Saturday, February 19, 2011

Bernanke calls for nations to rebalance gaps in trade

PARIS - Federal Reserve Chairman Ben Bernanke on Friday urged countries with large trade surpluses, such as China, to let their currencies rise in value to help prevent another global financial crisis.

He also called on nations with persistent trade deficits, such as the United States, to narrow budget shortfalls and save more.

Both steps would help balance trade and investment flows among countries, Bernanke said in a speech at a financial conference in Paris. Many countries worry about speculative money flooding their economies and inflating assets like real estate or stocks.

"None of these changes will be easy or immediate," Bernanke said.

The flow of capital and global imbalances more generally were expected to be on the table at the Group of 20 industrialized and emerging nations meeting in Paris, which began Friday and continues today. Bernanke and Treasury Secretary Timothy Geithner are representing the United States.

"If there is no stabilizing system, then you can have situation where like today, you have a two-speed recovery and demand is not optimally allocated around the world," Bernanke said in a question-and-answer session following his speech.

Emerging economies such as China are growing quickly, while industrialized countries such as the United States are expanding only slowly.

In his call for a rebalancing of the global economy, the Fed chairman singled out no specific countries. Instead, he urged those with large trade surpluses to let their currencies rise freely, encourage consumers to spend more and rely less on export-led growth. That was a reference to China.

Similarly, Bernanke said countries with sizable trade deficits must reduce government spending over time. This reference was to the United States.

The Fed chief's tone was milder than in a speech he gave in November when he struck back at China and other global critics for challenging the Fed's $600 billion Treasury bond-purchase program. The purchases are intended to lower interest rates, lift stock prices and encourage more spending by U.S. consumers and businesses.

Critics have said the bond purchases could help ignite inflation or speculative investment. China and some other countries called the purchases a scheme to drive down the dollar and give U.S. exporters an unfair edge. A lower dollar makes U.S. products cheaper.

Emerging countries such as Thailand and Indonesia feared that falling Treasury yields would send money flooding their way in search of higher returns. Those markets could be left vulnerable to a crash if investors later decided to pull out and move their money elsewhere. In his November speech, Bernanke warned China that it and other developing nations were putting the global economy at risk by keeping their currencies artificially low.

Bernanke struck a more professorial tone in his remarks Friday. He stressed that countries must collaborate to confront financial threats. And he didn't specifically discuss the Fed's bond-purchase program.

Looking back at the global financial crisis, the Fed chief said the United States and other countries share blame. Countries with trade surpluses plowed money into mortgage and other investments in the United States, helping escalate their value. Bernanke said a paper he co-wrote and presented to the financial-stability forum in Paris confirms this.

But he also said the United States failed to safely absorb money flooding in from emerging nations such as China, Middle Eastern oil countries and industrialized countries in Europe.

by Greg Keller and Jeannine Aversa Associated Press Feb. 19, 2011 12:00 AM

Bernanke calls for nations to rebalance gaps in trade

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