James Pethokoukis

Politics and policy from inside Washington

Should America embrace a weaker dollar?

Sep 24, 2009 17:12 UTC

Does Ben Bernanke care about the dollar? Larry Kudlow doesn’t think so:

Today’s FOMC policy announcement from the Federal Reserve basically sends a message that Bernanke & Co. doesn’t care one wit about the sinking dollar or the rising gold price. In fact, the latest policy directive removes last month’s reference to commodity-price increases, while there is no reference to the greenback at all. The central bank is going to keep buying mortgages and adding to its balance sheet of high-powered money creation. … The bottom line is that the Fed is going to continue to create an excess supply of new dollars, which is why the dollar exchange rate is likely to keep falling while gold and other commodities keep rising. Today’s incipient inflation will become much more pronounced in the next year or two. Helicopter Ben is not turning into King Dollar Ben. Actually, I believe the Fed and the Treasury want to nurture a cheaper dollar to boost U.S. exports as a means of fine-tuning stronger economic growth through the international channel. But there is no exit strategy from dollar creation. That’s gonna wait well into next year.

And guess what? The White House might not care much either, so says Tom Barnett:

The long-term slide of the dollar is certainly helping, as is the fact that Asia, Europe, and America all seem to be recovering at roughly the same pace. Ideally, the U.S. will use this ongoing “framework” dynamic to accelerate China’s movement toward de-pegging its currency from the dollar and making it fully convertible, thus accelerating the dollar’s own decline as the global reserve currency. Over the long term, a dollar that can be balanced by a combination of the Euro and Chinese yuan (or some “Asia” basket that combines the value of the yuan, Korea’s won, India’s rupee, and Japan’s yen) is a dollar that cannot get too out of whack from its true value — as in, too fiscally undisciplined back home.

Obama’s framework proposal does truly represent a tipping point in global affairs: a financially humbled America committing itself to abide by IMF counseling in order to keep the trade peace among the world’s biggest economies. His critics will undoubtedly cast this as a humiliating capitulation to “foreign interests,” and these politically potent charges will force the president into all manner of showy protectionist displays. But the larger point is this: By submitting to the collective judgment of globalization’s “board of directors,” America finally admits that its self-styled international liberal trade order has blossomed beyond our control.


Your are opinion is totally useless. It does not provide a guideline into make money in the stock market. You are more like a professor than a truly investor. If someone gives you their savings, you will soon loss it all.

Is system risk regulation even possible?

Sep 24, 2009 16:24 UTC

Arthur Levitt, former chairman of the SEC, wants a systemic risk regulator who can serve as an “early warning system” and “director appropriate regulatory agencies to implement action.” (This is his House Fin Serv testimony.) I am not sure, ultimately, even the WH thinks this kind of prescience is possible. Anyone who could do that should be running money rather than serving in government. Better to tweak capital and leverage rules and force the big banks to show how they could be unwound — the “living will” idea.

The Fed as systemic risk regulator

Sep 24, 2009 16:00 UTC

In his testimony before the House Financial  Services Committee, economist Mark Zandi draws light to a problem I have been talking about and then offers a solution:

The principal worry in making the Federal Reserve the systemic risk regulator is that its conduct of monetary policy may come under overly onerous oversight. Arguably one of the most important strengths of our financial system is the Federal Reserve’s independence in setting monetary policy; it would be counterproductive if regulatory reform were to diminish even the appearance of this independence. This will become even more important in coming years, given prospects for large federal budget deficits and rising debt loads. Global investors will want to know that the Fed will do what is necessary to ensure inflation remains low and stable. To this end, it would be helpful if oversight of the Fed’s regulatory functions were separated from oversight of its monetary policy responsibilities. One suggestion would be to establish semiannual reporting by the Fed to Congress on its regulatory activities, much like its current reporting to Congress on monetary policy.

And here is how Paul Volcker sees all this working:

I am not alone in suggesting that a Fed governor should be nominated by the President and confirmed by the Senate as a second Vice Chairman of the Board with particular responsibility for overseeing Regulation and Supervision. The point is to pinpoint responsibility, including relevant reporting to the Congress, for a review of market developments and regulatory and supervisory practices. Staff authority, independence, professionalism, experience, and size should be reinforced.

Me:  I don’t see how Zandi’s solution would solve anything. Maybe the new vice-chairman would do most of the testifying about regulation rather than Bernanke? I think the true answer is that a lessening of independence is just a risk Zandi and Volcker are willing to take.

White House taking a flexible approach to financial reform

Sep 24, 2009 13:55 UTC

It was a revealing performance that Treasury Secretary Timothy Geithner gave on Wednesday before the House Financial Services Committee. and an important one. While Geithner frequently journeys to Capitol Hill, his latest appearance comes as the administration begins a new renews a push for passage of sweeping financial regulatory reform.

Maybe “push” is the wrong word. “Scramble” might be better since Geithner stressed that time is of the essence. “We can’t let momentum for reform fade as memory of the crisis recedes,” he said. Indeed, Tthe same dynamic is at play with financial reform as it is with healthcare reform: Get a reasonable bill passed this year or, ideally, before the November gubernatorial elections in New Jersey or Virginia, where Republicans are leading.

While Geithner said the uber-practical administration favors what will work, the reality might be closer to what will pass. Take the White House proposals for various consumer reforms, including the establishment of a Consumer Financial Protection Agency. Chairman Barney Frank wants to tweak the White House proposal, eliminating a provision that would force financial companies to offer “plain vanilla” versions of financial products. Frank would also exempt a range of businesses from CFPA oversight such as accountants and lawyers.

Geithner’s response: “There’s nothing in there, at first glance, that troubles me significantly in terms of its practical value.” This is good news. Rather than having a new agency attempt to determine what plain-vanilla mortgages and credit cards are and then mandate them, better to merely improve disclosure of fees and requirements for consumers.

Here is hoping that Geithner and President Barack Obama show a similar flexibility on the issue of a super-regulator and systemic risk. The White House continues to push for an expanded Federal Reserve regulatory role despite the potential risks to its independence. The idea of a SuperFed is also likely to meet stiff congressional opposition given the Fed’s role in creating the financial bubble through errors in monetary policy and lapses in regulatory judgment. Creation of a SuperFed might also have to accompany passage of a bill to audit the central bank, another threat to its independence.

Christopher Dodd, Frank’s opposite in the U.S. Senate, favors a single regulator to oversee banks. Ideally, the Fed would then be free to focus on its core mission of conducting monetary policy, while, as an American Enterprise Institute analysis put it, a separate super-regulator could enjoy supervisory economies of scale and achieve consistency. This easily passes the Geithner “what will work” standard.

More evidence of rising trade protectionism

Sep 24, 2009 13:44 UTC

As Reuters reports it:

The United Steelworkers union, fresh from persuading President Barack Obama to restrict tire imports from China, filed a new case Wednesday asking for duties on coated paper from both China and Indonesia. The action came just one day after Chinese President Hu Jintao complained to Obama about the tires decision in a meeting on the sidelines of a United Nations summit in New York. … The steelworkers union, which represents workers in a number of industries, sees itself in a battle against what it believes are unfair foreign trade practices that have led to the loss of millions of U.S. manufacturing jobs. They are joined in their latest trade case by paper manufacturers NewPage Corp of Miamisburg, Ohio; Appleton Coated LLC of Kimberly, Wisconsin; and Sappi Fine Paper North America of Boston, Massachusetts, which together employ about 6,000 union workers at paper mills in nine states. … Unlike the steelworkers’ petition in the tires case, this complaint will not land on Obama’s desk. Instead, the U.S. International Trade Commission, a U.S. federal agency, will have the final word on whether anti-dumping and anti-subsidy duties will be imposed after an investigation by the U.S. Commerce Department.

Worried about how this sort of thing will affect the economy recovery both in the US and globally? Ed Yardeni is:

But what about Art Laffer’s warning about how rising taxes and protectionism could still cause another Great Depression?” …  He observed: “While Fed policy was undoubtedly important, it was not the primary cause of the Great Depression or the economy’s relapse in 1937. The Smoot-Hawley tariff of June 1930 was the catalyst that got the whole process going. It was the largest single increase in taxes on trade during peacetime and precipitated massive retaliation by foreign governments on U.S. products. Huge federal and state tax increases in 1932 followed the initial decline in the economy thus doubling down on the impact of Smoot-Hawley. There were additional large tax increases in 1936 and 1937 that were the proximate cause of the economy’s relapse in 1937.”

I completely agree with Art that the Smoot-Hawley tariff was the major cause of the Great Depression. So it is certainly disturbing to see the Obama Administration pander to the United Steelworkers by slapping a tariff on tires imported from China. This morning’s WSJ reports that three paper companies and the United Steelworkers filed an antidumping case Wednesday against China and Indonesia, making good on the union’s threat to protect other US industries after winning a recent trade decision against China. We’ve seen plenty of similar trade flare-ups in the past even during the Reagan and Bush Administrations. Nevertheless, they can spin out of control. More importantly, now is not a good time to resort to protectionism given that the global economic freefall earlier this year was mostly attributable to a collapse in exports as trade credits froze up.

A bigger and more likely threat to a sustainable recovery is the sun-setting of the Bush tax cuts after 2010. This will amount to a major tax increase that could send the economy back into a recession in 2011. I don’t think this will trip up the bull market any time soon. But it is likely to become a big issue by the second half of next year.


High taxes and restrictions in free trade are good for economic growth. Everybody knows that.

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