Dueling profiles

Posted By Daniel W. Drezner Monday, March 30, 2009 - 1:48 PM

Newsweek has two long profiles this week -- one on Tim Geithner, and one on Paul Krugman.

The Krugman profile was more interesting, because Evan Thomas managed to encapsulate my own feelings whenever I read Krugman these days:

If you are of the establishment persuasion (and I am), reading Krugman makes you uneasy. You hope he's wrong, and you sense he's being a little harsh (especially about Geithner), but you have a creeping feeling that he knows something that others cannot, or will not, see. By definition, establishments believe in propping up the existing order. Members of the ruling class have a vested interest in keeping things pretty much the way they are. Safeguarding the status quo, protecting traditional institutions, can be healthy and useful, stabilizing and reassuring. But sometimes, beneath the pleasant murmur and tinkle of cocktails, the old guard cannot hear the sound of ice cracking. The in crowd of any age can be deceived by self-confidence, as Liaquat Ahamed has shown in "Lords of Finance," his new book about the folly of central bankers before the Great Depression, and David Halberstam revealed in his Vietnam War classic, "The Best and the Brightest." Krugman may be exaggerating the decay of the financial system or the devotion of Obama's team to preserving it. But what if he's right, or part right? What if President Obama is squandering his only chance to step in and nationalize—well, maybe not nationalize, that loaded word—but restructure the banks before they collapse altogether?

The fundamental question is whether Krugman is a brilliant hedgehog, an insecure pain in the ass, or -- as frequently is the case -- both at the same time.

The rest of Thomas' essay does suggest a little pique on Krugman's part:

Obama aides have invited commentators of all persuasions to the White House for some off-the-record stroking; in February, after Krugman's fellow Times op-ed columnist David Brooks wrote a critical column accusing Obama of overreaching, Brooks, a moderate Republican, was cajoled by three different aides and by the president himself, who just happened to drop by. But, says Krugman, "the White House has done very little by way of serious outreach. I've never met Obama. He pronounced my name wrong"—when, at a press conference, the president, with a slight note of irritation in his voice, invited Krugman (pronounced with an "oo," not an "uh" sound) to offer a better plan for fixing the banking system.

This kind of lament suggests that Krugman is less the lonely voice of reason and more someone who wishes he was on the inside looking out. And yet, what if he's right?

The Geithner essay, by Michael Hirsch, suggests that that the Treasury Secretary is finally hitting his stride. One would ordinarily dismiss this as a standard magazine puff piece, but Hirsch isn't really known for writing those. It's worth reading, side by side, with our own David Rothkopf's ~~jeremiad against~~ mild tweaking of Geithner in yesterday's Washington Post ("he looks like Harry Potter").

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This is what happens when financial markets do not read my blog [UPDATED]

Posted By Daniel W. Drezner Wednesday, March 25, 2009 - 9:29 PM

Apparently the foreign exchange markets got taken for a ride earlier today in response to Tim Geithner's chat at the Council on Foreign Relations. This makes me wonder if anyone working in forex markets actually listened to the words that came out of Geithner's mouth.

Here's Kathy Lien at FX360 explaining what Geithner said that caused markets to go into a tizzy:

In a blink of an eye, the U.S. dollar has collapsed against the Euro, Japanese Yen and other major currencies. The trigger was comments from Tim Geithner who said that the U.S. is "quite open" to China's suggestion of moving towards a Special Drawing Right (SDR) linked currency system. If the world adopts the SDR, which was created by the IMF as an international reserve asset, it would mean that countries around the world would need to hold less U.S. dollars. (emphasis added)

Except that this is not what Geithner actually said. To be more specific, he did say "quite open," but that's not all he said in his first response. This is from the CFR transcript:

[A]s I understand his proposal, it's a proposal designed to increase the use of the IMF's special drawing rights. And we're actually quite open to that suggestion. But you should think of it as rather evolutionary, building on the current architectures, than -- rather than -- rather than moving us to global monetary union.

Here was my contemporaneous read of what Geithner said:

Geithner is asked about China (not my question) and the IMF's new proposals for expanded lending. He responds by praising Zhou Xiaochuan, China's central bank governor, but claims that he hasn't read his proposal in detail. Geithner makes it clear that he is quite open to expanding the IMF's Special Drawing Rights for less developed countries. Still, he wants it to evolve and be integrated within the current international monetary system -- as opposed to the de novo creation of a new global currency.
I've read the report (Tim, it's not that long, take a look!) and Zhou is not proposing anything so radical so soon, so this is a bit of a red herring. Still, Geithner's statement here carries the same kind of firm pushback that Obama gave yesterday about any move ending the dollar as the global reserve currency.

SDRs are intended for least developed countries, so expanding that program would not profoundly affect the distribution of currency reserves among the world's principal players.

And yet, after Geithner reaffirms this point later in the talk, Lien interprets it as follows:

A few minutes after saying the U.S. is open to an SDR linked currency, Geithner clarified his comments by saying that there is "no change in dollar as world's reserve currency and likely to remain so for long time." In our alert, we said that the dollar would rebound if he attempts to clarify his comments. These contradictory statements are clearly the act of an amateur Treasury Secretary that has been thrust onto the public forum and is struggling with the need to be very particular in his choice of words.

Okaaaaaay..... except there was no contradiction between his statements, and anyone who's been following this stuff for the past week should have understood Geithner's point the first time.

Question to readers: shouldn't the forex markets have interpreted these statements better than your humble blogger? What does this say about the wisdom of crowds?

UPDATE: The Financial Times' Krishna Guha, Tom Braithwaite and Peter Garnham provide more precise reporting on this point:

The dollar fell 1.3 per cent against the euro as headlines saying “Geithner open to SDR currency” flashed across traders’ screens. With the currency falling, Mr Geithner’s interviewer – Roger Altman, a deputy Treasury secretary in the Clinton administration – gave Mr Geithner the chance to clarify.
The Treasury secretary said: “I think the dollar remains the world’s dominant reserve currency.” The dollar subsequently recovered much of its losses.

One fuzzy headline, and you get majoy gyrations in the forex markets.

James Carville once said, "I want to come back as the bond market. You can intimidate everybody." I want to be reincarnated as a headline editor.

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Bond markets react wildly to blinding glimpse of the obvious

Posted By Daniel W. Drezner Thursday, January 22, 2009 - 9:35 PM

Felix Salmon reviews Tim Geithner's written testimony and concludes that, "Geithner's answers are highly diplomatic and content-free,"

The bond market, however, appears to disagree:

Mr. Geithner’s strong words on China have resulted in a sharp selloff in Treasurys. In testimony to Congress, Geithner wrote, in response to a question from Sen. Olympia Snowe, (R-Maine), that President Obama’s administration “backed by the conclusions of a broad range of economists - believes that China is manipulating its currency.”
“He came right out and said Obama believes China is manipulating their currency,” says Maryann Hurley, bond market strategist at D.A. Davidson, who notes that China’s economy is slowing as well. “It’s very easy to pick another country to be your whipping boy. In an era where we’re looking at deficits as far as the eye can see all we don’t need is somebody starting to dump our debt.”

As the FT's Krishna Guha and Alan Beattie write, "experts said the declaration could fuel trade tensions at a time of global recession and fast-rising unemployment."

I'm as concerned about this as the next guy, but let's be careful here and parse things out.

The bond market is conflating two issues here. The first is that Geithner said out loud what everyone knows to be true. And, to be sure, before the U.S. responds to currency manipulation, it has to say that it's happening. So Geithner's statement is a quasi-first step.

The second issue, however, is what kind of action Obama and Geithner are planning. Beattie and Guha suggest options like, "punitive import tariffs on Chinese goods."

This is where a closer look at Geithner's written testimony would be a good idea. Here are the two relevant passsages:

[W]e look forward to a productive economic dialogue with the Chinese government on a number of short- and long-tem issues. The Yuan is certainly an important piece of that discussion, but given the crisis the immediate focus needs to be on the broader issue of stabilizing domestic demand in China and the US. The latest figures show that China's growth in 2008 was 9%, a full 4 percentage points lower than in the previous year. Because China accounts for such a large fraction of the world economy, a further slowdown in China would lead to a substantial fall in world growth (and demand for US exports) and delay recovery from the crisis. Therefore, the immediate goal should be for us to convince China to adopt a more aggressive stimulus package as we do our part to try to pass a stimulus package here at home....
[T]he best approach to ensure that countries do not engage in manipulating their currencies is to demonstrate that the disadvantages of doing so outweigh the benefits. If confirmed, I look forward to a constructive dialogue with our trading partners around the world in which Treasury makes the fact-based case that market exchange rates are a central ingredient to healthy and sustained growth.

Two signals here. First, Geithner seems more concerned about China expanding its domestidc growth than with any manipulation of the yuan right now -- a conviction shared by Brad Setser, incidentally.

Second, it seems pretty clear that Geithner's first option on the currency issue is jaw-jaw rather than protect-protect. In other words, the bond market should have reacted more like Felix Salmon.

UPDATE: Be sure to check out Salmon's follow-up post.

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