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Top economic powers seek crisis solution
By Jeannine Aversa, AP Economics Writer
Sunday, April 13, 2008 | 1 comment(s)
WASHINGTON — The world’s leading economic figures took seats at the epicenter of U.S. political power Friday to explore how best to prevent another financial crisis like the credit and mortgage debacles that sent tremors around the globe.
Risks to the United States and the global economy have intensified since finance officials from the Group of Seven countries last gathered here in October. Many economists now believe the United States has fallen into a recession and that the odds of a worldwide downturn have risen sharply — to one in four — according to the International Monetary Fund, a global financial firefighting institution.
Treasury Secretary Henry Paulson and Federal Reserve Chairman Ben Bernanke hosted Friday’s G7 discussions, where officials were expected to consider a plan that would seek to increase the openness, or transparency, of financial markets and to sharpen financial regulators’ response to such quick-hitting problems.
Those talks, involving the top finance ministers of Japan, Germany, Britain, France, Italy and Canada, got under way in the afternoon and were preceding the weekend meetings of the 185-nation IMF and the World Bank.
Before the meeting began, Japanese Finance Minister Fukushiro Nukaga told reporters he believed that each country should undertake suitable measures to extinguish financial fires when they erupt around the globe.
In the United States, where credit troubles sprang forth with a vengeance last August and quickly spread financial turmoil worldwide, the damage is sorely felt. Foreclosures have surged to record highs, job losses in the first three months of this year have neared the staggering quarter-million mark and financial companies have racked up billions of dollars in losses. The once mighty Bear Stearns, the fifth-largest investment bank in the United States, crashed, prompting a takeover by JP Morgan in a controversial deal backed by the Fed.
Worldwide financial losses could approach $1 trillion over two years, the IMF said earlier this week.
Bernanke said the “financial distress we’re seeing now is among the most severe episodes of the postwar era.” However, the Fed chief — a student of the Great Depression in this country — said the current experience is not anything “remotely like” that.
The plan the G7 officials were working on was developed by the Financial Stability Forum, a group that includes central bankers and major financial regulators from around the world. The panel is headed by Mario Draghi, chief of Italy’s central bank, who was presenting his group’s findings to the other G-7 officials during their closed-door meeting.
David McCormick, the Treasury Department’s pointperson on international affairs, said that Draghi’s report will include more than 65 recommendations designed to make financial markets less secretive and improve supervision, which in theory would help prevent a repeat of the current financial debacles.
One suggestion is to have banks, securities firms and other financial institutions disclose their holdings of risky securities, such as those backed by subprime mortgages given to people with tarnished credit. Those subprime mortgages, which soured with the collapse of the U.S. housing market, were at the heart of the U.S crisis.
Another suggestion involves improving the operation of credit rating agencies, which have been criticized for contributing to the problems by not accurately assigning risk to mortgage-backed investments. Another recommendation involves strengthening supervisors’ guidance to banks for dealing with cash crunches.
Asked whether there would be a coordinated action by the G7 to use public money to provide relief, McCormick, earlier this week said, “We are not at all certain that would make sense.”
Soaring oil prices, meanwhile, also are complicating the global outlook.
In the United States, high energy prices are acting as a double-edged sword: they are causing people to spend less on other things, thus adding another drag on growth. And, they increase the risks of an inflation flare-up as other companies boost their prices in response. U.S. gasoline prices are marching toward $4 a gallon.
Another issue likely to crop up during Friday’s discussions is the big drop in the value of the U.S. dollar, which has fallen in recent months to record lows against the euro and has fallen sharply against Japan’s yen.
Ongoing efforts by the U.S., backed by the G7, to prod China to let its currency rise in value also will be discussed. China’s undervalued currency has been blamed for contributing to the United States’ swollen trade deficit and the loss of millions of factory jobs. Progress has been made on the China currency front, but officials say more needs to be done.
The G-7 finance officials had a dinner scheduled for Friday night that was to include executives of some of the world’s biggest financial companies. The idea: look at the causes and consequences of the recent financial turmoil. Officials invited to those talks included top executives of Citigroup, Deutsche Bank, Barclays, Credit Suisse, Lehman Brothers and Morgan Stanley.
Risks to the United States and the global economy have intensified since finance officials from the Group of Seven countries last gathered here in October. Many economists now believe the United States has fallen into a recession and that the odds of a worldwide downturn have risen sharply — to one in four — according to the International Monetary Fund, a global financial firefighting institution.
Treasury Secretary Henry Paulson and Federal Reserve Chairman Ben Bernanke hosted Friday’s G7 discussions, where officials were expected to consider a plan that would seek to increase the openness, or transparency, of financial markets and to sharpen financial regulators’ response to such quick-hitting problems.
Those talks, involving the top finance ministers of Japan, Germany, Britain, France, Italy and Canada, got under way in the afternoon and were preceding the weekend meetings of the 185-nation IMF and the World Bank.
Before the meeting began, Japanese Finance Minister Fukushiro Nukaga told reporters he believed that each country should undertake suitable measures to extinguish financial fires when they erupt around the globe.
In the United States, where credit troubles sprang forth with a vengeance last August and quickly spread financial turmoil worldwide, the damage is sorely felt. Foreclosures have surged to record highs, job losses in the first three months of this year have neared the staggering quarter-million mark and financial companies have racked up billions of dollars in losses. The once mighty Bear Stearns, the fifth-largest investment bank in the United States, crashed, prompting a takeover by JP Morgan in a controversial deal backed by the Fed.
Worldwide financial losses could approach $1 trillion over two years, the IMF said earlier this week.
Bernanke said the “financial distress we’re seeing now is among the most severe episodes of the postwar era.” However, the Fed chief — a student of the Great Depression in this country — said the current experience is not anything “remotely like” that.
The plan the G7 officials were working on was developed by the Financial Stability Forum, a group that includes central bankers and major financial regulators from around the world. The panel is headed by Mario Draghi, chief of Italy’s central bank, who was presenting his group’s findings to the other G-7 officials during their closed-door meeting.
David McCormick, the Treasury Department’s pointperson on international affairs, said that Draghi’s report will include more than 65 recommendations designed to make financial markets less secretive and improve supervision, which in theory would help prevent a repeat of the current financial debacles.
One suggestion is to have banks, securities firms and other financial institutions disclose their holdings of risky securities, such as those backed by subprime mortgages given to people with tarnished credit. Those subprime mortgages, which soured with the collapse of the U.S. housing market, were at the heart of the U.S crisis.
Another suggestion involves improving the operation of credit rating agencies, which have been criticized for contributing to the problems by not accurately assigning risk to mortgage-backed investments. Another recommendation involves strengthening supervisors’ guidance to banks for dealing with cash crunches.
Asked whether there would be a coordinated action by the G7 to use public money to provide relief, McCormick, earlier this week said, “We are not at all certain that would make sense.”
Soaring oil prices, meanwhile, also are complicating the global outlook.
In the United States, high energy prices are acting as a double-edged sword: they are causing people to spend less on other things, thus adding another drag on growth. And, they increase the risks of an inflation flare-up as other companies boost their prices in response. U.S. gasoline prices are marching toward $4 a gallon.
Another issue likely to crop up during Friday’s discussions is the big drop in the value of the U.S. dollar, which has fallen in recent months to record lows against the euro and has fallen sharply against Japan’s yen.
Ongoing efforts by the U.S., backed by the G7, to prod China to let its currency rise in value also will be discussed. China’s undervalued currency has been blamed for contributing to the United States’ swollen trade deficit and the loss of millions of factory jobs. Progress has been made on the China currency front, but officials say more needs to be done.
The G-7 finance officials had a dinner scheduled for Friday night that was to include executives of some of the world’s biggest financial companies. The idea: look at the causes and consequences of the recent financial turmoil. Officials invited to those talks included top executives of Citigroup, Deutsche Bank, Barclays, Credit Suisse, Lehman Brothers and Morgan Stanley.
Transcripts show Fed worried about deflation in 2002
WASHINGTON (AP) — Just-released transcripts show the Federal Reserve was worried about the threat of deflation when it decided to cut a key interest rate by a half-point in November 2002. Then-Federal Reserve Chairman Alan Greenspan called the prospect “pretty scary.”
Those transcripts, released Friday, showed that Greenspan and his colleagues were focused on what should be done about a sluggish economy and the threat that the country could tumble into a period of deflation, something the country had not experienced since the Great Depression.
While the Fed strives to achieve low inflation, it does not want to see the economy enter a period of serious deflation with the value of real estate and other assets dropping, because that sets off destabilizing forces that can have serious consequences. The United States was battered by deflation during the 1930s, and Japan experienced a lost decade of growth in the 1990s after its real estate bubble burst, causing a severe bout of deflation in that country.
Some critics have argued that there was never a serious threat of deflation in the United States in the period of the 2001 recession and that the extremely low interest rates engineered by the Fed created a housing boom that drove prices and sales up to record levels only to burst in 2006, sending shock waves through the economy that are still reverberating.
The transcripts released Friday show that Fed officials at the time were not that worried about the effects low interest rates might have, arguing that if inflation started rising, the Fed could reverse course and start raising rates but that a bout of deflation would be harder to combat.
The Fed did cut the federal funds rate, the interest that banks charge on overnight loans, by a half-point at the November 2002 meeting, moving it from 1.75 percent down to 1.25 percent, the lowest level in 41 years. That was the only rate cut the Fed made that year.
During the discussions, Greenspan expressed concern about the country falling into a “deflationary hole.”
“It’s a pretty scary prospect and one that we certainly want to avoid,” Greenspan told other members of the Federal Open Market Committee, the Fed panel that meets eight times a year to set interest rates.
The Fed would cut the funds rate one more time the next year, pushing it to a 45-year low of 1 percent on June 25, 2003. The central bank left the funds rate at that level for an entire year until it began a gradual move to raise rates in June 2004.
While Greenspan was hailed when he left the Fed in early 2006 after 18 1/2 years as chairman for safely guiding the U.S. economy through a number of dangers, the bursting of the housing boom that year and a resulting severe credit crunch have prompted a reassessment of those actions.
But in an interview on CNBC this week, Greenspan said he had “no regrets” about Fed policy during his tenure and said there was little Fed officials or other regulators could have done to avert the housing crisis.
In the interview, Greenspan blamed the housing crisis on “egregious lending practices” in the subprime mortgage market.
Critics charge that Greenspan pushed rates too low and left them there too long, fueling a housing bubble that has now burst, causing severe troubles including the possibility that the country has fallen into a recession.
But at the time, Greenspan and his colleagues clearly saw the biggest dangers coming from weak growth and possible deflationary forces.
On the possibility that a half-point cut might be too much, Greenspan said at the November meeting, “It’s a mistake that does not have very significant consequences.
On the other hand, if we fail to move and we are wrong, meaning that we needed to, the costs could be quite high.”
William McDonough, president of the New York Federal Reserve Bank, argued that if the Fed cut rates by only a quarter-point, financial markets would consider Fed officials “a bunch of wimps, which is not an attractive assessment for a group that is supposed to be a very important public body.”
Current Fed Chairman Ben Bernanke, a former Princeton economics professor who had joined the Fed earlier that year as a board member, supported Greenspan’s recommendation to cut rates by a half-point.
Bernanke said the country seemed to be experiencing the same type of “jobless recovery” that had occurred for a prolonged period after the 1990-91 recession and that a cut in rates was needed to boost growth.
While the Fed releases minutes of its closed-door discussions three weeks after the meetings are held, the full transcripts are only released with a lag of five years.
WASHINGTON (AP) — Just-released transcripts show the Federal Reserve was worried about the threat of deflation when it decided to cut a key interest rate by a half-point in November 2002. Then-Federal Reserve Chairman Alan Greenspan called the prospect “pretty scary.”
Those transcripts, released Friday, showed that Greenspan and his colleagues were focused on what should be done about a sluggish economy and the threat that the country could tumble into a period of deflation, something the country had not experienced since the Great Depression.
While the Fed strives to achieve low inflation, it does not want to see the economy enter a period of serious deflation with the value of real estate and other assets dropping, because that sets off destabilizing forces that can have serious consequences. The United States was battered by deflation during the 1930s, and Japan experienced a lost decade of growth in the 1990s after its real estate bubble burst, causing a severe bout of deflation in that country.
Some critics have argued that there was never a serious threat of deflation in the United States in the period of the 2001 recession and that the extremely low interest rates engineered by the Fed created a housing boom that drove prices and sales up to record levels only to burst in 2006, sending shock waves through the economy that are still reverberating.
The transcripts released Friday show that Fed officials at the time were not that worried about the effects low interest rates might have, arguing that if inflation started rising, the Fed could reverse course and start raising rates but that a bout of deflation would be harder to combat.
The Fed did cut the federal funds rate, the interest that banks charge on overnight loans, by a half-point at the November 2002 meeting, moving it from 1.75 percent down to 1.25 percent, the lowest level in 41 years. That was the only rate cut the Fed made that year.
During the discussions, Greenspan expressed concern about the country falling into a “deflationary hole.”
“It’s a pretty scary prospect and one that we certainly want to avoid,” Greenspan told other members of the Federal Open Market Committee, the Fed panel that meets eight times a year to set interest rates.
The Fed would cut the funds rate one more time the next year, pushing it to a 45-year low of 1 percent on June 25, 2003. The central bank left the funds rate at that level for an entire year until it began a gradual move to raise rates in June 2004.
While Greenspan was hailed when he left the Fed in early 2006 after 18 1/2 years as chairman for safely guiding the U.S. economy through a number of dangers, the bursting of the housing boom that year and a resulting severe credit crunch have prompted a reassessment of those actions.
But in an interview on CNBC this week, Greenspan said he had “no regrets” about Fed policy during his tenure and said there was little Fed officials or other regulators could have done to avert the housing crisis.
In the interview, Greenspan blamed the housing crisis on “egregious lending practices” in the subprime mortgage market.
Critics charge that Greenspan pushed rates too low and left them there too long, fueling a housing bubble that has now burst, causing severe troubles including the possibility that the country has fallen into a recession.
But at the time, Greenspan and his colleagues clearly saw the biggest dangers coming from weak growth and possible deflationary forces.
On the possibility that a half-point cut might be too much, Greenspan said at the November meeting, “It’s a mistake that does not have very significant consequences.
On the other hand, if we fail to move and we are wrong, meaning that we needed to, the costs could be quite high.”
William McDonough, president of the New York Federal Reserve Bank, argued that if the Fed cut rates by only a quarter-point, financial markets would consider Fed officials “a bunch of wimps, which is not an attractive assessment for a group that is supposed to be a very important public body.”
Current Fed Chairman Ben Bernanke, a former Princeton economics professor who had joined the Fed earlier that year as a board member, supported Greenspan’s recommendation to cut rates by a half-point.
Bernanke said the country seemed to be experiencing the same type of “jobless recovery” that had occurred for a prolonged period after the 1990-91 recession and that a cut in rates was needed to boost growth.
While the Fed releases minutes of its closed-door discussions three weeks after the meetings are held, the full transcripts are only released with a lag of five years.
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