Treasury Secretary Snow is leading a delegation that includes Federal Reserve Chair Alan Greenspan to China to push for currency reform:
Results sought in China currency reform, By Martin Crutsinger, AP: ...The Bush administration is fielding its top economic team for the Oct. 16-17 meetings in Beijing; Treasury Secretary John Snow leads the delegation, backed by Federal Reserve Chairman Alan Greenspan. The presence of Greenspan has raised hopes among U.S. manufacturers that what could have been just a routine consultive meeting of the U.S.-China Joint Economic Commission will produce more tangible results in the area of most concern -- currency values. ... The first step occurred on July 21 when China announced that it was breaking a decade-long fixed link between the Chinese yuan and the U.S. dollar. ... Optimists hoped for greater moves in the weeks and months to come. But it has not played out that way with the yuan little changed since its July move. American manufacturers contend that the yuan is undervalued ... That makes Chinese goods cheaper in the United States and American products more expensive in China and is a major reason for the trade gap, manufacturers believe. Congress has reacted to the gap with calls for ... 27.5 percent tariffs on all Chinese imports unless Beijing takes more steps to allow its currency to rise in value against the dollar. ... The administration is hoping that the prospect of across-the-board tariffs will prompt China to allow greater appreciation of the yuan...
Is it appropriate for the Federal Reserve Chair to lobby foreign governments on behalf of the administration? There are competing short-run interests. Krugman says it well:
Here's what I think will happen if and when China changes its currency policy, and those cheap loans are no longer available. U.S. interest rates will rise; the housing bubble will probably burst; construction employment and consumer spending will both fall; falling home prices may lead to a wave of bankruptcies. And we'll suddenly wonder why anyone thought financing the budget deficit was easy... I'm not saying we should try to maintain the status quo. Addictions must be broken, and the sooner the better. After all, one of these days China will stop buying dollars of its own accord. And the housing bubble will eventually burst whatever we do. Besides, in the long run, ending our dependence on foreign dollar purchases will give us a healthier economy. In particular, a rise in the yuan and other Asian currencies will eventually make U.S. manufacturing, which has lost three million jobs since 2000, more competitive. But the negative effects of a change in Chinese currency policy will probably be immediate, while the positive effects may take years to materialize. And as far as I can tell, nobody in a position of power is thinking about how we'll deal with the consequences if China actually gives in to U.S. demands, and lets the yuan rise.
I would have no problem with Greenspan's pressure on China if it were clearly linked to monetary policy concerns, but that has not been done. Instead it appears the Fed Chair is making a trip to serve a political purpose on behalf of the administration and to serve the short-run interests of one group, business, over the interests of other groups (though Stiglitz says benefits to business may be small). I don't think that is a proper role for the Fed Chair or the Fed more generally, but then again, there is the idea that the Fed Chair is intended to be the one conduit of political influence on the Board of Governors. Still, to me, this is too close for comfort to the line that maintains the Fed's independence, a line that should never be crossed - but perhaps I'm being too strict.