Treasury secretary says U.S. concerned about deficits

Associated Press • Jun 1, 2009 at 12:00 AM

BEIJING — As the federal budget deficit soars into the stratosphere, Treasury Secretary Timothy Geithner is reassuring the Chinese — the largest holders of U.S. government debt — that the Obama administration is serious about restoring fiscal discipline once the current economic crisis is resolved.

Geithner, making his first trip to China as Treasury secretary, used a major economic policy address Monday as well as separate meetings with top Chinese officials to deliver that message.

“As we recover from this unprecedented crisis, we will cut our fiscal deficit, we will eliminate the extraordinary government support that we have put in place to overcome the crisis,” Geithner said in a speech to students at Peking University, which Geithner attended as a young college student learning Chinese nearly three decades ago.

Geithner repeated that message in a round of interviews Tuesday with Chinese media as he wrapped up his two days of talks.

“We are very committed to make sure that when recovery is established, that we go back to living within our means, that we bring our fiscal deficits down to a sustainable level, that we unwind and reverse these exceptional measures that we’ve taken in the financial sector,” Geithner told Chinese state television.

Geithner said he had found support among Chinese leaders for the actions the U.S. was taking.

“I’ve actually found a lot of confidence here in China, justifiable confidence, in the strength and resilience and dynamism of the American economy and I think a very sophisticated understanding ... of the steps we’re taking and why they’re so important not just to the United States but to China and the rest of the world,” he said.

In an interview with China Daily, Geithner had praise for the actions taken by the Federal Reserve. Geithner said Fed Chairman Ben Bernanke had done an “enormously impressive job in the worst financial crisis in decades.”

Chinese officials did not comment publicly on Geithner’s reassurances, but judging from the reaction of the college students, Geithner may still have some explaining to do.

The students peppered the Treasury secretary with questions about the debt, the administration’s massive amounts of support to the banks and U.S. auto companies and the recent rise in interest rates on U.S. Treasury securities.

Some students wanted to know whether China’s holdings of $768 billion of Treasury securities — which makes China America’s biggest creditor — were safe, given projections by the Obama administration that the deficit for this year will soar to an astronomical $1.84 trillion, four times the previous single-year record.

Some students wondered whether the recent rise in interest rates was a signal that investors are beginning to worry that U.S. budget deficits will threaten inflation, weaken the dollar and reduce the value of the Chinese holdings.

China’s investments in the United States “are very safe,” Geithner told the students. “We have the deepest, most liquid financial markets in the world.”

He said the recent rise in long-term rates for Treasury securities was not a reflection of worries about rising U.S. budget deficits but a reflection of the view by investors that the global economy is improving, which lessens demand for U.S. Treasuries as a safe haven.

As far as spending large amounts of money to support Chrysler LLC and General Motors Corp. as they go through bankruptcy filings, Geithner said the administration was optimistic that government support would only be temporary. “We want to have a quick, clean exit,” he said.

GM filed for Chapter 11 bankruptcy on Monday as part of an administration plan to shrink the automaker to a sustainable size with support from an additional $30 billion from the government’s bailout fund.

Geithner also stressed to the students that the administration would soon unveil a comprehensive overhaul of financial system regulations designed to fix the flaws exposed by the current crisis, the worst to hit the U.S. economy since the Great Depression.

He said the changes would make federal regulations “smarter and more effective” by strengthening oversight of hedge funds and derivatives, consolidating and streamlining banking regulation and providing the government with the necessary tools to shut down large financial institutions that are posing a risk to the entire system.

“We have a lot to do, but we are going to fix this,” he pledged.

Later, Geithner and other Treasury officials met at the Great Hall of the People with a team of economic officials from China led by Vice Premier Wang Qishan for discussions about the upcoming high-level talks in Washington this summer between the two nations.

At the start of the session, Geithner said, “The world has a huge stake in our two countries working closely together to lay a foundation for recovery.”

Wang called the upcoming talks, which will replace the Strategic Economic Dialogue begun in the Bush administration, an “important initiative in growing the China-U.S. relationship.”

Geithner will wrap up his visit Tuesday with meetings with Chinese President Hu Jintao and Premier Wen Jiaboa. Wen sent shock waves through global financial markets in March when he publicly expressed worries about the soaring U.S. budget deficits and what that meant “about the safety of our assets.”

China’s huge holdings of Treasury debt represent the billions of dollars that have been transferred over the years into Chinese hands to pay for America’s soaring trade deficits.

Previous Treasury secretaries have lectured the Chinese about the need to allow their currency, the yuan, to rise in value against the dollar as a way of lowering those trade deficits by making Chinese goods more expensive and thus less desirable for American consumers and U.S. products cheaper in China.

But Geithner did not issue the same demands, part of a campaign by the Obama administration to pursue improved relations with China in hopes of getting a better outcome on economic tensions and in other areas. The administration needs support from China on a host of foreign policy issues, including North Korea’s recent testing of nuclear weapons.

Geithner praised the role China is playing in stimulating the global economy. It has unveiled a sizable economic stimulus program, second only to the U.S. program.

He said that a successful transition to a more balanced and stable global economy will require substantial changes to economic policy and financial regulation around the world and especially in the U.S. and China, the world’s largest and third largest economies.

Geithner said he believed the first steps toward a global recovery were occurring which raised hopes the world “will succeed in averting financial collapse and global deflation.”

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