NY Fed Speech on Asset Prices and Income Disparity Under (and Mis) Reported in the US

OK, so it was only a speech by the president of the New York Fed, Tim Geithner, to the Council on Foreign Relations. But the disparity in reporting between the Financial Times, both in placement and content, and the Wall Street Journal (and to some degree Bloomberg) is striking. Not surprisingly, the WSJ downplayed the speech itself and the elements that might offend investors, market professionals, and plutocrats. And the New York Times did not cover it.

The FT played the story more or less straight up (see the text of the speech here), and called attention to it by making it the top story in its “Briefing,” the summary of stories on its first page (upper right corner). The long form appears on page three of the US edition:

The widening gap between the rich and middle-class Americans is undermining political support for free trade in the US, the president of the Federal Reserve Bank of New York, warned on Thursday.
Tim Geithner told the Council on Foreign Relations that the “political challenge” of sustaining support for further global economic integration “may be the most important economic challenge of our time”.

The New York Fed chief also warned that the inflow of surplus savings from abroad could be distorting US asset prices and keeping risk premiums artificially low across financial markets….

Mr Geithner said maintaining support for open markets would be made more difficult “because of what has happened to the distribution of income and economic insecurity”.

He cited as big political problems the “long-term increase in income inequality”, the “slow pace of growth in real wages for the middle quintiles of the population”, increased volatility in income and the greater exposure of families to risks involved in financing retirement and healthcare.

Echoing views expressed by Larry Summers, his former boss as Treasury secretary in the Clinton administration, Mr Geithner said it was “not enough to explain that globalisation is inevitable” and protectionist policies were self-defeating.

Better education and an improved safety net were a “necessary part of the solution to this challenge”. But, he warned, “these reforms will have a long fuse and they may not yield the hoped-for increase in support”.

Mr Geithner cautioned that the low level of risk premiums across asset markets was “unusual” and might not prove lasting….

But he warned that the inflow of surplus savings from abroad – including “very substantial official accumulation of dollar reserves” by countries seeking to maintain fixed exchange rates – could be distorting asset prices, sending the wrong signals to savers and investors.

Mr Geithner said these forces were “surely transitory” but could “mask or dampen the effect on risk premiums in financial markets that we might otherwise expect”, given the huge US trade deficit and its long- term fiscal challenges.

The speech gave two clear warnings: income disparity in the US is producing a backlash against globalization, and the generosity of strangers in financing our trade and fiscal deficits may be reducing risk premia and distorting asset prices, which is economist-speak for “producing a bubble.” And he stressed the need for concrete measures to attack the gap between the wealthy and the middle class, namely “education and better safety nets,” but also cautioned that they might not be sufficient to ward off an increase in protectionism.

Now what did the Journal make of this? First, they didn’t put their coverage in the paper at all, at least not in the copy that arrived on my doorstep this morning. You could find it only in their online version, posted the afternoon of January 11.

Second, as you will read below, it discredits Geithner by calling him a “worry wart.” Third, it somehow omits his view that capital inflows may be distorting (as in inflating) US asset prices, and misrepresents him on income inequality:

New York Fed President Timothy Geithner delivered one of his strongest warnings yet on threats facing the U.S. economy, citing the budget deficit, fixed exchange rates and growing inequality.

In his three years on the job, Mr. Geithner has taken on the New York Fed’s traditional role as chief worry wart. But some of his past warnings have been muffled by opaque and wonky language.

He was far clearer in a speech today to the Council on Foreign Relations in New York. He said some countries, to keep their currencies fixed to the dollar, are accumulating big reserves of dollar-denominated securities, thereby holding down long-term interest rates, which might be distorting U.S. growth and investment. He didn’t name the offenders, but China and some Persian Gulf oil exporters are probable candidates….

Mr. Geithner said, “Even … before the increase in number of retirees starts to have a major impact on Social Security and Medicare expenditures, we are running an unsustainably large fiscal deficit.”….

He also echoed San Francisco Fed President Janet Yellen on the threat of growing inequality. And paraphrasing his former boss, former Treasury Secretary Lawrence Summers, he said it’s “not enough” to say globalization is inevitable and protectionism will only hurt. Nor, he suggested, is it enough to call for more education and a better safety net: they “have a long fuse and they may not yield the hoped-for increase in support.” He didn’t, however, say what steps should be taken.

Now some may quibble with my reading, but the Journal’s presentation is distorted in subtle and overt ways. Once Geithner got into the tough message part of his speech, he spent roughly as much time (measured in sentence count) talking about external deficits as the budget deficit. Yet the Journal focuses on how “fixed” exchange rates, a word never used by the Fed president, are the cause of the large capital flows into the US, and implicitly blames our capital suppliers for lending us money. The Chinese have taken issue with the characterization, pointing out that it is the US’s low savings rate that produces its trade deficit and its inability to fund its government deficit. Any Keynesian would tell you that is a reasonable argument.

Similarly, blaming Persian Gulf states for a dollar peg is just plain wrong. We are the ones that have insisted that oil be denominated and paid for in dollars. It’s one of the ways the US maintains its right of seigniorage. In keeping, in response to questions, Geithner said that the risks to the dollar’s continued ascendancy “probably come from us, not from broader change in the world.”

The speech devoted roughly as much air time income disparity’s role in fuelling resistance to globalization as it did to the discussion of both the fiscal and trade deficit, and even said, “The political challenge of sustaining support for the process of integration may be the most important economic challenge of our time.” Yet the Journal mentioned this part of the speech only in passing. Why? The Journal has been denying the existence of a growing gap between the top and everyone else (see our post, “The Wall Street Journal Defends the Super-Rich“)

Finally, the Journal’s phrase, “Nor, he suggested, is it enough to call for more education and a better safety net,” implies that Geithners believes they may not be sufficient (true) and connotes that they aren’t worth doing. In fact, he called them, “a necessary part of the solution to this challenge.”

The Bloomberg’s coverage, while similarly downplaying possible asset overvaluation in the US and the relationship between income inequality and opposition to globalization, seemed to do so more benignly than the Journal. Bloomberg focused mainly on the question and answer session after the speech. This makes perfect sense. Serious Fed watchers would probably want to read the speech in its entirety, so the author may have decided that writing about the unscripted remarks would be more useful to his audience. But this emphasis nevertheless means that central elements of Geithner’s message never got to casual readers.

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