JERUSALEM (Reuters) - Major economies, particularly the United States, must balance financial market discipline and supervision better to cushion against future crises, New York Federal Reserve President Timothy Geithner said on Monday.
By Steven Scheer
JERUSALEM (Reuters) - Major economies, particularly the United States, must balance financial market discipline and supervision better to cushion against future crises, New York Federal Reserve President Timothy Geithner said on Monday.
This meant wide changes to "incentives" particularly for the largest global financial institutions, he said during a Group of 30 meeting in Jerusalem.
"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," he told a news conference.
!ADVERTISEMENT!Geithner declined to comment on U.S. monetary policy but, when asked how the Fed would combat growing inflation risks stemming from soaring food, oil and overall commodity prices, he replied with one word: "Effectively." He declined to elaborate.
Central banks and regulators had made "a very impressive effort" in building an early consensus on changes to help reduce vulnerability and "make the system more resilient in future crises," Geithner said.
"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 said.
The United States was going through a "necessary but difficult adjustment process" after a long global economic boom," he said.
"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.
Despite declining economic growth in most developed economies, inflation remains problematic for policymakers due to higher food and oil prices.
Bank of Israel Governor Stanley Fischer said that oil prices, currently above $130 a barrel, will fall in the next two years because there will be a "supply response" but "it was possible that oil prices could rise further for some time."
Geithner said that each country would have to balance the need for price stability and long-term sustainable growth.
BETTER THAN THE 1970s
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.
Geithner is a proponent of financial market overhauls that would rid the system of the type of excessive incentives paid to financial executives which some officials believe caused the current global crisis.
Major banks have reported more than $200 billion of writedowns so far from the crisis that started with defaults in the U.S. mortgage market but snowballed as investors turned their back on mortgage backed securities and other exotic derivatives.
Among the casualties of the global financial crisis has been investment bank Bear Stearns <BSC.N>, which the Fed acted to help broker a buyout by JPMorgan Chase & Co <JPM.N>.
European Central Bank head Jean-Claude Trichet said at the news conference that financial markets were experiencing an "ongoing correction" and repeated that the Group of Seven nations were concerned about excessive dollar volatility.
"We are observing an ongoing market correction, which has ... high level of volatility," Trichet said.
Trichet declined to comment on soaring oil and commodity prices, European inflation and monetary policy. But he reiterated a G7 statement from last month that sharp moves in the dollar versus the euro <EUR=> were a "cause of concern."
In April, the G7 industrial nations issued their strongest statement of concern in more than seven years about sharp currency swings and a weaker U.S. dollar.
Trichet said it was "extremely important" that the international community had reached a consensus that steps should be taken to ensure the global economy functioned more smoothly in the future.
At the G30 meeting in Jerusalem, its first gathering in Israel since 1992, members behind closed doors discussed the global economy, the credit crunch and reforms and regulations that need to be put in place to deal with the problems, said Jacob Frenkel, chairman of the G30.
(Additional reporting by Rebecca Harrison and Alastair Macdonald, editing by David Christian-Edwards)
