By correspondents Li Zengxin and Zhong Liang in Istanbul
(Caijing Magazine) Plans to reform financial supervision in the United States – ground zero for the global financial crisis -- still face challenges despite early signs of economic recovery.
For example, the U.S. government deficit is expected to swell to US$ 9 trillion over the next 10 years as a result of huge government stimulus and corporate bailout packages. Proposed national health care reform is another potentially costly project.
Beyond these challenges, countries around the world are trying to root out economic dilemmas by diminishing risks and adjusting policies as part of a post-crisis reconstruction. They're also pushing for a more efficient framework to coordinate global financial supervision.
But how are U.S. officials confronting these issues? What are they doing to recover, reform, coordinate and rebalance? And what are Washington's positions on issues of concern to China, such as the safety of foreign reserves and international financial institution reform?
These and other questions were on a list posed by Caijing's chief editor, Hu Shuli, during a discussion with U.S. Treasury Secretary Timothy Geithner during the recent 2009 annual conference of the World Bank and the International Monetary Fund (IMF). Here are excerpts from the interview:
Global Reserve Currency
A key topic at the IMF conference was whether the U.S. dollar should be used as an international reserve currency, and whether it can be replaced. Unofficial discussions were reportedly held during the meeting between the so-called BRIC nations – Brazil, Russia, India and China – and global oil producers about the possibility of dumping the U.S. dollar for other currencies in future oil transactions. The news triggered a fall in the dollar's value.
Geithner said China and the United States have a shared interest in safeguarding the value of the dollar.
"Our interest is in trying to make sure both American and global investors know that U.S. markets are strong in liquidity and offer stability," he said.
Investors have shown confidence in the U.S. government's ability to maintain sustainable growth, Geithner said, and that confidence has helped stabilize the value of dollar assets.
According to Geithner, the U.S. economy has seen a significant adjustment. Its current account deficit has fallen to about 3 percent of GDP in the second quarter 2009 from about 7 percent in 2005. This shows that "exceptional things" are being done to fix the financial system, either without borrowing or by borrowing substantially less from the rest of the world, Geithner said.
The stability of the U.S. currency is a top concern for the treasury secretary, as the dollar plays a special role as the world's international reserve currency, thus affecting monetary stability. "The dollar's role comes with special burdens and responsibilities that require we are especially careful to sustain confidence in U.S. financial assets," he said.
But Geithner emphasized that a fundamental issue for reforming the international monetary system is to get economic policies right.
"You can have people spend a lot of time talking about international monetary reform and the future of the fund, the SDR (Special Drawing Rights)," he said. "But if people don't get the policies right, it doesn't matter what they do."
Geithner also said the United States needs to prove it can balance sustainability and a fiscal deficit. The best way to reach that goal is to restore the financial system and encourage a healthy private sector.
U.S. and IMF Reform
The United States, with 16.77 percent of the IMF's votes, is said to have de facto veto rights under the current voting framework. Major decision-making at the organization requires at least 85 percent support.
China has questioned current voting quotas. But Geithner defended the system, saying the United States deserves more clout because it represents "a significantly larger fraction of global economic and financial activity."
"We contribute to not just the resources of the IMF but to the region, to the banks, too -- a significant amount of resources, more than our specific share," he said. "Our influence depends on getting other countries to agree with us and to support a consensus on change."
The United States has been a substantial force for innovation, he said, particularly regarding how the IMF works and responds to financial crises in ways critically important to financial stability.
Geithner also said it would be right to give emerging economies, which have been underrepresented and are not included at the core of international institutions, greater stakes and more influence. This also would reduce risk, he said, especially since it would give the IMF a much larger capacity for responding to economic crises.
At the same time, Geithner said, a stronger and more legitimate IMF would not have a negative impact on the global status of the United States.
Geithner called for giving the IMF greater capacity to issue emergency loans. He added that a key to such reform would be to make institutional arrangements so that countries feel comfortable with depositing money in the IMF.
The global framework for financial supervision urgently needs an overhaul. But as one of the first countries to propose systematic reform, the United States still faces battles. For example, any plan advanced by Geithner for President Barack Obama's administration still has to pass Congress.
Geithner said although reform may lead to some unpredictable results and restrain innovation, "these are not the major risks that we are facing." A bigger risk, he said, is that there may not be enough political will to make reform happen.
Reform also needs international coordination. To maintain the financial system's normal operations and effective capital allocation requires stability, Geithner said. And that will be hard to achieve through the market alone.
"It needs a series of standards," he said. "And it is the government's task to define and implement."
Geithner said financial reform needs clear direction as well. What's the limit? What stimulus mechanism should be used? A special framework may not be needed; Geithner said the current framework for cooperation between the Financial Stability Board and IMF is adequate. So a new, independent executive institution may not be effective. Rather, changing the current situation depends on how each country shapes policy and cooperates.
"Of course, I'm worried about a lack of reform momentum after the economic recovery," Geithner said. Yet he remains "generally optimistic."
"We're trying the basic devices – making deadlines that are made public, set to make people accountable," he said.
"I've seen lots of failed attempts at cooperation," the treasury chief said. "This feels much more promising to me. But in the end, you'll be the judge of what we do."