Former Treasury Secretary Paul O’Neill has ridiculed the "strong dollar” policy that every Treasury secretary since Robert Rubin in 1995 has publicly backed.
"When I was Secretary of the Treasury [2001-02], I was not supposed to say anything but ‘strong dollar, strong dollar,’” O’Neill related in a recent interview with Bloomberg.
"I argued then and would argue now that the idea of a strong dollar policy is a vacuous notion.”
That’s because the $3 trillion daily foreign exchange market controls the value of currencies rather than governments, O’Neill points out. "The markets actually have control over those relationships,” he says.
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"When people say ‘strong dollar,’ if they don’t mean that ‘we believe intervention can work and we’re prepared to intervene,’ then ‘strong dollar’ is ridiculous.”
The dollar has dropped 15 percent against the euro over the past year, with the euro hitting a record of nearly $1.60 last week.
While the Bush administration has continued to sing praised for a strong dollar in public, most experts agree that the administration is pleased with the greenback’s weakness.
That’s because a falling dollar boosts exports, narrowing the huge U.S. trade deficit and supporting an economy that probably is in recession.
G-7 finance ministers denounced "sharp fluctuations in major currencies” at their meeting April 11 in Washington, but they didn’t back up their statement with intervention, and most experts don’t believe intervention is in the cards.
The last coordinated intervention among major central banks came in late 2000, when they sought to boost the sinking euro. Soon after taking office, the Bush administration made clear its opposition to meddling in currency markets.
The last solo intervention by a major central bank happened in 2003-04, when the Bank of Japan sold massive amounts of yen to support the dollar.
O’Neill wasn’t too impressed with the results of Japan’s action.
"Look at the history of intervention: what Japan did for a decade,” he says. "There was no evidence that financial [currency market] intervention did anything to change the relative value of currencies.”
On other subjects, O’Neill said the Federal Reserve’s bailout of Bear Stearns enabled us to "dodge the bullet of a major worldwide financial collapse.”
Still, he thinks, "We probably have a few more quarters before all the losses associated with subprime and commercial building loans get reported.”
He defended the Fed and Treasury Secretary Henry Paulson for their handling of the Bear Stearns bailout.
"They had no choice,” O’Neill says. "We were on the verge of a financial collapse of unbelievable proportions that hasn’t been seen since the 1930s.”
The danger was a meltdown such that consumers going to their ATMs would find no money available, that consumers going to their gas stations would find their credit cards weren’t accepted, that consumers going to banks would find them closed, O’Neill says.
"In the 1930s, the president had to close banks to let people calm down and recapitalize,” O’Neill points out.
"We were too close to that for comfort. So what the Fed and Treasury did was essential. Bear Stearns was a pawn. It could have been anyone.”
© NewsMax 2008. All rights reserved.
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