By Steven K. Beckner

PARIS (MNI) – Federal Reserve Chairman Ben Bernanke called Friday
for more international “coordination” of monetary and fiscal policy to
achieve a more “balanced” world economy.

Bernanke did not elaborate on just how that coordination would work
as he participated with other leading central bankers in a conference on
“Global Imbalances and Financial Stability” sponsored by the Bank of
France.

There was general agreement on the panel that greater “balance” is
needed in advance of a meeting of the Group of 20 finance ministers and
central bank governors, but it was not immediately obvious how that is
to be achieved.

Notably, for example, Zhou Xiaochuan, governor of the People’s Bank
of China, suggested it could take up to 10 years to shift resources away
from his country’s export-oriented manufacturing sector and said there
is resistance among Chinese exporters to allowing yuan appreciation.

China, as usual, is the chief target of G20 calls on emerging
market countries to rely more on domestic demand and less on exports and
to adopt more flexible exchange rate regimes.

In a clear reference to China in earlier prepared remarks, Bernanke
said, “policymakers in the emerging markets have a range of
powerful–although admittedly imperfect–tools that they can use to
manage their economies and prevent overheating, including exchange rate
adjustment, monetary and fiscal policies, and macroprudential measures.”

He was responding to allegations made by China, Brazil and others
that the Fed’s stimulative zero interest rate policy is fuelling hot
money flows and “negative spillovers” into Asia.

Responding to a question from Bank of France Governor Christian
Noyer, Bernanke said the global economy faces “two different kinds of
problems which are obviously linked:

“One has to do with the allocation of demand across countries,”
Bernanke said. “If there’s no stabilizing system, no way to address a
savings glut or some other mechanism that is keeping balance from being
restored then you can have a situation where like today you have a
two-speed recovery and demand is in some sense not optimally allocated
around the world.,” he added. “I think that’s an issue that remains. And
we need to talk more about coordination of monetary and fiscal policy
both in the short run and the long run to allow for a more balanced
growth path.”

“The second kind of risk,” Bernanke said, “has to do with financial
systems that are not able to effectively intermediate the capital that
flows in. That’s a problem that we’re hearing from emerging markets
today. They’re saying they’re getting a lot of capital inflow and
instead of being productively used, some of it is going into fixed
assets or in many cases is storing up trouble for the future.”

“Clearly — and the United States had a similar problem — clearly
these efforts we’re all undertaking to strengthen our regulatory and
supervisory systems and create more capital and so on, if successful,
will reduce that risk,” Bernanke continued. “And I think that’s a very
important goal. We’re not there yet, but we’re certainly set the course
that will take us there in the next few years.”

Bank of England Governor Mervyn King took a bit gloomier view
following Bernanke’s comments. He said the new Basel agreement on
international capital requirements and other financial reforms “will
improve the resilience of the international financial system,” but
added, “It’s very important not to have unrealistic expectations.”

“Changes in market sentiment will always happen,” said King. “There
will always be events taking place that are not only not expected but
perhaps not even imagined before it happens. The world does not offer a
perfect insurance opportunity.”

Earlier, King declared, “our international monetary system is in
need of reform” because “it is ill-suited to today’s circumstances.”

King said countries are “pursuing economic strategies that are in
conflict,” with China preferring a slow adjustment and the United States
and the United Kingdom a quicker adjustment of trade imbalances. He said
“there is a risk that this conflict will be resolved by persistent” weak
growth and high unemployment.

A smiling Zhou seemed not to dispute King’s assessment, observing
that China has far more manufacturing capacity than needed to meet
domestic demand and therefore, while “it’s possible,” it will take time
for resources to be shifted into services to meet Chinese consumers’
desires. He cited a “cycle of 10 years” for investment shifts.

What’s more, he said that everytime China revalues the yuan,
companies there warn that they will “go into bankruptcy.” Nonetheless,
he said, they survive. He said the challenge is to adjust the exchange
rate while allowing Chinese companies to survive.

Zhou said there needs to be a “good compromise” between changes in
“the price mechanism,” i.e. exchange rates, and “structural” changes to
reduce China’s trade surplus.

Meanwhile, European Central Bank President Jean-Claude Trichet said
macroprudential supervision can potentially be used to cope with the
effects of excessive capital flows and resulting imbalances and said
capital controls can even be used as a last resort. But he said “there
is no good way” of dealing with capital inflows.

Trichet said changes in the financial markets need to be “much
better understood” to avoid “sudden eruptions” of financial stability do
not happen in the future. He also called for better macroeconomic
forecasting and understanding of how financial instability affects the
economy. And he said A”we need more progress in regulating systemic
risk.”

French Finance Minister Christine Lagarde said the world faces
“three scenarios:”

– one in which heavily indebted countries with large trade deficits
boost savings through fiscal deficit reduction, but surplus nations do
nothing,” which she called a “not exactly desirable” scenario that would
lead to weak global growth;

– two, “business as usual” in which neither deficit nor surplus
countries change their growth patterns, a scenario which she said would
“risk another crisis,” or

* three, a scenario in which countries like the United States
increase their savings and reduce their budget and trade deficits, while
countries like China increase domestic demand to reduce trade surpluses.

This latter, most desirable scenario “is going to require
cooperation and understanding of each others’ positions,” said Lagarde,
who added that G20 countries need to “move from understanding to
cooperating to collaborating” to reduce imbalances.

** Market News International **

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