It didn't have the “gotcha” catchiness of Treasury Secretary-nominee Timothy Geithner's failure to pay some taxes, but in the long run the more significant theme of his confirmation hearing Wednesday before the Senate Finance Committee was the value of the dollar.
Testifying in support of Geithner, former Federal Reserve chairman Paul Volcker warned that “several trillions of dollars will be necessary” from taxpayers and from the Federal Reserve to resuscitate the U.S. financial system.
“Obviously, commitments made of that magnitude raise very large questions,” Volcker told the committee. It’s not only the potential waste of taxpayer money, “there are also risks of undermining confidence in the dollar and raising the fears of future inflation.”
If foreign investors were to quickly sell their large holdings of Treasury securities, it would wreak havoc with U.S. finances and drive down the value of the dollar.
As of November, Chinese investors were the leading overseas holders of U.S. Treasury bonds with $682 billion invested. Japanese investors ranked second with $577 billion.
Some economists — and it seemed at Wednesday’s hearing some senators, too — worry about a sell-off by foreign investors of Treasury securities if they fear that the dollar is being depreciated to ease the U.S. debt burden.
In his questioning of Geithner, Sen. Charles Schumer, D-N.Y., reported that he’d been conferring with financial sources with expertise about the costs and benefits of a “good bank/bad bank” entity that would get illiquid assets off of banks’ balance sheets, so the banks could more confidently lend to businesses and consumers.
This entity would be owned by the federal government.
'Great worries for the dollar'
The experts “said it could be $3 trillion, $4 trillion if you did the whole good bank/bad bank across the board, which creates great worries for the dollar and for inflation down the road,” Schumer said. “I mean it just shakes our financial system, something that large.”
Schumer added later in an interview, “If you do it across the board, it’s going to be very expensive. There are wide ranges of estimates (of the cost). There are so many bad assets on the banks’ books; big banks, small banks and ones in between.”
“If the dollar goes into a fall, there’s real trouble,” he said. “I don’t think it will at this point, but you’ve got to keep an eye on it.”
With a stimulus bill growing in excess of $800 billion, the $700 billion in federal money under the Troubled Asset Relief Program, costly wars in Afghanistan and Iraq, and Medicare and Social Security benefits promised to Baby Boomers, the U.S. government’s dependence on Chinese and other foreign investors grows ever greater.
The stimulus may grow even bigger. One committee member who quizzed Geithner, Sen. John Kerry, D-Mass., complained that an $825 billion stimulus package, as envisioned by House Democrats, was simply too small to have enough of a simulative effect.
In the short run, at least, it is Chinese and other foreign investors who will pay for much of this spending through their purchases of Treasury securities.
'Mutual addiction' between China and U.S.
Finance Committee chairman Sen. Max Baucus, D-Montana, noted what he called “this mutual addiction” between the United States and China, with Americans buying Chinese products, and Chinese investors funding America’s spending by buying Treasury securities.
With his nomination to be voted on perhaps this week, one bleak fact that Geithner will face in his new job was how deeply in hock America is to foreign investors. His boss, President Barack Obama, chose to skirt that issue in his inaugural address.
Geithner took a non-committal line at Wednesday's hearing, avoiding any specific recommendations for cutting spending or reducing dependence on foreign investors.
In response to a question from Baucus, he did emphasize “the obligation we have to put in place a set of policies that would improve confidence in Americans and in investors around the world in our capacity to run our country more effectively.”
He saw the need “to try to convince people we will be able to live within our means” and to confront the future burden of spending on Medicare and other entitlement programs.