Geithner Sees ‘Durable’ Signs of Greater Confidence in Markets
By Rebecca Christie and Peter Cook
July 16 (Bloomberg) — Treasury Secretary Timothy Geithner said there are “durable” signs that financial markets are on the mend, while repeating that the U.S. must not withdraw its stimulus measures before an economic recovery is entrenched.
“We’re seeing durable signs of greater confidence” in markets, Geithner said in an interview with Bloomberg Television during a visit to Paris today. At the same time, he warned that withdrawing stimulus too soon would “weaken the basic fabric of the economy,” and “that’s not something we can afford to do.”
Geithner’s remarks reflect an economy that’s showing signs of pulling out of its deepest recession in half a century, with at the same time little momentum for a recovery. The Treasury chief stressed today that the Obama administration’s efforts are focused on restoring the U.S. to a path of growth, then reining in budget deficits later to buttress the value of the dollar.
In a later Internet chat with Les Echos newspaper today, the Treasury chief said “the dollar’s role in the international financial system places special responsibilities on the United States — to sustain confidence in our financial system, to bring our fiscal deficits down when recovery is in place, and to preserve the Fed’s strong record of price stability.”
A Treasury report today showed foreign investors sold a net $22.6 billion in May, the most since November. Japan and Russia cut their holdings of U.S. debt even as China — whose foreign- exchange reserves have now surpassed a record $2 trillion — enlarged its portfolio.
CIT Spurned
Geithner didn’t comment directly on CIT Group Inc., the commercial lender in danger of bankruptcy after the Treasury and other U.S. regulators declined to offer additional federal aid.
Geithner’s remarks on the Fed, where he worked as president of the Federal Reserve Bank of New York before taking the Treasury’s helm in January, follow increasing skepticism among U.S. lawmakers about proposals for the central bank to take on new powers.
A group of economists yesterday warned in an open letter yesterday that politicians should avoid interfering in the Fed’s conduct of monetary policy.
Geither said he is “confident” in the Fed’s ability to deliver low and stable inflation.
The Treasury secretary was in Paris at the end of a trip that included his first visit to the Middle East in his current job. One feature of the tour was reassuring that the Obama administration is committed to a “strong” dollar and curbing record budget deficits to achieve that objective.
Stimulus Question
At the same time, he didn’t rule out considering another fiscal stimulus package to secure a sustained U.S. economic recovery.
“I don’t think we’re in a position yet to make that judgment,” he said in the Internet chat with Les Echos newspaper, when asked about another economic-recovery package. The $787 billion stimulus already enacted “was designed to make a contribution over a two-year period and the biggest impact on investment will come in the second half of this year.”
Economic figures this week showed signs of stabilization in manufacturing, bolstering the case for a recovery beginning in the second half of the year.
A Fed report yesterday showed industrial production shrank 0.4 percent in June, the least in eight months. The Labor Department said today that fewer Americans filed claims for unemployment insurance last week.
‘Vulnerable’ to Shocks
Fed officials at their June 23-24 meeting perceived that dangers to the economy had lessened since their previous gathering, in April, minutes of their discussions showed yesterday. They still saw the U.S. as “vulnerable” to shocks, and judged there was a danger of renewed declines in consumer spending once gains in incomes from the stimulus package waned.
“We’re not going to repeat the classic mistake that the U.S. made in the 1930s and that governments around the world have made in financial crises, by at the first sign of hope putting the brakes on prematurely,” Geithner said in the interview with Bloomberg Television today.
The Treasury chief today also reiterated the Obama administration’s commitment to overhauling U.S. financial regulations to reduce the risk of future crises. He said that effort also needs to be undertaken overseas.
“It is very important that we work with the Congress to put in place comprehensive reform of the financial system,” he said. “Part of this will require changes to compensation practices to make them better aligned with risk. We don’t want to see a return to the pattern of practices that helped cause this crisis.”
Stress Tests
Asked by Les Echos whether European policy makers should perform stress tests on their banks, Geithner said that was up to them — while noting that the exercise in the U.S. helped lure new capital to the nation’s banking system.
“That’s a judgment the Europeans are going to have to make,” Geithner said. The U.S. tests “resulted in a lot of capital coming into the banking system earlier, and on more substantial scale than we could have thought.”
The Treasury secretary said today that emerging Asian economies are providing ground for “cautious optimism” about the prospects for global growth. China became the first major economy to rebound from global recession after today reporting 7.9 percent growth in the second quarter.
July 16, 2009