Obama Jumps on the Elephant, Speaks Out About The Giant Pool

STRASBOURG -- On Wednesday, I wrote about the undervalued role that trade imbalances, and the resulting capital flows, played in causing the current financial crisis. President Obama had raised the issue in a press conference Wednesday, catching some of his own advisers off guard. On Friday, Jon Ward of the Washington Times followed up with a necessary question at a press conference in Baden-Baden, Germany. Obama's answer, which could lead to a remaking of the global economy, follows below, with the key parts in bold.

Q    Thank you, Mr. President.  I'm going to read my question; I hope that's not too much of a breach in protocol here.  I have a question about surplus and deficit countries and trade imbalances.  Mr. President, you said in London that the world may not be able to rely any longer on the U.S. as a "voracious consumer market."  Did you talk with Chancellor Merkel about Germany's enormous trade surplus and its impact on the global economy going forward?  . . .

PRESIDENT OBAMA:  Well, Jon, I do think that even as we are trying to solve the immediate crisis we've got to learn some lessons from the previous years to figure out how do we avoid another crisis.  And if you look at the U.S. economy, what we've seen is a series of bubbles and then busts, much of it having to do with huge flows of capital into speculative sectors of the economy.

Part of the problem that we saw was a lack of regulatory oversight, and so we're moving very aggressively on that front.  And in the short term, my biggest concern is how do I just make sure that people get back to work?  So our stimulus package, our efforts to stabilize the housing market, our efforts to remove the toxic assets from the banks so that banks start lending more effectively and businesses can open, people can get hired again  -- all that is focused on my top priority right now, which is making sure that we're no longer hemorrhaging jobs and we start creating jobs.

As we emerge from the crisis, though, we're going to have to take a look at how do we ensure -- a term that Chancellor Merkel spoke quite a bit about at the summit, and that is sustainable economic growth.  And in order for growth to be sustainable it can't be based on speculation, it can't be based on overheated financial markets or overheated housing markets, or U.S. consumers maxing out on their credit cards, or us sustaining nonstop deficit spending as far as the eye can see.

So once we stabilize the economy, we're going to have to start bringing these huge deficits that our government is running, we're going to have to start bringing those down.

Families are going to have to start making more prudent decisions about spending, and increasing their savings rate.  Businesses are going to be making investments, and we want to spur as much investment as possible, but the whole point is to move from a borrow-and-spend economy to a save-and-invest economy. (More after the jump.)

Now, the U.S. will remain the largest consumer market, and we are going to make sure that it's open.  One of the principles that we very clearly affirmed in London was that protectionism is not the answer.  It's not the Germans' fault that they make good products that the United States wants to buy.  And we want to make sure that we're making good products that Germans want to buy.  But if you look overall, there is probably going to need to be a rebalancing of who's spending, who's saving, what are the overall trade patterns.

And it, by the way, it doesn't just include developed economies like Germany and the United States; it also means we want to encourage emerging markets to consume more. If you start seeing China and India improve the living standards of its people, now those are huge markets where we can sell.  And that's why the last few days that I've spent talking about the international economy relates directly to the jobs that are being lost in the United States.

I know this was a long answer but it was a big question.  The bottom line is that as long as the United States and Germany are keeping our open trading relationship, as long as our approach to currency is one that ensures fairness -- which generally speaking, the relationship between the United States and European central banks has been very cooperative and very solid -- as long as we have proper rule of the road and regulatory frameworks in place, then the key is to have friendly economic competition, the United States making the best products, making the best decisions, making the best investments, and Germany doing the same, and then all of us can do well together.