Bernanke warns on imbalance risks

Ben Bernanke said it was “extraordinarily urgent” that the US and Asia adopt policies that prevent a revival of global economic imbalances as the financial crisis ebbs.

He warned that global imbalances – the big gaps between national saving, consumption and investment rates reflected in large trade deficits and surpluses – had helped cause the crisis and needed to be corrected.

For the US, he said the US must establish a sustainable fiscal trajectory anchored by a clear commitment to substantially reduce federal deficits over time. He said the US faced a “difficult fiscal situation” but insisted that US policymakers “recognize that we need to develop a fiscal exit strategy” that would put the US on a sustainable long-term fiscal path.

Mr Bernanke also urged Asian nations not to slip back into export-led growth and called on them to build up domestic consumption instead.

He said that Asia, which is leading the rebound, risked seeing asset bubbles fuelled by capital inflows. He said one way to mitigate this risk would be through some greater exchange rate flexibility offset by fiscal consolidation.

The fact is that the US current account deficit has declined from 6 per cent of gross domestic product before the crisis to about 3 per cent, but could increase again as the recovery builds.

Many Asian economies had learnt a “problematic” lesson from the 1997 Asian crisis that it was desirable to rely on export-led growth while building up large amounts of reserves to insure against a sudden reversal in capital flows.

But reserve accumulation may be as a “by-product” of growth strategies rather than the reason for which economies ran trade surpluses. Mr Bernanke suggested that if growth in emerging nations could shift towards domestic demand the reserve issue would not be as great a problem.