Geithner says dollar to remain reserve currency

NEW YORK (Reuters) – Treasury Secretary Timothy Geithner said on Wednesday the U.S. dollar will remain the world’s reserve currency for a long time, though he expressed openness to expanded use of an IMF currency basket.

The U.S. dollar tumbled after Geithner told policy-makers and business executives at the Council on Foreign Relations that he was “quite open” to a Chinese suggestion to move toward greater use of an IMF-created global currency basket comprising dollar, euros, sterling and yen.

Prompted by the moderator to clarify his position, Geithner said: “The dollar remains the world’s dominant reserve currency and I think that’s likely to continue for a long period of time.”

“As a country, we will do what’s necessary to make sure we’re sustaining confidence in our financial markets and in this economy’s long-term fundamentals,” he added.

Earlier this week, Chinese central bank governor Zhou Xiaochuan, said the world should consider using the IMF’s Special Drawing Rights (SDR) basket as a super-sovereign reserve currency.

Geithner said he hadn’t read Zhou’s proposal, but added, “as I understand it, it’s a proposal designed to increase the use of the IMF’s Special Drawing Rights. I am actually quite open to that suggestion.”

“But you should think of it as rather evolutionary, building on the current architecture, than rather than moving us to global monetary union.”

China’s foreign exchange reserves are the largest in the world at nearly $2 trillion and China is the biggest holder of U.S. Treasury debt.

The dollar initially fell against the euro on reports of Geithner’s remarks, but pared losses he reiterated his faith in the dollar as world reserve currency.

“Geithner admits to not having read China’s proposal, and President Obama’s comments on the dollar yesterday — no need for another reserve currency and that the dollar was fundamentally strong — was more of the underlying signal,” said Marc Chandler, senior currency strategist at Brown Brothers Harriman in New York.

Senior Obama adviser Paul Volcker also said on Wednesday a Chinese suggestion to move toward a world currency system linked to the IMF’s SDRs was not practical.

“I understand restiveness about the lopsided nature of the present international monetary system that’s so dependent on the dollar,” Volcker said at a panel with British Prime Minister Gordon Brown at New York University.

But Volcker said when China questioned the dollar’s role as the world reserve currency, “They ignore the fact that they didn’t have to buy those dollars in the first place so they contributed to the problem.

FOREIGN APPETITE STRONG

Speaking on CNBC television later Wednesday, Geithner underscored his desire to see a strong dollar.

“I want to say this very clearly, a strong dollar is in America’s interest. We are going to make sure to pursue policies that improve the long-term fundamentals of the U.S. economy,” he said. Geithner also said there was “no evidence” foreign investors were losing interest in buy U.S. debt.

He also told CNBC there were signs the government’s efforts to support the economy and stabilize the financial sector were beginning to bear fruit, with the “pace of deterioration” slowing in some areas.

Geithner said in the interview that he was committed to putting the funds remaining in the Treasury $700 billion financial rescue program to work quickly and efficiently, and he held the door open to asking Congress for more.

“We always said this crisis may require more resources to deal with effectively, and we’re going to make sure we work with the Congress over time so that we can do this on a scale that is going to bring recovery back as soon as possible,” he said.

Geithner played down the idea that there was a sharp division between the United States and Europe over the amount of fiscal stimulus need to combat the global downturn.

“I think there is more commitment to a greater level of stimulus across the major economies than we’ve ever seen,” he said.

Panic: The Untold Story of the 2008 Financial Crisis – FULL EPISODE | VICE Special Report | HBO

VICE on HBO looks at factors that led to the 2008 financial crisis and the efforts made by then-Treasury Secretary Henry Paulson, Federal Reserve Bank of New York President Timothy Geithner, and Federal Reserve Chair Ben Bernanke to save the United States from an economic collapse. The feature-length documentary explores the challenges these men faced, as well as the consequences of their decisions.

Trump Should Be a Better Boss

“The Deep State,” on the other hand, is a description of the millions of bureaucrats immune from the political ebbs and flows. The term is meant to suggest that these men and women are pursuing agendas that run contrary to the preferences of the president, the peole who voted for him, or the nation at large.

.. We can debate whether and how much the Deep State is actually countering Trump’s agenda. But one thing that is not debatable is that the anonymous author is not part of such a group. Anonymous is, rather, a “senior administration official” who, based on what his  op-ed reveals, serves at the pleasure of the president. Trump could get rid of him, if he knew who he was.

.. Instead of rebuking Anonymous with the same complaints many conservatives have lobbed at the career officials at the Department of Justice, we could instead see his op-ed as an illustration of the inherent principal–agent problem that every president must confront. And the essay strongly suggests that Trump is struggling with this problem.

.. Simply stated, the principal–agent problem arises whenever any principal deputizes an agent to do his bidding. How can the principal make sure that the agent is actually doing what he has been tasked to do? Well, it requires monitoring and sanctions — both of which are costly to the principal.

.. Indeed, the differences between presidential success and failure often come down to how the president handles the monitoring of his staff. Jimmy Carter, for instance, was an unsuccessful president in no small part because he was a micromanager.

.. Dwight Eisenhower, on the other hand, imported organization structures from the military to great success. More recently, in Confidence Men, Ron Suskind reported that Barack Obama instructed U.S. Treasury Secretary Tim Geithner to draw up a plan to dissolve Citigroup; however, Suskind claimed, Geithner ignored the order, and Obama never followed up. That is the principal–agent problem in action.

.. These are all symptoms of an executive branch that is suffering from a lack of sufficient management.

.. If Trump does not have a good handle on what his agents are up to, then his power necessarily is going to decline, as the principal–agent problem grows. We can bemoan the fact that his political appointees are undermining democratic accountability by ignoring or circumventing Trump’s dictates, but that misses the point. The principal–agent problem exists just about everywhere. It is a consequence of human nature, whereby people are prone to put their own judgments and interests first. That’s why principals must monitor their agents.

‘Are We Safe Yet?’ The answer’s not so simple.

Since 2008, U.S. banks have raised roughly $500 billion in new shareholder capital, bringing the total to $1.7 trillion. The added capital provides a larger cushion against losses (and, of course, the new shareholders enjoy any profits).

.. In addition to more capital, banks also have a more stable base of funds used for lending. According to Geithner, deposits now represent 86 percent of U.S. banks’ liabilities, up from 72 percent in 2008. Deposits tend to be stable, because most are insured by the government (up to $250,000 by the Federal Deposit Insurance Corp.) During the crisis, the flight of uninsured short-term funds (so-called repurchase agreements and commercial paper) threatened the entire financial system.

.. Despite this, Dodd-Frank has crippled government’s ability to defuse future financial crises. It has restricted government’s “ability to act as a lender of last resort.” The Fed’s power to lend to individual institutions is curtailed, making it harder to nip future crises in the bud. The Fed can’t act until many institutions are in trouble. Consequently, we are “even less prepared to deal with a crisis” than in 2007.

.. The real Dodd-Frank scandal is that this misinterpretation of events, widely embraced by both parties, has been allowed to stand. In many bailouts, banks’ shareholders suffered huge losses or were wiped out; similarly, top managers lost their jobs. The point was not to protect them but to prevent a collapse of the financial system.

If the Trump administration doesn’t repudiate the conventional wisdom and change the law accordingly, it risks creating a future, self-inflicted wound.