Geithner: It Coulda Mighta Been the Fed's Fault
The Wall Street Journal sees Treasury Secretary Tim Geithner seeing a little bit of the light–that green, excessive light of too much moolah flowing from central banks. Quoting him from the Charlie Rose Show:
I would say there were three types of broad errors of policy and policy both here and around the world. One was that monetary policy around the world was too loose too long. And that created this just huge boom in asset prices, money chasing risk. People trying to get a higher return….It was too easy, yes. In some ways less so here in the United States, but it was true globally. Real interest rates were very low for a long period of time….our long rates in the United States started to come down—even were coming down even as the Fed was tightening over that period of time, and partly because monetary policy around the world was too loose, and that kind of overwhelmed the efforts of the Fed to initially tighten. Now, but you know, we all bear a responsibility for that. I'm not trying to put it on the world.
The Journal points out that it isn't that easy to absolve our own Federal Reserve in this, as Geithner half-assedly tries to do:
He's right that monetary policy needs to be considered in global terms, but he's still too quick to pass the buck from the Fed to other central banks. The European Central Bank was much tighter than the Fed throughout this period. The Fed was by far the major monetary player because much of the world was on a dollar standard, with its monetary policy linked to the Fed's. That was true of China, most of Asia and the Middle East.
The Fed's loose policy from 2003 to 2005 created the commodity and credit bubbles that made these countries flush with dollars. Given their low domestic propensity to consume, these countries then recycled those dollars back into dollar-denominated assets, such as Treasurys and real-estate-related assets such as Fannie Mae securities. The Fed itself had created the surplus dollars that kept long rates low and undermined for a substantial period its belated attempts to tighten.
I only wish Charlie Rose has asked Geithner about what sort of disaster some future Treasury Secretary will be surveying based on the stunningly expansionary monetary policy of the past year.