Fed’s Lockhart: Big Global Trade Drop Tied to Credit Crisis
March 26, 2009 Michael S. Derby
Dow Jones Newswires
A fall in global trade levels that’s out of proportion to the actual contraction in economic activity has been bedeviling economists, but the president of the Federal Reserve Bank of Atlanta may have an answer for this conundrum.
In a speech in Paris, Dennis Lockhart tied this unusual situation to the financial market’s broader problems.
“Some of the fall in international trade can be attributed to the disruption of the interbank credit system,” Lockhart said. He noted that international trade was highly dependent on the availability of credit, and that those who lend are unusually concentrated.
“The marked reduction of interbank lending appetite has been associated more with the market for short-term liquidity, but it also has affected trade credit,” he said. “With the interbank liquidity crisis, banks have moved to reduce overall counterparty exposure including trade credit,” Lockhart added.
Lockhart is a voting member of the interest rate-setting Federal Open Market Committee. His comments came from a speech given before a conference on food and water issues, held by the Global Interdependence Center.
His formal remarks skipped over monetary policy and the economic outlook. But he did offer praise for a Treasury plan that would bring the government together with private investors to rid banks’ balance sheet of bad assets.
“The removal of legacy ‘toxic’ assets from bank balance sheets is an essential step,” Lockhart said. He added the now ongoing bank stress tests will help determine adequate capital levels for banks. Lockhart said he also supported alterations to accounting standards made by the Financial Accounting Standards Board.
The official’s relatively brief remarks also reaffirmed his support for international trade, which he said had helped create jobs and wealth across the world.
“Progress is at risk” in expanding trade, Lockhart said, in part because of the financial system breakdown. “By restoring functioning credit markets, I believe these weaknesses can be repaired,” the official said.
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