Supervision, market discipline balance needed: Geithner

By Steven Scheer, Reuters

JERUSALEM — Major economies, particularly the United States, must better balance market discipline and supervision to cushion future financial market crises, New York Federal Reserve President Timothy Geithner said Monday.

“My own sense is that we’re going to have to find a better balance between market discipline and supervision, certainly in the United States, but that’s a question we’re looking at across the major financial centers,” Geithner said at a news conference during a Group of 30 meeting in Jerusalem. He said that central banks and regulators had made a “a very impressive effort” in building an early consensus on changes to help reduce vulnerability and “make the system more resilient in future crises.” “I think that is going to involve a whole range of changes in the incentives we create for financial institutions, particularly the largest global financial institutions,” he added. Geither said that the United States was going through a “necessary but difficult adjustment process” after a long global economic boom. “But the circumstances in each country are very different and the policy responses are going to have to be very different even though we face a common challenge in the global inflation dynamics,” Geithner said. Each country would have to balance the need for price stability and sustainable growth in the long term, he added. Geithner said that compared with the oil price shock of the 1970s, the global economy was “better positioned to deal with the consequences of the slowdown.” “It’s looking at least for now really very resilient to the broader pressures you see,” Geithner said. When asked how the Fed would combat inflation risks, he replied: “Effectively.” But he declined to elaborate. European Central Bank head Jean-Claude Trichet, also speaking at the news conference, said that financial markets were experiencing an “ongoing correction” and repeated that the G-7 was concerned about excessive dollar volatility. “We are observing an ongoing market correction, which has … high level of volatility,” Trichet said. Trichet — who declined to comment on soaring oil and commodity prices, European inflation and monetary policy — reiterated a statement by the Group of Seven industrialized nations from last month that sharp moves in the dollar versus the euro were a “cause of concern.” “We indicated together that sharp moves and excessive volatility was a cause of concern. There is nothing new there,” he said. The Group of Seven, or G-7, as the leading industrial nations are known, in April issued their strongest statement of concern in more than seven years about sharp currency swings and a weaker U.S. dollar dampening growth in Europe. The G-7 has not made such a united effort since 2000, when the group intervened to prop up the euro to avert a global financial crisis. “What is extremely important … is that there has been a consensus of the international community on the methodology … to work out what would the nice avenues which would be ending with the better functioning of the global system,” Trichet said.