Bernanke Blames China For Currency Policies - Forbes

When Ben Bernanke talks, the world stops to listen. Early Friday morning, the Fed chairman spoke at a European Central Banking Conference in Frankfurt, where he defended his policy of quantitative easing and accused China and other emerging markets for undervaluing their currencies and causing global imbalances. Bernanke also called for more fiscal stimulus but for being mindful of the deficit.
Bernanke seemed to lay blame for the so-called "currency wars" on China and other fast-growing emerging economies. "Currency undervaluation by surplus countries is inhibiting needed international adjustment and creating spillover effects that would not exist if exchange rates better reflected market fundamentals," said Bernanke in Frankfurt on Friday.
Speaking to Europe's central bankers, the chairman of the Federal Reserve attributed the large capital inflows experienced by emerging economies to their foreign exchange policy, which he considered to be incompletely adjusted. Investors, in part seeking "return differentials that favor emerging markets" are actually being drawn by "additional returns [from] expected exchange rate appreciation," said Bernanke.
China was a clear target in Bernanke's speech. The Chinese, along with finance ministers from countries such as Germany and Brazil, have accused the U.S. of deliberately depreciating its currency to the detriment of the global recovery. The policy of reserve accumulation, which is the means by which surplus countries manipulate their currency, grew to "six times their level a decade ago" to over $5 trillion. "China holds about half of the total reserves," countered Bernanke.
The bearded academic also denied that his institution's second round of long-term asset purchases, dubbed QE2, was responsible for the weakening of the dollar. "Much of the decline over the summer in the foreign exchange value of the dollar reflected an unwinding of the increase in the dollar's value in the spring associated with the European sovereign debt crisis," noted Bernanke. The depreciation of the greenback is due to "changes in investor risk aversion" and the "underlying strength and stability that the U.S. economy has exhibited over the years," he said.
Bernanke asked emerging economies to allow exchange rates to be set by market forces to "reflect market fundamentals." This would in turn "shift demand from surplus to deficit countries."
"The international monetary system has a structural flaw: it lacks a mechanism, market based or otherwise, to induce needed adjustment by surplus countries, which can result in persistent imbalances," repeated Bernanke, making no reference to deficit countries, the other side of the imbalance.
Quantitative easing has come to be the term by which the Fed's easing has been referred to in the U.S. The chairman considered the usage "inappropriate" as quantitative easing, he says, "typically refers to policies that seek to have effects by changing the quantity of bank reserves, a channel which seems relatively weak." He contrasted it with the actual policy, by which "securities purchases work by affecting the yields on the acquired securities and, via substitution effects in investors; portfolios, on a wider range of assets."
Bernanke was joined in a panel by IMF boss Dominique Strauss-Kahn, European Central Bank president Claude Trichet, and Brazilian central bank president Henrique Meirelles.
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