Markets & Finance

Sampling Bernanke's and Geithner's Latest Grilling


The Fed chairman and the Treasury Secretary defended their work and said the dollar will continue to serve as the world's reserve currency

By BusinessWeek staff

Between the dry, measured testimony before various congressional panels and the poker-faced responses to queries from outraged lawmakers, how do Timothy Geithner and Ben Bernanke find time for their day jobs? The Treasury chief and the Federal Reserve chairman were back in the spotlight yet again on Mar. 24, this time testifying in front of the House Financial Services Committee about their handling of the AIG (AIG) bailout.

What did Wall Street economists have to say about the Geithner-Bernanke double feature and other important topics on Mar. 24? Here's a sampling, as compiled by BusinessWeek staff:

Action Economics

Bernanke, in [his] prepared testimony , said the AIG rescue was needed to avoid [a systemic financial] meltdown, while the retention bonuses were inappropriate. He was more testy in his Q&A as he tired of the repeated attacks on his character. Geithner said that new financial resolution authority was needed and agreed that the AIG bonuses were deeply troubling, even as more than one congressmen tried to pin an early date on his knowledge about the bonuses.

Geithner got a little fired up over the question of seeking a cheaper solution to AIG, saying that the Fed's action was not taken because AIG asked for help, nor to protect foreign banks, but because failure would have been "catastrophic." Bernanke also said that Lehman wasn't "allowed to fail, but failed because they could find no solution."

Geithner and Bernanke rejected proposals for a global reserve currency and a shift away from the dollar that were recently put on the table by China before the upcoming G-20 meeting. Both were also hostile to a line of questioning on the constitutional authority of the Fed and Treasury to undertake such emergency measures, with Geithner saying the authority was granted by "this body, of course," referring to Congress. Geithner also cautiously endorsed steps to apply mark-to-market accounting with the "right balance."

Tony Crescenzi, Miller Tabak

The Wall Street Journal highlighted [on Mar. 24] a proposal by China's central bank governor Zhou Xiaochuan to supplant the dollar as the world's currency, putting in its place a currency based on a basket of currencies. Central banks already have this ability and they have in fact been diversifying their reserve assets for most of this decade. In the absence of a credible alternative, the dollar is likely to remain the world's reserve currency for at least the next 20 years—until China's economy overtakes the U.S. economy in size and China both liberalizes its foreign exchange regime and creates a debt market where the world's central banks can park reserve assets. (Both Bernanke and Geithner said they would not want to abandon the dollar as the main currency.) Another possibility is the ascendance of a bloc of currencies such as the euro, but it would take degrees of harmonization that are very difficult to achieve, largely because of political considerations and cultural differences.

Still, China's call for change underscores the massive shifts underway in the world of international finance. An interesting aspect of China's proposal is that by calling for increased use of Special Drawing Rights (SDRs)—which is essentially a basket of currencies used for accounting purposes at the International Monetary Fund (IMF)—China is using its economic power to gain influence with an institution that has had substantial influence on world economic affairs, although on a reduced scale in recent years.

China surely has angst, just as other "emerging" markets do, regarding its say in financial institutions that influence the world economy. For example, China's share of voting power at the IMF is just 1.9%, Brazil's is 1.4%, and India's is 1.9%. The U.S. share is 16.8%.

Jan Hatzius, Goldman Sachs

Our forecast implies that the period of outright declines in real consumer spending is likely to be behind us, and modest growth is likely in coming quarters. First, the first quarter appears to be tracking slightly positive. Second, the impact of the increase in credit restraint has likely peaked and should soon cease to have a major negative impact on the change in consumption. Third, real income should continue to perform much better than one might expect based on the weakness in the labor market. Although the positive impact of the decline in energy prices has probably run its course, the fiscal stimulus is likely to pick up the slack.

We see both upside and downside risks to our consumption forecast. The main upside risk lies in the effort by policymakers to unfreeze lending to consumers. If this effort is successful, we might not just see an end to the drag from tightening credit availability, but an actual boost from loosening credit availability. The main downside risk lies in sharper-than-expected multiplier effects from the deterioration in the labor market, both directly via income and indirectly via a further worsening in credit quality.


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