Bernanke warns on imbalance risks with Asia

Ben Bernanke warned that the U.S. and Asia should not return to old economic imbalances
Ben Bernanke said on Monday that it was “extraordinarily urgent” that the US and Asia adopt policies that prevent a revival of global economic imbalances as the financial crisis ebbs.

The Federal Reserve chairman warned that global imbalances — the big gaps between national saving, consumption and investment rates reflected in large trade deficits and surpluses — had helped cause the crisis and needed to be corrected. Mr Bernanke said the US must establish “a sustainable fiscal trajectory anchored by a clear commitment to substantially reduce federal deficits over time”. He said the US faced a “difficult fiscal situation” but insisted that US policymakers “recognise that we need to develop a fiscal exit strategy” that would put the US on a sustainable long-term fiscal path. Linking the fiscal situation to the fate of the dollar, which slid further on Monday, he said the development of such a plan was “critically important to maintain confidence in our economy and confidence in our currency”. Speaking at a conference on Asia and the world economy hosted by the San Francisco Fed, Mr Bernanke urged Asian nations not to slip back into export-led growth and called on them to build up domestic consumption instead. He said that Asia, which is leading the rebound, risked seeing asset bubbles fuelled by capital inflows. He said one way to mitigate this risk would be “through some greater exchange rate flexibility” offset by fiscal consolidation.

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“As the global economy recovers and trade volumes rebound . . . global imbalances may reassert themselves,” the Fed chief warned. “Policymakers around the world must guard against this outcome.” The US current account deficit has declined from 6 per cent of gross domestic product before the crisis to about 3 per cent, but could increase again as the recovery builds. He said the US-centered crisis had many similarities with past emerging market crises — fuelled by giant capital inflows that overwhelmed both market discipline and regulatory safeguards against the mispricing of risk. Mr Bernanke said the “close interaction” between imbalances (in the shape of these capital flows) and regulatory failures meant that policymakers had to tackle “both of them” rather than deal only with regulation or the global economy.

He said many Asian economies had learnt a “problematic” lesson from the 1997 Asian crisis that it was desirable to rely on export-led growth while building up large amounts of reserves to insure against a sudden reversal in capital flows. But he said he saw reserve accumulation as a “by-product” of growth strategies rather than the reason for which economies ran trade surpluses. Mr Bernanke suggested that if of growth in emerging nations could shift towards domestic demand the reserve issue would not be as great a problem.