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Ethos Issue 3, Oct 2007
Asia After the Crisis: What Now,
What’s Next?
Interview with Timothy F. Geithner
I think now that you see more pressure on
resources and on goods inflation in a place like China, there
may be early signs that the disinflation effect may be diminishing.
The broader impact on monetary policy in
general is more complicated. I think countries that are still
trying to tightly manage the volatility of the exchange rate—particularly
those that are more closely integrated with the United States
and China—face a risk that over time, it will become
harder to sustain that commitment to exchange rate stability
with a commitment to price stability. In much of Asia, you
don’t really have that pure combination of an independent
central bank with a clear price stability mandate. The typical
construct in Asia is a more mixed model where you have a much
more closely managed exchange rate, and central banks with
a range of different objectives and not fully independent.
In terms of asset price volatility in the
world of price stability, the overwhelming consensus among
academics and central bankers now is that if you get the monetary
policy wrong, you could amplify the volatility of asset bubbles.
You might make the bubbles worse and you might make it harder
for monetary policies to cushion the effects of the bubble.
In some ways, the definition of a good monetary
policy means that you can’t effectively use monetary
policy to defuse these potential bubbles ex ante. There are
two arguments for this: One is that you don’t really
know about asset price bubbles until after the fact. Even
if they look obvious in the present, you can’t tell
for sure whether they are in the early stages. You don’t
know the scale of the mispricing. The second argument is that
monetary policy could act to defuse the bubbles but the damage
it might cost might not be worth the benefit.
Singapore was an early globaliser
and this has benefited all segments of society. Yet the fruits
of economic growth brought about by globalisation are becoming
much more unevenly distributed now than before. What do you
think is the role of fiscal policy in helping economies adjust
to the inequitable distribution of economic growth?
This is a challenge common to countries both rich and less
rich. The consensus in the US is to look less at fiscal policy
as the solution to that problem and to look more to areas
where Singapore is already exceptionally good, such as improving
the evenness and the quality of educational outcomes, as well
as adapting important features of the safety net, particularly
in terms of health insurance and pension funds. The approach
is to make people more comfortable living in a world where
they’re going to change jobs many different times, where
they must face more uncertainties and more anxieties about
the stability of the economic future. Of course, you have
to finance these things and there is going to be rich debate
on the optimal ways to finance these measures over time.
The US has had a long period of expansion,
relatively low unemployment, and good average increase in
incomes. Our demographic trends are a little bit later than
in many countries. Our initial fiscal stances also give us
a bit more room to manoeuvre. As a result, there hasn’t
been enough pressure yet to force political resolution over
these kinds of challenges. You see the beginnings now of a
necessary debate over evolution of the tax regime, health
insurance and social security, but we’re at the early
stages on these issues.
One of the nice things about central banks,
even a central bank like ours that does many different things
besides monetary policy, is that our responsibility ends before
fiscal policy, education and healthcare and all these other
areas.
That said, we are not quite the same as
the more common and classic central banking system which leaves
the central bank with only monetary policy and takes everything
else out. We’re more like Singapore in the sense that
we do broader surveillance and other functions. I think that
a more integrated model is a better model and a more comfortable
model. The broader question about integration with fiscal
and monetary policy is a complicated one.
I have to say I look at many aspects of
your system with a lot of envy, because you have an exceptionally
meritocratic, high quality civil service and the capacity
to do things with public policy that governments have to do.
Hopefully, our own policy system will be up to the challenge
in the future.
Mr Timothy F. Geithner became the ninth
President and Chief Executive Officer of the Federal Reserve
Bank of New York on 17 November 2003. In that capacity, he
serves as the Vice Chairman and a permanent member of the
Federal Open Market Committee, the group responsible for formulating
the monetary policy of the US. Mr. Geithner was Director of
the Policy Development and Review Department at the International
Monetary Fund from 2001 until 2003. He served as Under Secretary
of the Treasury for International Affairs from 1999 to 2001,
and was closely involved in the response of the international
community to the Asian Financial Crisis. He was in Singapore
as the guest-of-honour and speaker at the Economic Society
of Singapore’s Annual Dinner 2007, and was interviewed
by Donald Low, Director of the Institute of Policy Development,
Civil Service College, Singapore on 13 June 2007.
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