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MONETARY AUTHORITIES IN THE U.S. and elsewhere have been roundly -- and rightly -- criticized for the worst financial crisis since the Great Depression. They also ought to be praised for assiduously avoiding the policy mistakes of the 1930s and, indeed, for consciously pursuing precisely the opposite path taken by the hapless or hidebound policymakers of that era.
For all the populist opprobrium heaped on the "bank bailout" embodied in the Troubled Asset Relief Program and the Federal Reserve's doubling of its balance sheet, these policy steps have helped prevent a credit collapse that produced the Great Depression.
Indeed, the much-maligned TARP looks to have earned a $10 billion profit for the taxpayers, a return of 8.5%, according to an analysis of SNL Financial, a consultancy. And that's before the sale of Citigroup (C) shares, on which Uncle Sam should realize a profit. And his investment in General Motors may also turn a profit based on the automaker's turnaround, which could turn out to be the year's hottest stock offering.
While monetary policy has sought to stave off the credit contraction of the 1930s, other economic policies have been careful not to follow the disastrous path of protectionism that throttled world trade in that doleful decade.
Arguably, what the Smoot-Hawley tariff was to the Great Depression, U.S. attempts to label China a "currency manipulator" have the potential to depress trade and capital flows in today's globalized economic system.
Fortunately, both countries appear to working to avoid that disastrous outcome. The announcement on the Saturday before Easter by Treasury Secretary Geithner that the Obama administration would push back the April 15 deadline for its semiannual report as to whether China is a "currency manipulator," the U.S. maintains a vital dialog with that nation on an array of vital economic and geopolitical topics.
An aside: it appears one should pay attention to the ecclesiastical calendar to anticipate key economic announcements by the White House. The Obama administration announced on Christmas Eve it will lift the previous $200 billion cap on aid to Fannie Mae (FNM) and Freddie Mac (FRE.) For the announcement of the delay of the China currency report, the administration dropped the news on Easter weekend, when Congress is away and the media is half-staffed while the public is on holiday. The oldest PR trick in the book is to release news you don't want to get wide exposure ahead of holidays or weekends.
Backing away from labeling China a currency manipulator doesn't sit well with Sen. Chuck Schumer, the New York Democrat who wants the U.S. to slap a tariff on Chinese goods he contends are too cheap because the renminbi is undervalued. At the same time, economist Paul Krugman also is beating the drum that China's currency peg is exacerbating unemployment in the U.S.
In order to maintain the yuan's exchange rate peg in the face of substantial trade surpluses requires China to buy the surfeit of dollars, which in invests in Treasury securities. This symbiotic relationship has worked well until the U.S. economy plunged into recession, sending unemployment to nearly 10%. Protectionists assert that, were it not for the Chinese currency peg that keeps its goods cheap on U.S. store shelves, American joblessness would be lower. And given the looming U.S. midterm elections, unemployment figures to be Democrats' biggest vulnerability.
Yet President Obama is resisting the protectionists in his party. Stratfor, the private intelligence outfit, reports Obama held a one-hour telephone conversation last Friday with Chinese president Hu. Among other things, Obama thanked Hu for agreeing to attend the Nuclear Security Summit in Washington April 12-13, where Iran will be a key topic. For its part, China stressed the importance of Taiwan and Tibet, over which it asserts sovereignty.
As for currency matters, Stratfor says China has sent several signals that it is willing to modify its stance and permit appreciation of the yuan. The key is that a higher exchange rate is in China's interest in that improves its terms of trade -- what it sells abroad will become costlier while what it buys will become cheaper -- resulting in an increase of purchasing power for Chinese consumers. But China emphasizes its exporters see a profit margin of 2% or less, which could be wiped out by a currency revaluation.
"Beijing is essentially telling the United States that it is willing to make adjustments to address U.S. concern but that I must do so in a way that does not jeopardize economic growth or make it appear weak to the Chinese public," according to a Stratfor report.
The Obama administration appears to understand this. Those in Congress such as Schumer play a "bad cop" in their calls for tariffs on China, a useful role. Obama gets to play the good cop, while China saves face.
Notwithstanding any unpleasant rhetoric, it appears the U.S. and China are working to prevent a replay of the policy blunders of the 1930s -- even as they make noises otherwise. Here's hoping so.
Comments: randall.forsyth@barrons.com
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