making sure they’re working together to reduce the risk. You see these kind of imbalances grow and emerge in the future. And I think there’s very broad support for that objective. The only disagreement you have is how best to do it. And that’s natural and inevitable.

And you know, countries are in different circumstances. You’ve got very large commodity producers. Some of them are big surplus countries like Saudi Arabia, for example. Some of them run large deficits, because of the investments needed to support that production, like Australia. You’ve got very small economies for whom trade is a multiple of GDP, like Singapore. Those are sort of different circumstances. You need to make sure you have a framework for cooperation with these indicative thresholds for limiting imbalances that recognize those differences.

But for the major economies, from the United States to China, from Germany to Japan, I think there’s a recognition that, if we allow these large, persistent imbalances to emerge in the future, that that would be bad for global growth, bad for future financial stability and make it harder for us to, again, resist the pressures we all face to resort to protection.

COOK: But there’s no specific numerical threshold here that, as you pointed out in your news conference here, no numbers. Some people talked about 4 percent of GDP being the magic number here. You don’t subscribe to that?

GEITHNER: You’ve heard people talk about that. And my own personal view is that’s going to — that will become the benchmark for the future.

COOK: Four percent?

GEITHNER: I think that’s because, if you look at what countries — the major economies project going forward, it’s what they expect to happen if they pursue the policy they’re pursuing. Most countries see their imbalances either stay below 4 percent or fall to 4 percent over the medium term. And for that reason, I think that’s likely to emerge as the basic benchmark countries look to.

But what this framework does is set up a — sort of an early warning system, so that if the IMF looks at what these countries are doing, and they see the risk of large imbalances reemerging again, outside those indicative guidelines or thresholds, then it’s like a yellow light. It’s a warning light, and it will help provoke changes in policies to reduce the risks that those will be sustained.

COOK: You’re counting on the IMF to play cop here?

GEITHNER: The IMF has to play cop. That’s what it exists to do. And again, no country can be the independent, unilateral arbiter of exchange rate misalignments. And no country can, on its own, figure out how best to reduce a persistently large imbalance. It requires cooperation. And you need an independent arbiter of what makes sense. And the IMF was designed to play that role. Hasn’t really been allowed to play that role. We’re trying to make sure it can play that role.

COOK: Let me ask you about another issue. Again, this race to the bottom, this notion that countries have been devaluing their currency, limiting appreciation of their currencies, to prop up their own — their own economies, their own exports. There’s a view here…

GEITHNER: Those are — I’m sorry. Those are very different things. Point out, because, you know, when people talk about this stuff, they talk about it with a lot of heat. What you’ve seen is countries that have run more flexible exchange rate systems, that are growing very rapidly, come under a lot of pressure. And that pressure is magnified because some countries are still limiting the appreciation of their currency. And that’s unfair. So the capital is flowing to where the exchange rates are moving.

So again, what this framework tries to do is to recognize that, to reduce the risk that that makes — that causes a lot of challenge for those countries, is you want to make sure that the countries that are running undervalued exchange rates recognize they need to allow those exchanges to move up to levels that more — better reflect economic fundamentals. And that’s what the communique reflects.

COOK: There’s some emerging economies out there — we heard this through the course of the discussions here on the sidelines. Some people saying America needs to look in the mirror. There are questions about the possible next round of quantitative easing coming from the Fed. That could weaken the dollar further. That’s going to throw liquidity out into the economy.

Real questions. Criticisms, even from the Germans today. Your own assessment on that? I know you don’t speak for the Fed, but talk to us about the criticisms coming from around the world that America doesn’t have its economic policies on the right track.

GEITHNER: If you look at what we’ve done, Peter, over this period of time, it’s incredibly impressive set of basic reforms to fix what was critical to causing our crisis and put us on a path to better growth in the future. I mean, just look again what’s happening in the United States over this brief period of time.

We’ve had household savings rate go from a modest negative to pretty strong positive number in a very short period of time. Families are reducing their debt levels to income. You’ve seen us dramatically restructure the financial system to take out most of the excess leverage, most of the weaker parts of the system. You’ve seen a very difficult, very damaging but necessary adjustment in real estate prices in a short period of time. You’ve seen productivity growth across the American business community rise at remarkably rapid levels. Very promising for their future productivity and competitiveness.

Those are very important reforms, and we’ve laid out a path to restore fiscal sustainability over the medium term, which of course, is very important to our capacity to grow in the future.

Now, if you look at the major economies as a whole, from Japan to Europe to the United States, all of us are in varying stage of digging out of those basic imbalances. In fact, we’re actually substantially ahead of those countries in digging out of this, because one of the great strengths of the United States is we tend to adjust very, very quickly. We’re a much more flexible, much quicker to adjust economy in that context.

But for all the major economies, because of the causes of the crisis, we’re going to face a period of slower growth than we would like. And much slower growth than is going to be possible and is already underway in the major emerging market economies like China and Brazil and India.

So the policies that the major economies need to pursue are going to be directed at trying to make sure the growth is stronger domestically. That’s what all the major economies are doing together. That’s very important, not just for us, but it’s very important the global economy as a whole, because collectively, we’re still roughly two-thirds of overall GDP growth. And I think the countries around the room understand that imperative, and they of course, recognize that their future growth depends a lot on how successful we are, not just in Japan and Europe and the United States, in digging out of this hole more rapidly.

COOK: Is it safe to say, though, that the Fed chairman found himself somewhat on the defensive…


COOK: … having to explain U.S. policy?

GEITHNER: No, I wouldn’t say that at all. Now, he did have the chance to outline what he thinks is good policy for the United States, as did his counterparts from the European Central Bank and from Japan and the other major economies. But again, if you just look across the world, the main thing you’re seeing is that the major economies are growing more slowly than the emerging economies. That creates this dynamic where you’re going to see more capital flow to emerging market economies in recognition of their stronger growth rates. It puts some pressure on them. That’s why it’s important that China and other countries move up.

But what’s necessary for Japan and Europe and the United States is still going to be, for some time to come, that we’re directing our policies to strengthening growth in our countries.

COOK: And it’s — very quickly, to look at home, some issues there. The Bush tax cuts: what is the realistic chances that, given the potential changes in Congress we could see on election day, that you’re going to be able to work out a deal on the Bush tax cuts in a lame duck session of Congress?

GEITHNER: Well, I think we’ll work out some absolutely. It’s enormously important we do so. It’s inconceivable to me you won’t see Congress come together and figure out how to extend those middle-class tax cuts that go to, you know, people making less than $250,000 a year. That’s 98 percent of working Americans, 98 percent of small businesses. I think it’s overwhelmingly compelling that we — Congress act quickly to do that. And I’m sure that it will happen.

COOK: Could your leverage be hurt by the results of the election? Polls, of course, suggest Republicans are going to have a big day.

GEITHNER: I don’t think there’s any disagreement, really, among Republicans and Democrats you want to extend those middle-class tax cuts. Now, we have more work to do in the United States, and we want to work with the new Congress in trying to make sure that we’re providing additional incentives to investment, making smart investments in public infrastructure, the things that are important to future growth. And if we can go extend those middle-class tax cuts, and add some well-designed, targeted incentives for business investment, that will help us dig out of this more quickly.

COOK: Final question for you. For those Americans who see the treasury secretary of the United States over here in South Korea talking to his G-20 colleagues about these global imbalances, things like that, they see 9.6 percent unemployment. They wonder how is any of this going to come back and address that issue?

GEITHNER: Excellent question. And this is very important for Americans to understand. We are one of the most productive, dynamic, innovated — innovative countries in the world. Our major global companies are at the frontier of innovation. We are playing a major role in helping meet the growing needs of these countries in China, India, Brazil, around the world that are growing so rapidly. Every time we sell something to those countries, we create more jobs in the United States.

So unemployment will come down quicker in the United States. Incomes of American workers will grow more rapidly if we are successful in trying to make sure that these countries are growing more rapidly. Growth comes more from domestic demand for consumption, and American companies are a greater part of that growth. And we see the changes in exchange-rate policies and other kind of reforms we’ve been promoting at these meetings. These are enormously important to Americans, which is why we’re doing them. And I think that we’ve made a lot of progress here.

COOK: Mr. Secretary, as always, thank you for the time.

GEITHNER: Good to see you, Peter.

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