Article

Bush Attempts to Strengthen His Weak Dollar

Overreliance on cheap credit to deal with the housing and banking mess exacerbates the dollar's weakness and increases gas prices, writes Scott Lilly.

SOURCE: AP/Charles Dharapak

Bush’s solution to current financial woes is to continue to rely on cheap credit, which is the same policy that created the housing bubble in the first place.

The demise of the dollar over the past seven years has been remarkable. On the day George W. Bush was inaugurated in 2001 Americans could buy a euro for $0.93. Earlier this week, after the president, the U.S. Secretary of the Treasury, and the President of the New York Federal Reserve Bank all sought to bolster the dollar on world markets, the greenback rallied about 1 percent—to $1.55 against the euro, after trading as low as $1.59 to the euro in mid-April.

Bush told reporters in Europe, "a strong dollar is in our nation’s interests," while Treasury Secretary Henry Paulson appeared on CNBC stating he would not "take intervention off the table” in his efforts to strengthen the dollar. In other words, Paulson is willing to fight international currency markets and buy up dollars in the face of declining world demand for the currency. But Tim Geithner, President of the New York Federal Reserve Bank, made it clear the job will not be that easy. Geithner indicated that the job might very well require tighter monetary policy.

The Bush administration is now in a severe policy squeeze. Rising oil and food prices are rapidly increasing the probability of a serious recession. Those prices are being driven upward in large part by a weakening dollar and speculation that the dollar will weaken further as investors worldwide sell a variety of dollar-denominated assets to purchase upward-moving dollar-denominated oil contracts as a hedge against inflation

But to strengthen the dollar the Bush administration must encourage the Federal Reserve to tighten the money supply, which might exacerbate the already dicey situation with the nation’s major financial institutions and the struggling housing market. It may or may not be possible to thread the eye of that needle, but there are strategies that would make the eye of the needle much larger.

First and foremost, the nation needs to prevent some significant portion of the currently troubled home mortgages from going into foreclosure, which would cause significant numbers of currently occupied homes to be dumped back into the already saturated real estate markets. There will be cascading consequences if that happens, and the victims will represent far more people than the unfortunate million or so families that will lose their homes. It will force further dramatic reductions in real estate values, place even more mortgages in jeopardy, and further threaten the solvency of major financial institutions. That in turn will encourage a loosening of monetary policy, which will further weaken the dollar and further increase the price of oil and other commodities that are traditionally priced in dollars, including most food staples.

Right now, the Bush administration is not only failing to come forward with a strategy to prevent further foreclosures, but also blocking both houses of Congress from moving forward with common sense proposals that would facilitate the renegotiation of troubled mortgages. Instead, Bush and Paulson are placing the entire burden for dealing with the housing bubble, the subprime mortgage crisis, and the resulting instability in the nation’s financial system on cheap credit, the same policy that created the housing bubble in the first place.

The Bush administration has forced the Federal Reserve to lower rates beyond levels that make sense for our currency and future price stability. Unfortunately, high gas and food prices are only the first of many costs the American people will pay for this policy blunder.

Scott Lilly is a Senior Fellow at the Center for American Progress.

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Authors

Scott Lilly

Senior Fellow