NEW DELHI (Reuters) - The United States is strongly committed to a strong U.S. dollar and financial markets there are recovering from the subprime crisis, some quicker than others, U.S. Treasury Secretary Henry Paulson said on Tuesday.
Paulson, speaking at a forum in the Indian capital of New Delhi, also said while innovation in U.S. capital markets had contributed to the subprime crisis, innovation was desirable and a contributor to growth in the world’s largest economy. “I’m strongly committed to a strong dollar,” he said in a moderated on-stage interview at the Fortune Global Forum, adding that currencies should be set in open markets based on economic fundamentals.
Paulson, who was not speaking from prepared notes, said China still had some work to do to get to a market-determined exchange rate, and needed more yuan flexibility in the meantime.
While many U.S. financial markets were functioning as normal in the aftermath of the subprime crisis that roiled global markets in July and August, Paulson said several, including high-yield debt, mortgage markets, highly structured debt securities and asset-back commercial paper, were not yet back to normal.
“All of those markets are doing better every day, as time goes on compared to where they were a number of weeks ago, but it is going to take a while to work our way through,” he said.
He said that the subprime mortgage market, where the crisis originated, would take longer to recover because of a large number of interest rate resets on adjustable-rate mortgages over the next 18 months.
And while it was “definitely the case” that innovation in U.S. capital markets had gotten ahead of regulatory controls, contributing to the crisis, Paulson said that such innovation remained desirable.
“I don’t think we would want it the other way around. If we had it the other way around, we’d be sacrificing growth and efficiency in the markets.”
Paulson is on the final day of a four-day trip to India. He has praised Indians for their progress in economic reforms, while urging them to accelerate their efforts to open the fast-growing economy to foreign competition.
He lauded India’s flexible rupee exchange rate, saying it was helping to control domestic inflation, and warned that capital controls could have counter-productive effects.
However, he tempered his comments on India’s new curbs on so-called participatory notes aimed at stemming the flow of anonymous foreign money flowing into its stock market. He said it was important that such rules be transparent and flexible.