Business Times - 12 Jun 2009
He questions if US$ as an international currency is in US's long-term interests
By ANTHONY ROWLEY IN BEIJING
SPEAKING in Beijing's Great Hall of the People, former US Federal Reserve chairman Paul Volcker last night acknowledged the legitimacy of China's concerns over the dollar and questioned whether it was in the long-run interests of the United States to continue providing an international currency.
The 'ultimate logic of a globalised financial system is, to me, a global currency', said Mr Volcker, now head of President Barrack Obama's Economic Recovery Advisory Board, in a speech to senior Chinese and other bankers from around the world.
His comments seem bound to open up a controversial debate on the future of the dollar as a global currency. Us Treasury Secretary Timothy Geithner has been criticised recently for also appearing sympathetic to China's concerns on this issue.
Mr Volcker also suggested during his speech as guest of the Institute of International Finance at its Beijing meeting that 'the sudden and unsettling drop' in global economic activity is slowing. But he warned that 'prospects for a really strong recovery, typical of most recessions seems unlikely'.
Instead, 'a long slog with continuing high levels of unemployment seems to be in store'. he said. 'For most of the developed world, sources of strong, spontaneous growth are hard to envisage. In the US, as elsewhere, even modest growth remains dependent on strong fiscal and monetary stimulus.'
Likewise, although 'a healing process in financial markets seems to be underway, the global financial system remains in intensive care', said the monetary world veteran. The best that can be said is that the system is 'out of the emergency room', he added.
On the dollar issue, Mr Volcker noted that 'Chinese officials have recently raised questions about the implications for China and others that are holding so many dollars'.
'I think it is reasonable to ask whether it is in the long-run interests of the United States itself to provide what is essentially a public good - an international currency - in amounts so large as to raise questions about its ultimate stability.'
However, he added: 'The fact is that there are no practical alternatives for today or for many tomorrows to the US dollar as an international currency.
'I think it should be clearly understood that the central responsibility of the United States - in its own interest, in China's interest, and in the world's interest - is to maintain both the purchasing power of the dollar at home and in international markets, and a strong and open financial system.'
He acknowledged that 'the present state of world affairs has made clear that our international monetary arrangements have not provided a needed element of discipline for either surplus or deficit countries'.
'Deep and ultimately destabilising imbalances have been prolonged, specifically the growing and seemingly irresistible current imbalances between China and much of the rest of Asia and the US. These have for years been covered by flows of foreign official and privately held dollars back to the US.
'Indirectly, those flows have to some degree helped fuel the mortgage market and the housing bubble that touched off the financial collapse.'
Touching on the financial crisis, Mr Volcker warned that 'moral hazard' is in danger of becoming embedded as a result of official bailouts of financial institutions and because of the 'too big to fail' ethos that pervades official attitudes towards mounting rescues of such institutions.
'We can, and we should, take steps to limit the need and possibility of official bailouts.'
He also called for accounting reforms and questioned the wisdom of attempts to enforce strict mark to market accounting for financial institutions.
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