- The Washington Times - Tuesday, April 21, 2009


The Obama administration last week declined to cite China for currency manipulation though most experts - including Treasury Secretary Timothy F. Geithner during his confirmation testimony - do not deny the obvious currency rate-fixing by China. Almost certainly, this decision reflected merely a tactical judgment not to offend China, given China’s vital role in the international economic recovery effort.

But Chinese currency manipulation provides a useful entry point into an important Washington debate: Do we well enough understand - and are we in a political position to honestly discuss - the causes of the current financial and economic crisis so we will be ready, this year, to enact financial re-regulation legislation?

I would argue that not only do we not yet understand enough, but also that we have plenty of time before new financial regulations need to be enacted. (Disclosure: I have given professional advice to a financial institution.) Everyone - from President Obama to House Financial Services Committee Chairman Barney Frank to major free-market economists and Republicans - at present agree that the gravamen of any new financial re-regulations must be to guard against financial institutions and major players taking systemic risks that may again undermine national and international finance.

And, while the day may well come when that risk will arise, for the next year at least (and probably for several years) the problem will be inducing financial institutions to trust each other, inducing holders of capital to take any chances on investment. Thus the financial danger for the time being is not risk-taking, but risk aversion.

At their heart, financial relations are based on trust. That trust has been shattered. It almost certainly will take new financial regulations, particularly in the United States, to rebuild that trust.

But for the regulations to serve that necessary function, they must be seen to reflect a correct assessment of the causes of the current calamity, a credible and timely check on those dangers - and still permit the financial system to generate prosperity.

A number of members of Congress - mostly from the left side of the political spectrum - have called for hearings on the causes of the financial failures. Though they may well have ideological oxen they plan to gore at such hearings, I agree with them that there ought to be extensive public hearings.

While cause and effect in human affairs inevitably is a muddled matter (scholars still debate the causes of the French Revolution and the cures of the Great Depression), we owe it to our hopes for future prosperity to make a serious effort to understand what just happened and why. That brings me back to the question of Chinese currency manipulation.

A growing body of leading experts think the Chinese refused to allow their exporting strength vis-a-vis the United States to be reflected in a true value of the yuan-renminbi. By pegging it to the dollar, they ran up huge surpluses and recycled the money back to the United States.

More significantly, the global account imbalances - profoundly exaggerated by fixing the yuan-renminbi - may have been the primary cause of the world financial crisis. The case against this act of “exchange rate protectionism” (Professor Max Corden coined the phrase) was forcefully and presciently put by Martin Wolf, the Financial Times’ chief economic commentator (and as close to being a 21st-century Walter Bagehot as we have) in his 2008 book “Fixing Global Finance”: “Many blame the United States’ predicament on the policies of the Federal Reserve and lax regulation of the financial system. These arguments are not without merit, but they are exaggerated.” Mr. Wolf goes on to make a powerful case that Chinese currency rate-fixing supercharged the current account imbalances and led to the disaster.

What makes Mr. Wolf’s argument piquant is that he cites, and relies on for the significance argument, the powerful lecture “Reflections on Global Account Imbalances,” delivered in 2006 in India by Lawrence H. Summers - then a private citizen and now Mr. Obama’s chief economic adviser.

It is doubly interesting that Mr. Summers gave the following dust-cover endorsement last year to Mr. Wolf’s book: “Mr. Wolf is the world’s pre-eminent financial journalist. This book should be read by anyone who cares about the future of the international system.”

Major reviews of his book all point to the centrality of this Chinese currency-manipulation charge. For example, the London Observer’s review by Will Hutton states: “Wolf is tough on China’s role in all of this and his book will be very unpopular with the Politburo and Chinese Communist Party, which want to blame the hegemonic U.S. for the crisis.”

White House public talking points cite “Wall Street greed” and the shortcomings of our health, energy, carbon and education policies as major causes of the crisis. It would appear the president’s senior economic adviser may have a somewhat different point of view.

Both the administration and the two parties in Congress owe the public the most considered, nonideological, nonpartisan public analysis of the causes of the current conditions. The financial re-regulation decisions they make may well decide whether our grandchildren live in prosperity or poverty. Let’s not rush to write and pass this fateful legislation, as we did on previous economic legislation, until the public and the government know what we are doing - and the politics permit an honest discussion.

Tony Blankley is the author of “American Grit: What It Will Take to Survive and Win in the 21st Century” and vice president of the Edelman public relations firm in Washington.

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