US central banker targets imbalances in crisis

A US central banker on Tuesday blamed economic imbalances, notably exchange rate rigidity, in the recent worldwide financial crisis.

Donald Kohn, vice chairman of the US Federal Reserve, told central bankers and analysts at a closed-door conference that even before the financial crisis, policymakers were “focused on reducing current account imbalances to stave off such stresses.”

The United States was told to save more, while “for some countries, especially China, increasing the flexibility of exchange rates was a key policy recommendation.”

“Despite the considerable attention paid to these issues, limited progress was made in actually implementing this agenda or in reducing global imbalances,” Kohn said, according to a written copy of his speech.

While the crisis was sparked by the financial sector, Kohn said its problems had been “enabled, if not encouraged” by the global economic environment.

The imbalances had put pressure on real interest rates, and the low yield in turn sent investors to higher risk products and increased borrowing.

“Thus, in my view, global imbalances contributed to important macroeconomic and financial vulnerabilities and, hence, to the emergence of the global financial crisis,” he said.

Without pointing specifically to China, Kohn said it was in the best interests of economies to adopt more flexible exchange rates.

“More flexible exchange rates will help domestic demand fill in the gap left once foreign demand falls back to a more sustainable level.

“More flexible exchange rates also provide domestic policymakers greater scope to focus on domestic goals of full employment and price stability,” he said.

The United States has been calling for China to allow the renminbi to appreciate, claiming that Beijing was undervaluing its currency to make its exports competitive.

IMF chief Dominique Strauss-Kahn, Financial Stability Board head Mario Draghi and investor George Soros are among participants at the meeting in Zurich.

Chinese central bank chief Zhou Xiaochuan, European Central Bank head Jean-Claude Trichet, Bundesbank chief Axel Weber were also due to attend.