Friday, January 23, 2009

Geithner on Yuan: More Analysis

Bond markets react wildly to blinding glimpse of the obvious
Thu, 01/22/2009 - 4:35pm

Felix Salmon reviews Tim Geithner's written testimony and concludes that, "Geithner's answers are highly diplomatic and content-free,"

The bond market, however, appears to disagree:
Mr. Geithner’s strong words on China have resulted in a sharp selloff in Treasurys. In testimony to Congress, Geithner wrote, in response to a question from Sen. Olympia Snowe, (R-Maine), that President Obama’s administration “backed by the conclusions of a broad range of economists - believes that China is manipulating its currency.”

“He came right out and said Obama believes China is manipulating their currency,” says Maryann Hurley, bond market strategist at D.A. Davidson, who notes that China’s economy is slowing as well. “It’s very easy to pick another country to be your whipping boy. In an era where we’re looking at deficits as far as the eye can see all we don’t need is somebody starting to dump our debt.”

As the FT's Krishna Guha and Alan Beattie write, "experts said the declaration could fuel trade tensions at a time of global recession and fast-rising unemployment."

I'm as concerned about this as the next guy, but let's be careful here and parse things out.
The bond market is conflating two issues here. The first is that Geithner said out loud what everyone knows to be true. And, to be sure, before the U.S. responds to currency manipulation, it has to say that it's happening. So Geithner's statement is a quasi-first step.

The second issue, however, is what kind of action Obama and Geithner are planning. Beattie and Guha suggest options like, "punitive import tariffs on Chinese goods."

This is where a closer look at Geithner's written testimony would be a good idea. Here are the two relevant passsages:

[W]e look forward to a productive economic dialogue with the Chinese government on a number of short- and long-tem issues. The Yuan is certainly an important piece of that discussion, but given the crisis the immediate focus needs to be on the broader issue of stabilizing domestic demand in China and the US. The latest figures show that China's growth in 2008 was 9%, a full 4 percentage points lower than in the previous year. Because China accounts for such a large fraction of the world economy, a further slowdown in China would lead to a substantial fall in world growth (and demand for US exports) and delay recovery from the crisis. Therefore, the immediate goal should be for us to convince China to adopt a more aggressive stimulus package as we do our part to try to pass a stimulus package here at home....

[T]he best approach to ensure that countries do not engage in manipulating their currencies is to demonstrate that the disadvantages of doing so outweigh the benefits. If confirmed, I look forward to a constructive dialogue with our trading partners around the world in which Treasury makes the fact-based case that market exchange rates are a central ingredient to healthy and sustained growth.

Two signals here. First, Geithner seems more concerned about China expanding its domestidc growth than with any manipulation of the yuan right now -- a conviction shared by Brad Setser, incidentally.

Second, it seems pretty clear that Geithner's first option on the currency issue is jaw-jaw rather than protect-protect. In other words, the bond market should have reacted more like Felix Salmon.

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( filed under:
Bretton Woods II Chimerica financial meltdown Geithner globalization)

Warren Buffets interview on PBS tonight - Full Transcript


Warren Buffett Interview
Warren Buffett Interview Transcript

Below is a short interview with Warren Buffett who was featured on the the PBS Nightly Business Report tonight.
PBS’ Nightly Business Report & Warren Buffett
Full Transcript of NBR Anchor Susie Gharib’s interview with Warren Bufffett
Airs January 22, 2009,

Nightly Business Report’s 30th Anniversary

SUSIE GHARIB, ANCHOR, NIGHTLY BUSINESS REPORT: Are we overly optimistic about what President Obama can do?
WARREN BUFFETT, CHAIRMAN, BERKSHIRE HATHAWAY: Well I think if you think that he can turn things around in a month or three months or six months and there’s going to be some magical transformation since he took office on the 20th that can’t happen and wouldn’t happen. So you don’t want to get into Superman-type expectations. On the other hand, I don’t think there’s anybody better than you could have had; have in the presidency than Barack Obama at this time. He understands economics. He’s a very smart guy. He’s a cool rational-type thinker. He will work with the right kind of people. So you’ve got the right person in the operating room, but it doesn’t mean the patient is going to leave the hospital tomorrow.

SG: Mr. Buffett, I know that you’re close to President Obama, what are you advising him?
WB: Well I’m not advising him really, but if I were I wouldn’t be able to talk about it. I am available any time. But he’s got all kinds of talent right back there with him in Washington. Plus he’s a talent himself so if I never contributed anything for him, fine.

SG: But I know that during the election that you were one of his economic advisors, what were you telling him?
WB: I was telling him business was going to be awful during the election period and that we were coming up in November to a terrible economic scene which would be even worse probably when he got inaugurated. So far I’ve been either lucky or right on that. But he’s got the right ideas. He believes in the same things I believe in. America’s best days are ahead and that we’ve got a great economic machine, its sputtering now. And he believes there could be a more equitable job done in distributing the rewards of this great machine. But he doesn’t need my advice on anything.

SG: How often do you talk to him?
WB: Not often, not often... no no and it will be less often now that he’s in the office. He’s got a lot of talent around him.

SG: What’s the most important thing you think he needs to fix?
WB: Well the most important thing to fix right now is the economy. We have a business slowdown particularly after October 1st it was sort of on a glide path downward up til roughly October 1st and then it went into a real nosedive. In fact in September I said we were in an economic Pearl Harbor and I’ve never used that phrase before. So he really has a tough economic situation and that’s his number one job. Now his number one job always is to keep America safe that goes without saying.

SG: But when you look at the economy, what do you think is the most important thing he needs to fix in the economy?
WB: Well we’ve had to get the credit system partially fixed in order for the economy to have a chance of starting to turn around. But there’s no magic bullet on this. They’re going to throw everything from the government they can in. As I said, the Treasury is going all in, the Fed and they have to and that isn’t necessarily going to produce anything dramatic in the short term at all. Over time the American economy is going to work fine.

SG: There is considerable debate as you know about whether President Obama is taking the right steps so we don’t get in this kind of economic mess again, where do you stand on that debate?
WB: Well I don’t think the worry right now should be about the next one, the worry should be about the present one. Let’s get this fire out and then we’ll figure out fire prevention for the future. But really the important thing to do now is to figure out how we get the American economy restarted and that’s not going to be easy and its not going to be soon, but its going to get done.

SG: But there is debate about whether there should be fiscal stimulus, whether tax cuts work or not. There is all of this academic debate among economists. What do you think? Is that the right way to go with stimulus and tax cuts?
WB: The answer is nobody knows. The economists don’t know. All you know is you throw everything at it and whether it’s more effective if you’re fighting a fire to be concentrating the water flow on this part or that part. You’re going to use every weapon you have in fighting it. And people, they do not know exactly what the effects are. Economists like to talk about it, but in the end they’ve been very, very wrong and most of them in recent years on this. We don’t know the perfect answers on it. What we do know is to stand by and do nothing is a terrible mistake or to follow Hoover-like policies would be a mistake and we don’t know how effective in the short run we don’t know how effective this will be and how quickly things will right themselves. We do know over time the American machine works wonderfully and it will work wonderfully again.

SG: But are we creating new problems?
WB: Always

SG: How worried are you about these multi-trillion dollar deficits?
WB: You can’t just do one thing in economics. Anytime somebody says they’re going to do this and then what? And there is no free lunch so if you pour money at this problem you do have after effects. You create certain problems. I mean you are giving a medicine dosage to the patient on a scale that we haven’t seen in this country. And there will be after effects and they can’t be predicted exactly. But certainly the potential is there for inflationary consequences that would be significant.

SG: We all know that in the long run everything is going to work out, but as you analyze President Obama’s economic plan, what do you think are the trade-offs? What are the consequences?
WB: Well the trade-off… the trade-off basically is that you risk setting in motion forces that will be very hard to stop in terms of inflation down the road and you are creating an imbalance between revenues and expenses in the government that is a lot easier to create than it will be to correct later on, but those are problems worth taking on, but you don’t get a free lunch.

SG: What about the regulatory system, is it a matter of making new rules or simply doing a better job at enforcing the rules we already have?
WB: Well there are probably some new rules needed, but the regulatory system I don’t think could have stopped this. Once you get the bubble going... once the American public, the U.S. Congress, all the commentators, the media, everybody else started thinking house prices could go nothing up, you were creating a bubble that would have huge consequences because the asset class was so big. I mean you had 22 trillion dollars probably worth of homes. It was the biggest asset of most American families and you let them borrow 100% in many cases of the price of those and you let them refi up to where they kept taking out more and more and treating it as an ATM machine.. the bubble was going to happen.

SG: But everybody is saying we need more rules, we have to enforce them, we need to go after every institution, every financial market. Do you think that new rules will do the trick or do we have enough rules that we just need to enforce them?
WB: Well you can have a rule for example to prevent another real estate bubble; you just require that anybody bought a house to put 20% down and make sure that the payments were not more than a third of their income. Now we would not have a big bust ever in real estate again, but we would also have people screaming that you’re denying home ownership to all these people that you got a home yourself and now you’re saying a guy with a 5% down payment shouldn’t get one. So I think it’s very tough to put rules out... I mean I can design rules that will prevent it but it will have other consequences. It’s like I say in economics you can’t just do one thing and where the balance is struck on that will be a political question. My guess is that it won’t be struck particularly well, but that’s just the nature of politics.

SG: You’ve said that we’re in an economic Pearl Harbor, so how bad are things really?
WB: They’re bad, they’re bad. The credit situation is getting a little better now. Things have loosened up from a month ago in the corporate debt market. But the rate of business descent is at a pretty alarming pace, I mean there is no question things have really slowed down.Peoples’ buying habits have changed. Fear has taken over and fear is a tough thing to fight because you can’t go on television and say don’t be afraid, that doesn’t work. People will get over it, they got greedy and they got over being greedy. But it took a while to get over being greedy and now the pendulum has swung way over to the fear side. They’ll get over that and we just hope that they don’t go too far back to the greed side.

SG: What’s your view on the recession? How much longer is it going to last?
WB: I don’t know. I don’t know. I don’t know the answer to these things. The only thing is I know that I don’t know. Maybe other people think they know, but I have no idea.

SG: The last time we talked, you said back in the Spring, you said the recession is not going to be a short-haul thing. What is your feel for it right now?
WB: It isn’t going to be short, but I just don’t know Susie. There’s no way of knowing.

SG: Berkshire Hathaway is in a lot of businesses that are economically sensitive, like furniture, paint, bricks. Do you see any signs of a pick up?
WB: No. No. The businesses that are either construction or housing related, or that are just plain consumer businesses, they’re doing very, very poorly. The American consumer has stepped back big time and it’s contagious and there’s a feedback mechanism because once you hear about this then you get fearful and then don’t do things at all. And that will end at a point, but it hasn’t ended at this point. Now fortunately our two biggest businesses are not really tied that way- in insurance and in our utility business we don’t feel that, but everything that’s consumer related feels it big time.

SG: Do you think that the psyche of the American consumer has changed, becoming more savers than spenders?
WB: Well it certainly has at this point and my guess is that continues for quite a while. What it will be five years from now, I have no idea. I mean the American consumer when they’re confident they spend and they’re not confident now and they’ve cut it back but who knows whether.. I doubt that that’s a permanent reset of behavior, but I think it’s more than a one day or one week or one month wonder in that case.

SG: Is that a bad thing?
WB: Well it just depends who the consumer is. I mean consumer debt within reason makes sense. It makes sense to take out a mortgage on a home particularly if you aren’t buying during a bubble. You are normally going to see house price appreciation if you don’t buy during a time when people are all excited about it. So I don’t have any moral feelings about debt as to how people should.. I think people should only take on what they can handle though and that gets to their income level…

SG: Let me ask it this way, with Americans saving more may be good for consumers, but is that bad for business?
WB: Well it’s certainly bad for business in the short term. Now whether it’s better for business over a 10 or 20 year period... if the American public gets itself in better shape financially that presumably is good for business down the road, but while they’re getting themselves in better shape, its not much fun for the merchant on Main street.

SG: One thing that Americans aren’t buying these days is stocks. Should they be buying?
WB: Well just as many people buy a stock everyday as sell one so there are people buying stocks everyday and we’re buying stocks as we go along. If they’re buying into a business that they understand at a sensible price they should be buying them. That’s true at any time. There are a lot more things selling at sensible prices now than they were two years ago. So clearly it’s a better time to buying stocks than a couple of years ago. Is it better than tomorrow? I have no idea.

SG: This financial crisis has been extraordinary in so many ways, how has it changed your approach to investing?
WB: Doesn’t change my approach at all. My approach to investing I learned in 1949 or ‘50 from a book by Ben Graham and it’s never changed.

SG: So many people I have talked to this past year say this was unprecedented… the unthinkable happened. And that hasn’t at all impacted your philosophy on this?
WB: No and if I were buying a farm, I wouldn’t change my ideas about how to buy a farm or an apartment house or a business and that’s all a stock is. It’s part of a business so if I were going to buy stock in a private business here in Omaha, I’d look at it just like I would have looked at it two years ago and I’ll look at it the same way two years from now. I look at how much I am getting for my money, how good the management is, how the competitive position of that business compares to others, how durable it is and just fundamental questions. The stock market is... you can forget about that. Any stock I buy I will be happy owning it if they close the stock market for five years tomorrow. In other words I am buying a business. I’m not buying a stock. I’m buying a little piece of a business, just like I buy a farm. And that doesn’t change. And all the newspapers headlines of the world don’t change that. It doesn’t mean you can’t buy it cheaper tomorrow. It may turn out that way. But the real question is did I get my money’s worth when I bought it?

SG: One of your famous investing principals is, “be fearful when others are greedy and greedy when others are fearful.” So is this the time to be greedy, right?
WB: Yeah. My greed quotient has risen as stocks have gone down. There’s no question about that. The cheaper something gets that you’re going to buy, the happier you feel, right? You’re going to buy groceries the rest of your life; you want grocery prices to go up or down? You want them to go down. And if they go down you don’t think gee I got all those groceries sitting in my cabinet at home and I’ve lost money on those. You think I am buying my groceries cheaper, I am going to keep buying groceries. Now if you’re a seller, obviously prices are higher. But most people listening to this program, certainly I, myself, and Berkshire Hathaway, we’re going to be buying businesses over time. We like the idea of businesses getting cheaper.

SG: So where do you see the opportunities in the stock market right now?
WB: That one I wouldn’t tell you about.

SG: Let me throw out some sectors and you just tell me quickly how you feel about these sectors.
WB: Susie, I am not going to recommend anything…

SG: Even in general, for example a lot of people now are looking at infrastructure companies, is that a sector that you find attractive?
WB: I wouldn’t have any comment. What they ought to do is look at businesses they understand. They‘d be happy owning for years if there was never a quote on the stock. Just like they buy in privately into a business in their hometown... They ought to forget all about what somebody says is going to be hot next year or the year after, whatever… because what’s going to be hot you may be paying twice as much for as something that’s not going to be hot. You don’t want to think in terms of what’s going to be good next year, you want to think of what’s a good business to be in and then buy it at an attractive price. And then you can’t lose.

SG: Do you see more opportunities in the U.S. compared to overseas?
WB: Well I am more familiar with the U.S. We have such a big market. I see lots of opportunities here and I see lots of opportunities around the world.

SG: Investor confidence was so shattered last year, what do you think its going to take to restore confidence?
WB: If people were dependent on the stock market going up to be confident they’re in the wrong business. They ought to be confident because they look at a business and think I got my money’s worth. They ought to be confident if they buy a farm, not on whether they get a quote the next day on the farm, but they ought to look at what the farm produces, how many bushels an acre do they get out of their corn or soybeans and what prices do they bring. So they ought to look to-the business as to whether to be confident compared to the price that they paid and they ought to forget about what anybody is saying, including me on television, or what they’re reading in the paper. That’s got nothing to do with whether they made a good decision or not. What’s got to do with whether they made a good decision, what kind of business they bought and what they paid for it.

SG: People are reeling from this whole Bernie Madoff scandal. What would you say to people who have lost trust in the financial system?
WB: They shouldn’t have lost... you don’t need to lose trust in the American system. If you decide to buy a farm and you pay the right price for it, you don’t need to lose faith in American agriculture you know because the prices of farms go down…

SG: But you know what I’m saying. People lost money last year in companies that they thought were rock solid. As I said the unthinkable happened and then on top of it, this whole Bernie Madoff scandal. It has undermined people’s sense of well being about our system. So what do you say to people who have lost trust?
WB: Well they may be better off not being in equities. If they’re really depending on somebody else and they don’t know anything about the somebody else, they’ve got a problem. They shouldn’t do that. I mean there are going to be crooks out there and this guy was a crook on a scale that we’ve never seen before. But you ought to know who you’re dealing with. But if you’re going to buy a stock in some business that’s been around for a 100 years and will be around for 100 more years and it’s not a leveraged company and it sells some important product and it’s got a strong competitive position and you buy it at a reasonable multiple of earnings, you don’t have to worry about crooks, you’re going to do fine.

SG: Is there any take away lessons from the Bernie Madoff story?
WB: Well he was a special case. I mean here is a guy who had a good reputation for 30 years or something, and the trust of a lot of people around him. So it’s very easy to draw assurances from the fact that if fifty other people that are prominent and intelligent trust the guy, that maybe you should trust him too. But I wouldn’t put my trust in a single individual like that. I would put my trust in a very good business. I would want a business that was so good that if a social guy was running it, it would still certainly do well and there are plenty of businesses that are like that.

SG: So are you saying that investing has gotten so complicated that investors should stick to what they know? Is that the take-away lesson?
WB: You should always stick to what you know. I say the “know-nothing investor” and there’s nothing wrong with being a “know-nothing investor”. I spend 60 hours a week, thinking about investments and most people have got jobs and other things to do. They can buy index funds. And they’re not going to do better then an index fund if they go around and trust some guy who’s promising them very high returns. If you buy a cross section of American business and you don’t buy it during a period when everybody is all enthused about stock, you’re going to do fine over 10 or 20 years. If you buy something with the idea that you’re going to do fine over 10 months, you may or may not. I do not know what stock is going be up 10 months from now, and I never will.

SG: What about Berkshire Hathaway stock? Were you surprised that it took such a hit last year, given that Berkshire shareholders are such buy and hold investors?
WB: Well most of them are. But in the end our price is figured relative to everything else so the whole stock market goes down 50 percent we ought to go down a lot because you can buy other things cheaper. I‘ve had three times in my lifetime since I took over Berkshire when Berkshire stock’s gone down 50 percent. In 1974 it went from $90 to $40. Did I feel badly? No I loved it! I bought more stock. So I don’t judge how Berkshire is doing by its market price, I judge it by how our businesses are doing.

SG: Is there a price at which you would buy back shares of Berkshire? $85,000? $80,000?
WB: I wouldn’t name a number. If I ever name a number I’ll name it publicly. I mean if we ever get to the point where we’re contemplating doing it, I would make a public announcement.

SG: But would you ever be interested in buying back shares?
WB: I think if your stock is undervalued, significantly undervalued, management should look at that as an alternative to every other activity. That used to be the way people bought back stocks, but in recent years, companies have bought back stocks at high prices. They’ve done it because they like supporting the stock…

SG: What are your feelings with Berkshire. The stock is down a lot. It was up to $147 thousand last year. Would you ever be opposed to buying back stock?
WB: I’m not opposed to buying back stock.

SG: Everyone wants to know your plans. What you’re going to do with all of Berkshire Hathaway’s cash, some 30 billion dollars? Is this now the right time to do a big acquisition?
WB: Well we’ve spent a lot of money in the last 4 months. We spent $5 billion on Goldman Sachs, $3 billion on GE, $6.6 billion on Wrigley, we’ve got $3 billion committed on Dow. We’ve spent a lot of money. We’ve got money left, but I love spending money. Cash makes me very unhappy. I like to always have enough and never way more than enough, but I always want to have enough. So we would never go below $10 billion of cash at Berkshire. We’re in the insurance business - we got a lot of things. We’re never going to depend on the kindness of strangers. But anything excess in that, I love the idea of buying things and the cheaper they get the better I like it.

SG: You’ve been talking about doing a big acquisition for a while now, what are you waiting for?
WB: Well we’ve spent $20 billion dollars... that might not be.

SG: I mean in terms of a company…
WB: Well we’ll wait for the right deal. We had a deal to buy Constellation for roughly $5 billion and then events with the French coming in meant we didn’t do it. But I was delighted to commit to that $5 billion dollars for Constellation Energy. And it could happen tomorrow. That one happened on a Tuesday afternoon I mean it happened like that. Constellation was in big trouble and we flew back that day, talked to the people at MidAmerican that Tuesday and made them an offer that night.

SG: It seems that you’re pretty optimistic about the long term future of the American economy and stock market, but a little pessimistic about the short term... is that a fair assessment of where your head is right now?
WB: I am unquestionably optimistic about the long term. I’m more than a little pessimistic about the short term, but that doesn’t mean I am pessimistic about the stock market. We bought stocks today. If you tell me the economy is going to be terrible for 12 months, pick a number, and then if I find something that is attractive today, I am going to buy it today. I am not going to wait and hope that it sells cheaper 6 months from now. Because who knows when stocks will hit a low or a high? Nobody knows that. All you know is whether you’re getting enough for your money or not.

SG: As you know it’s the 30th anniversary of Nightly Business Report. As you look back on the past three decades, what would you say is the most important lesson that you’ve learned about investing?
WB: Well I’ve learned my lessons before that. I read a book what is it, almost 60 years ago roughly, called The Intelligent Investor and I really learned all I needed to know about investing from that book, in particular chapters 8 and 20 so I haven’t changed anything since.

SG: Graham and Dodd?
WB: Well that was Ben Grahams’ book The Intelligent Investor. Graham and Dodd goes back even before that which was important, very important. But you know you don’t change your philosophy assuming you think have a sound one and I picked up I didn’t figure it out myself, I learned it from Ben Graham, but I got a framework for investing that I put in place back in 1950 roughly and that framework is the framework I use now. I see different ways to apply it from time to time but that is the framework.

SG: Can you describe what it is? I mean what is your most important investment lesson?
WB: The most important investment lesson is to look at a stock as a piece of business not just some thing that jiggles up and down or that people recommend or people talk about earnings being up next quarter, something like that, but to look at it as a business and evaluate it as a business. If you don’t know enough to evaluate it as a business you don’t know enough to buy it. And if you do know enough to evaluate it as a business and its selling cheap, you buy it and don’t worry about what its doing next week, next month or next year.

SG: So if we asked for your investment advice back in 1979 back when Nightly Business Report first got started, would it be any different than what you would say today?
WB: Not at all. If you’d ask the same questions, you’ve gotten the same answers.

SG: Thank you so much Mr. Buffett … Thank you so much, always a pleasure talking to you.
WB: Thank you, been a real pleasure.

More on Obama - Geithner China comments

January 23, 2009
Geithner Hints at Harder Line on China Trade

WASHINGTON — Timothy F. Geithner, who moved closer to confirmation as Treasury secretary on Thursday, told senators that President Obama believed China was “manipulating” its currency, suggesting a more confrontational stance toward that country than under the Bush administration.

Mr. Geithner’s comment was made in writing to the Senate Finance Committee hours before it voted 18 to 5 to recommend that the full Senate confirm him. The statement, which is certain to anger the Chinese government, comes at a particularly sensitive time, with economies in both the United States and China weakening and tensions already rising around the globe over trade.

The United States, moreover, is increasingly dependent on China to finance its ballooning deficit.
An administration official said that Mr. Geithner was only repeating what Mr. Obama had said during the campaign, and pointed out that his statement also emphasized that the president intended to use “all the diplomatic avenues available to him” to address the currency question.

It remained unclear whether Mr. Geithner was signaling that Mr. Obama would officially declare later this spring that China was engaging in currency manipulation, when the administration is required by a 20-year-old trade law to report to Congress on exchange rate issues. Such a finding would begin a legal process that starts with diplomacy and could end with the imposition of trade barriers like tariffs. The objective would be to persuade China to let the value of its currency, the yuan, freely float — a move that would let its value rise and would increase the cost of its exports.

“President Obama — backed by the conclusions of a broad range of economists — believes that China is manipulating its currency,” Mr. Geithner wrote. He stopped short of charging that China is manipulating its currency intentionally to gain an unfair trade advantage, as the 1988 law requires for an official citation of currency “manipulation.”

Even so, the Obama administration’s restatement of that position in writing on its second day was immediately seen as significant. The Bush administration purposely did not use the term “currency manipulator” to avoid antagonizing the Chinese, even when it was criticizing China’s trade policies.

The more aggressive position will be popular with organized labor in the United States, a major supporter of Mr. Obama’s presidential campaign, and with many manufacturers who say China is purposely keeping its currency devalued against the dollar and leaving American exports at a competitive disadvantage against lower-priced Chinese goods.

“It’s huge,” said Simon Johnson, a former chief economist at the International Monetary Fund who is now a professor of economics at the Massachusetts Institute of Technology. “I’m very supportive in general and I think China needs to be called to account and the I.M.F. has not done it,” he said.

But, he added, “I have to say this is really a bit of an issue for Mr. Obama’s internationalist sort of theme for his foreign policy because this is going to be at least a spat with China, and if we don’t back down it’s then a row, and you know how that goes.”

Prices of Treasury debt fell modestly after news of Mr. Geithner’s comments, reflecting worry among investors that China might be less willing to buy United States debt if the new administration pushed the country to further revalue its currency. The yield on the 30-year bond, which moves in the opposite direction from its price, climbed to 3.247 percent from 3.159 percent on Wednesday afternoon.

Even before, yields on long-term government debt had been moving up in the last three weeks, as investors anticipated a significant increase in government borrowing.

The Obama official, who did not want to be identified because of the sensitivity of Mr. Geithner’s confirmation process, cited the Treasury nominee’s earlier oral testimony to the Finance Committee. “As Tim Geithner said, it is important for the United States and the world economy that our major trading partners operate with a flexible exchange rate system,” the official said, “in which market forces determine the value of exchange rates. The new administration is committed to using a fully integrated approach to bring this about in the current economic environment.”

As a senator, Mr. Obama supported legislation as recently as last year that would open the door to trade sanctions against China for currency manipulation.

Mr. Geithner’s statement was in response to a written question about the new administration’s stance that was submitted by Senator Charles E. Schumer, Democrat of New York, a vocal critic of China’s currency policies.

On Thursday, Mr. Schumer welcomed Mr. Geithner’s reply. “For the first two days, this is a big step” from the Obama administration, he said in an interview. “And I think it’s an indication: They are not going to be anti-free trade; they are not going to be for putting artificial barriers in the way. But when other countries do, they’re going to be much tougher on them.”

The National Association of Manufacturers, whose members have pushed previous administrations to get tougher with China, was pleased, but also cautious given the potential for a confrontation that could exacerbate global woes.

“You know the world has changed a lot with the financial crisis and China has a lot in U.S. Treasuries,” said Frank Vargo, vice president for international economic affairs at the manufacturers’ association. “This needs to be done in a cooperative, not a confrontational, way.”

Some market strategists said Mr. Geithner’s statement inflamed a contentious issue unnecessarily given that China’s exports and economy were slowing significantly.

“Things have changed quite a bit since Hank Paulson made an issue of this,” said one, Edward Yardeni, an independent analyst, referring to Henry M. Paulson Jr., the just-departed Treasury secretary. “The Chinese trade surplus is shrinking dramatically and China’s economy is falling into recession. I think it really wasn’t necessary. It doesn’t accomplish anything.”

Mr. Paulson initiated a round of strategic talks with the Chinese and, on his watch, the Chinese allowed the yuan to appreciate nearly 20 percent.

Mr. Geithner would be as aware of China’s sensitivity as anyone, and no one has suggested that he made his statement in error. Before taking his current post as president of the Federal Reserve Bank of New York, Mr. Geithner was a policy director at the I.M.F. Before that, he was the under secretary of the Treasury for international affairs in the Clinton administration, a crisis manager during the Asian financial crisis of the 1990s and a Treasury attaché to Japan. By his own description, Mr. Geithner’s expertise is in matters of currency exchange rates and monetary policy.

In his written statement to the Senate panel, Mr. Geithner further noted Mr. Obama’s support as a senator for “tough legislation to overhaul the U.S. process for determining currency manipulation and authorizing new enforcement measures so countries like China cannot continue to get a free pass for undermining fair trade principles.”

“The question is how and when to broach the subject in order to do more good than harm,” he added. “The new economic team will forge an integrated strategy on how best to achieve currency realignment in the current economic environment.”

The full Senate is expected to confirm Mr. Geithner, 47, as Treasury secretary on Monday. Some Republican senators blocked a vote for this week, given lingering objections about Mr. Geithner’s failure until recently to pay about $34,000 in payroll taxes on his income at the I.M.F. from 2001 to 2004.

He was roundly criticized in his Finance Committee hearing on Wednesday, but its bipartisan vote reflected members’ opinion that Mr. Geithner’s expertise outweighed his personal tax lapses. Those were “completely unacceptable,” said Senator Kent Conrad, Democrat of North Dakota. “In normal times that alone would lead me to oppose his nomination. These are not normal times.”

All the panel’s Democrats and five of the 10 Republicans voted for Mr. Geithner.
“I’m convinced he’s a person of great integrity even though he’s made these mistakes,” said Senator Orrin G. Hatch, Republican of Utah. But another Republican, Senator Michael B. Enzi of Wyoming, said, “I’m really disappointed that we’re even voting on this,” given that other nominees had been disqualified for less.

Vikas Bajaj contributed reporting from New York.

Princeton in the news!

From the Conscience of a Liberal - Paul Krugman

January 22, 2009, 7:40 pm — Updated: 7:40 pm -->
Invasion of the DC body-snatchers

So, for the second time since I arrived at Princeton in 2000, my “boss” — people who know academic life will know why I put quotes around that — has been abducted by Washington. First, a terrific economics department head named Ben Bernanke went off to do something or other in the monetary field.

Now, Anne-Marie Slaughter, the equally terrific dean of the Woodrow Wilson School, has gone off to become the director of policy planning at the State Department. I assume that means we’ll now actually have planned policy — what an innovation!

Anyway, congrats to Anne-Marie — and kudos to Secretary Clinton for making such a great hire.

Smart is the new cool. Living in Princeton, I feel a justified sense of pride

The Global "Adverse Feedback Loop"


Roubini, Edwards Predict Slump in S&P 500 on China (Update3)
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By Michael Patterson and Adam Haigh

Jan. 23 (Bloomberg) -- Stocks will retreat around the world because of shrinking demand from China as growth in the third- biggest economy slows, said Nouriel Roubini, the New York University professor who predicted last year’s financial crisis.

Global equities will fall 20 percent from current levels as China, which contributed 19.5 percent to total growth in 2007, contends with its slowest expansion in seven years, he said. Wall Street strategists predict the Standard & Poor’s 500 Index will rise 29 percent this year from the closing level yesterday.

Roubini, an economics professor at NYU’s Stern School of Business, said China already is in a “recession” despite government data showing a 6.8 percent fourth-quarter growth rate, as power output drops and manufacturing shrinks.

“Demand is falling in China, they’re over-invested in capacity and there’s a global supply glut,” Roubini, 50, said in a telephone interview. “It has very, very important implications.”
Roubini’s view is shared by Societe Generale SA global strategist Albert Edwards, who was correct in forecasting in March 2007 that a U.S. contraction would spur a bear market in equities. Edwards says the China slowdown will reduce earnings at industrial, energy and raw-materials companies, worsening a selloff in emerging and developed-market stocks that may send the S&P 500 down 40 percent to 500.

Emperor’s Clothes
“People should be thinking really hard about this rather than sticking their heads in the sand,” said Edwards, a London- based strategist and member of the top-ranked global investment strategy team in Thomson Extel’s surveys the past three years. “We’re just pointing out when the emperor doesn’t have any clothes on.”

The consensus among eight strategists surveyed by Bloomberg this week is for the index to end the year at 1,066. The S&P 500 fell 1.5 percent yesterday to 827.50, and futures on the index dropped 2.2 percent as of 4:32 a.m. in New York.

Data at China’s National Bureau of Statistics is gathered in a “scientific and realistic method,” Ma Jiantang, the agency’s director, said at a briefing in Beijing yesterday in response to a question about the accuracy of government figures. Zhang Yingxiang, a spokeswoman for the statistics bureau, declined further comment when contacted by phone today.

China Stocks Fall
China’s economy grew 9 percent for all of 2008 after a 13 percent expansion in the previous year, the fastest in the world. China’s CSI 300 Index fell 0.6 percent at the close in Shanghai, the biggest drop in eight days. Commodity producers led declines after Aluminum Corp. of China Ltd. and Yunnan Copper Industry Co. reported lower profit.

Economists at JPMorgan Chase & Co., Citigroup Inc., the World Bank and the International Monetary Fund all predict China will grow at least 7 percent this year, while investors Jim Rogers and Mark Mobius are buying Chinese shares on expectations the government will bolster economic growth with interest-rate cuts and fiscal stimulus. The IMF said China’s contribution to global growth increased to 19.5 percent in 2007 from 17.2 percent in the previous year.

China, which has $1.9 trillion set aside in the world’s largest reserves, plans to spend at least 4 trillion yuan on bridges, housing and tax breaks to boost the economy. Chinese President Hu Jintao has pledged further measures to maintain stable growth in the face of “serious challenges and difficulties.”

China Recession?
Rogers, who predicted the start of the commodities rally in 1999, recommends investors buy China’s agriculture, water treatment, power generation and infrastructure stocks because the companies won’t be hurt by the nation’s slowing economy.

“China could be in recession, I have no idea and it’s not relevant to me because I’m using my judgment as to what will happen six months from now,” said Rogers, who authored books on investing including “A Bull in China: Investing Profitably in the World’s Greatest Market.”

“There is a lot happening in China and there will be those that will hold up well.”

China’s economy will grow 6.3 percent this quarter from a year earlier, according to the median estimate of nine economists surveyed by Bloomberg after yesterday’s GDP report.

China’s electricity output declined 7.8 percent in November from a year earlier and fell 3 percent in October, the first declines since February 2002, according to China Economic Information Net data compiled by Bloomberg. Manufacturing shrank for a third month as the deepening global recession cut demand for the nation’s toys, clothes and electronics.

‘Manipulating’ the Yuan
Edwards said rising unemployment among factory workers will fuel social unrest, threatening the Communist Party’s survival and increasing the risk authorities will devalue the yuan to boost exports.

The yuan appreciated about 19 percent against the dollar between 2005 and July 2008 as China redressed what U.S. officials saw as an unfair price advantage for exports. The yuan has since stabilized at about 6.85 per dollar. Timothy Geithner, President Barack Obama’s nominee for Treasury secretary, said yesterday that China is “manipulating” its currency.

The yuan fell the most in a month today as the nation’s banks refuted the new U.S. administration’s accusation.

“If you amble your way through the analysis, you realize if push comes to shove they will devalue” the yuan, Edwards said. That may spur lawmakers in the U.S. and China to increase trade barriers, he said.

To contact the reporter on this story: Michael Patterson in London at Last Updated: January 23, 2009 05:50 EST