Treasury Secretary Timothy Geithner was in Palo Alto Monday with a simple message for Silicon Valley: Washington has more work to do to repair the U.S. economy, and it is in the process of doing it.
But the direction of the 49-year-old’s Q&A session at the Commonwealth Club of California was quickly pulled away from his defense of the administration’s economic policy toward the more salient issue of global trade, specifically China’s alleged manipulation of its currency to gain export advantages.
The value of the Chinese yuan is a hot-button issue in Washington, where the Treasury Department announced Friday it was delaying a scheduled report on China’s exchange-rate policies. Geithner said his department is holding the report until after the Group of 20 finance ministers meets next month in South Korea, where U.S. delegates hope to mobilize support behind a set of improvements to China’s currency practices.
“How much do you feel the Chinese currency is undervalued today?” moderator Michael Moritz, a partner at Menlo Park-based Sequoia Capital, flatly asked Geithner on Monday.
The Treasury secretary, who spent most of his childhood abroad, maintained his traditionally aggressive stance toward the world’s largest country, digging into China’s “unfair” and “damaging” policies.
“By almost any measure, it [the yuan] is significantly undervalued, more so than is true of any major significant emerging market currency,” Geithner said. “It’s not tenable for China long-term, and it’s unfair to all of China’s trading partners, America and others. It just creates a playing field that’s off-balance.”
He added: “It’s very damaging to what’s very important to everyone: the sense that we operate in a world where people play by a set of consistent rules of the game.”
Geithner noted that the yuan rose about 20 percent in value between 2005 and 2008 and three percent in recent months. “We want to see that process continue,” he said.
“And how far would you like to see it go?” Moritz asked.
Geithner issued a one-word response: “Higher.”
Moritz, a former director at Google, PayPal and Yahoo, also indulged Monday’s Silicon Valley audience by taking the conversation with the Treasury secretary to state and local economic challenges.
Referencing cities like Vallejo, Calif., which filed for bankruptcy in 2008, Moritz said the crisis many people see looming “right in front of the windshield” will come from mounting financial obligations that are encumbering state and local governments. A domino effect of city bankruptcies, Moritz said, could be more disruptive than the subprime mortgage crisis.
“It’s going to take quite a bit of time still for states to get back to the point where they feel they know how to finance the basic needs that only governments can meet,” Geithner said. “The Recovery Act reduced local risk…but it didn’t fill the hole completely. We’ve found it actually quite hard.”
The solution is not to depend on Washington, Geithner said, but to build political consensus locally about how limited resources should be allocated. “It’s not a financial challenge; it’s a political choice,” he said.
During the course of the hour-long session, Geithner, a father of two, including Elise Geithner ‘13, continually referred back to “educating our children” as one his own personal priorities for state and local governments.
One hope for Geithner is infrastructure development. Asked whether California’s proposed high-speed rail system, which would require a sizable chunk of its proposed $40 billion-plus cost from Washington, would affect the nation’s unemployment rate, Geithner said it would only put more people to work.
“Investment in public infrastructure, in transportation, is a good investment,” he said. “Our government doesn’t do it perfectly, but it’s a very good strategy…and it has the benefit of getting some of the people hardest hit by the recession back to work more quickly.”