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Thursday, March 26, 2009

Advice to Geithner: About the Dollar Saying Less Is Best

Government Analysis
Thursday, March 26, 2009

Dear Mr. Geithner, Here's How to Answer Currency Questions

Dennis Moore FOXBusiness

The question to Treasury Secretary Timothy Geithner on Wednesday morning sounded straightforward: Would he comment on “the Chinese government proposal about a global currency?” Any of the dozen or more reporters with whom I've spent time in the Treasury's basement pressroom over the years would know instantly how to answer it.

The new Treasury Secretary didn't. He maintained a tradition now more than a decade long of the new guy tanking the dollar.

Geithner, like his predecessors, tried to give a thoughtful, intellectually honest answer that, on the dollar, global currency markets simply will not allow.

Geithner's mistakes started with his first sentence: “I haven't read the governor's proposal”, referring to reported comments by Chinese Central Bank Governor Zhou Xiaochuan.

That's where he should have stopped.  In Washington, if you haven't read it, you don't talk about it.

Second, he accepted the questioner's premise.  Governor Zhou did not actually propose a new global currency to replace the dollar. He instead recommended expanding the role of Special Drawing Rights at the International Monetary Fund.  That’s a basket of dollars, euros, pounds and yen created in 1969 as reserves for IMF member nations.

The U.S. is already looking to expand the IMF's ability to help smaller and less developed countries get through the financial crisis.  In that light, Zhou's proposal is hardly revolutionary.

“And we're actually quite open to that suggestion,” Geithner said.

Cue the currency market panic.

The traders had ignored the rest of his response:  “But you should think of it as rather evolutionary, building on the current architectures.”

Dustin Reid, a currency strategist of RBS Global Banking said “Geithner did not say that the world monetary system should move away from using the dollar as the preferred global reserve currency in favor of using SDRs, as some initial headlines were suggesting.”

More important than what the Treasury Secretary said is what he didn't say.  It's known as the Rubin mantra:  “A strong dollar is in the national interest of the United States.”

Starting in the mid-1990s, that is what Clinton administration Treasury head Robert Rubin said in response to every – every -- question about the dollar.  Since then, no Treasury Secretary has been allowed to say anything else, no matter what the actual economic situation, without triggering a dollar selloff.

Rubin's successor, Larry Summers, had spent four years working under him and stuck word for word to the strong dollar, national interest mantra.  He didn't shock the dollar.

Then came Paul O'Neill, former CEO of Alcoa and a relative stranger to global currency markets.  He, too, tried to give an intelligent answer in 2001.

The U.S. was "not pursuing a policy of a strong dollar," he told a German newspaper. "In my opinion a strong dollar is the result of a strong economy.  There's no strong currency without a strong economy."  There's nothing analytically wrong with that but the deviation from Rubin sent the dollar diving.  O'Neill did some quick backtracking and said he'd learned his lesson.

John Snow, the next Secretary, took longer to learn.  In his defense, it may be said that the dollar was weakening significantly and the Rubin formulation looked increasingly divorced from reality.   In March 2003, Snow said he was “not particularly concerned” about the dollar -- and it promptly hit a four-year low against the euro.   In November of 2004, he said the U.S. wanted a "strong dollar," but the Bush administration felt no pressure to boost it.  That sent the currency plunging to a record low against the euro.

Eventually, Snow reached a modified formula:  “We support a strong dollar -- a strong dollar is in America's interest,'' he would tell reporters, but ``currency values are best set in open and competitive exchange markets.''

Finally came Henry Paulson, who like Rubin, came from Wall Street and knew how not to upset it.

And Secretary Geithner, with prompting from his interviewer, former Clinton Treasury official Roger Altman, backtracked by the end of the interview.  Did he think the dollar could be shoved aside?

“I do not.  I think the dollar remains the world's dominant reserve currency.  I think that's likely to continue for a long period of time,” he said, and the dollar promptly rallied.

What is the magic of the mantra?  Former Fed Chairman Alan Greenspan said he hated the mantra, at first.

“All of us who had to sit and listen invariably cringed more and more as the weeks and months went on.  It was boring, it was dull, it was repetitive, it was nonintellectual and it worked like a charm.”  It worked because it paralyzed the press and the traders -- leaving no room for speculation about any possible change in US dollar policy.

The lesson is clear:  if you haven't trod the trading floors of Goldman Sachs or been trained by someone who has, talking about the dollar can be deadly.

Having strayed from the true path of the strong dollar, and suffered the consequences, Tim Geithner is unlikely to indulge in actually answering the question again.


My Thoughts

I'll sum it all up for you. Geithner, shut up!

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